Personal finance must form part of your outlook

The shortest day of the year flew past and in the warm afterglow of fine food with family and friends the period between Christmas and New Year unfolded.

The temptation to remain wedded to a sofa and a remote control is high while the alternative of extended sessions of sleep was somewhat appealing too.

You should have, however, also taken time to think about another important matter — personal finances.

An investor is what anyone who earns money effectively becomes as they progress through life and a career.

The highfalutin terms that surround the process —returns on investment, yield management, capital gains — mask some simple truths. The money you earn that is not spent each week on essential consumables like food, insurance and heat is a resource to deploy to assets of various hues.

The worst, laugh out loud, supposed asset is a car. They depreciate like hell and incur annual insurance and tax costs alongside the upfront price.

If you purchase it with debt additional interest costs above the rate of inflation kick in.

If anything can be defined as a luxury item from an investment perspective it is a car, so treat it as such.

Being a bit of a petrol head myself these facts are a challenge to my education in wealth creation. However, once you have your mind around how a car performs financially you can move on.

While a car is probably the second most valuable investment you will make in life, the number one absorber of cash and debt is accommodation.

The obvious options here are buy or rent. Recent shifts in rentals, and record low interest rates, mean that the monthly average rent for a family home in many places is now at the same level that funds a mortgage.

You may be able to rent at this rate for the rest of your life (although you have no control over that) but you are left with nothing on the other side.

Moreover, landlords can chop and change, causing untold disruption to family life.

A tricky decision in a market where house prices are rising at present but property is an asset class that, unlike cars, can appreciate significantly over time.

Getting involved in this asset is challenging, absorbs a lot of monthly income, and is risky but requires your undivided attention for some time.

Once the car and property crossroads have been passed you move on to other assets. Equities, bonds and commodities require a rattle for the New Year.

Normally, most of us find our way in to these through pension products where a no-brainer tax break still applies and amplifies the ability of your money to travel further.

It is boring for most but building a savings pot that finances life after you choose to stop working is a critical element of the financial jigsaw in everyone’s life.

Ignore it at your peril because as you grow older the mathematics of creating a store of value gets harder. If you are over 21 and not doing things about your pension then you are —apologies to all — a bit of a dope.

If you do deploy money on financial assets in 2015 remember one key target — produce a return that beats interest rates and inflation because that is the definition of wealth creation. With both of those metrics low the challenge is not as daunting as other years.

We’re now at the frivolous end of this financial chain. Holidays? Clothes? Meals in fancy restaurants? Knock yourself out if all the above heavy items have been chewed over but tread carefully otherwise.

Burning hard-earned after-tax money on items that return zero monetary value are fun but useless to the creation of wealth.

* Joe Gill is a director of Corporate Broking with Goodbody Stockbrokers. His views are personal


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