Saving, borrowing, and investing are simply tools for helping us manage our cash. We spend cash buying the goods and services that enable us to maintain and improve our quality of life. We get cash typically by working. If we are lucky we might inherit cash or win it. However we get it, some of the time we are likely to have more of it coming in than we need to spend at that moment, and at other times we would like to spend more than we have coming in. Generally, short-term mismatches between earning and spending are taken care of by borrowing and saving.
Borrowing, saving, and money-sense
Typically, our salary goes into the bank at the end of a month. Some of that might go to pay the mortgage on our home, some of it might pay for goods bought with a credit card, what’s left over might sit in our bank account waiting for us to write cheques or draw cash to buy whatever. Money-sense means making the best use of the wide choice of saving and borrowing methods available to us so that we earn the highest rates of interest on any spare cash we have, and pay the lowest rates of interest on any cash we have to borrow. That’s fine when we are talking about managing our cash over a month or two, or even over a year or two. But what about when we are trying to manage our cash over our lifetime?
Managing cash for the future
There are several reasons why we might want to set aside cash now to get cash well into the future. We talked briefly about building up a fund to pay for private medical treatment. We might feel that we would like to be able to educate our children privately, or help them through university, or even help them to buy their first home. But by far the most important reason for wanting cash in the future is to help us to enjoy retirement.
A 30 year-old male in the UK today can expect to live until he’s 78. A 30 year-old female is likely to live to at least 81. By the time they are 60, they can look forward to at least another 20 to 25 years. Suppose you are 30, and thinking of maybe working until you are 60. You are looking forward to 30 years of work followed by something approaching 30 years of retirement. Medical science and better nutrition have dramatically increased our life expectancy. Medical science has also helped reduce the birth-rate. Within a few years there will be more of us retired than working.
Looking ahead a few years, it is inconceivable that any basic state pension, even with extra benefits, will provide for more than the barest level of subsistence. The state simply will not be able to afford to do anything else. If you are working and enjoy a reasonably good life style, and expect that to continue when you retire, you will have to build up a sizeable pot of money within a company and/or private pension scheme. It doesn’t have to be a pension fund in a formal sense, but one way or another you will need a lot more money than you probably imagine right now.
Money sense for the future
Money sense is good sense whether we are looking for a savings account for our spare cash or thinking what might happen many years from now. But whilst choosing the right savings account can make a difference of several pounds, or even several hundred pounds, what we do for the long-term right will make a major difference to our quality of life in the years to come.
|9 October, 2008 © 2008 K.R.Wade and Co Ltd|