How wealthy are you? I mean it's all relative of course, but if for any reason you or your partner were out of work tomorrow, how far could your savings take you? If the answer is "not very far" then you are probably not as wealthy as you think you are!
Life presents us with a series of moral dilemmas, a number of "want" versus "need" scenarios which, without financial discipline and structure, could lead to large bites being taken out of your pay-cheque on a regular basis. Not only does this erode your wealth, it leaves you less prepared for the future or any unforeseen events.
The problem with the way most people assess their financial stability is that they usually only consider the savings element of their finances, that is, how much their net worth is. But it is equally important to consider your monthly and annual outgoing and expenses. Even if you have a nest egg saved for a rainy day, you need to think about just how many rainy days those funds will take you through.
In preparing for life's many uncertainties, and even for its expected eventualities, you must consider the two sides of the savings equation: How much am I saving and how much am I spending. How you monitor and take control of these two crucial variables will have significant impacts on your ability to save, accumulate wealth and provide a cushion from any of life's unforeseen challenges.
Spending side
Let's first consider the spending side of the equation. Mortgage payments, school fees, student loans, car loan payments, food and utility bills (to name a few) take a significant portion of your monthly salary. It is important that you set up a budget in order to take control of these significant regular outgoings. Consider what percentage of your income is going towards each expense. Are there any opportunities to achieve cost savings? Mortgage providers for instance could be changed, allowing you to switch your existing mortgage to one which is more competitively priced. Food and beverage expenditure too can often be better managed. Bringing a coffee from home instead of your regular morning stop at the local cafe can lead to significant savings over the course of the year.
Of course one should also plan for leisure and entertainment. We all work hard and deserve to enjoy life. For many of us holidays, meals out and excursions are needs and not wants, and rightly so! Just make sure that you plan in advance and budget for their costs.
Managing your budget and your regular outgoings will free up cash which you could set aside in a savings account. You could also set yourself a savings target of say 10 per cent of your monthly income. Setting a savings target enforces a disciplined way of putting money away on a regular basis and allows you to fit your regular expenses and outgoings into the remaining proportion of your income.
Honesty important
It is important to be honest when assessing your outgoings and to be realistic in setting your goals. Don't be disheartened if you fail to meet your target on a few occasions. If it happens on a regular basis then review your budget again for any cost-cutting opportunities, or think about whether you simply need to realign your savings target to what is achievable for you. More importantly, remember to be flexible. Your circumstances change over time and your budgeting and savings patterns should too.
All this may seem a little daunting to think about but your bank is here to help you through this process. Speak to your relationship manager or financial adviser; they can help you to assess your monthly income and expenditure and suggest the best savings products that meet your needs, enabling you to get your savings plan on track.
No one can tell for certain what the future will bring but it always helps to be prepared.
The writer is Head of Personal Banking for Lloyds TSB Middle East. Opinion expressed here are his own and do not necessarily reflect that of Gulf News.
