Why Your Financial Wellbeing Isn’t About What You Earn

Comedian Harry Enfield as the brash, money obsessed “loads-a-money”

When you’re in a social situation and meet new people, the most common initial question is ‘What do you do for a living?’ 

The job question seems innocuous, inoffensive, and uncontroversial. But really it is about the other person subconsciously working out their status compared to you and whether you are below, above or on a par with them.

What job you do helps people broadly work out how much you earn. And how much you earn is often, for many people, a proxy for your and their self-worth. Research has shown that most people like to earn more than their peers.

How much people earn and spend can confer social status, validate their sense of self-worth and, in some cases, represent their need for acceptance by and respect from others.

For all but the poorest in society it’s not how much you make that matters to your general financial wellbeing and personal happiness. What really matters is how much you save.

So, instead of thinking to yourself “I’m a [insert job role] and I earn [insert amount of income] per annum.”, instead say to yourself “I’m a [insert job role] and I save and invest [insert amount here] each year.”.

It’s the amount you save and invest that determines whether you can cope with a financial drama so that it’s just an inconvenience and also enables you to build wealth to become financially secure in the long-term.

In my previous blog - How to turn a financial drama into a mere inconvenience – I explain why an emergency fund is so important and how to build one. So now I want to focus on how to make saving and investing for your long-term an integral financial habit.

Having funds for life after work isn’t optional

Building up wealth for when you are unwilling or unable to work is the most expensive financial goal and it’s not optional. So I recommend that you aim to save 15% of your gross income into tax advantaged savings accounts such as pension and ISA accounts.

Based on the current average (median) full-time monthly salary of £2,465 this would equate to a monthly savings target of £370. This might sound a lot, but it might be easier than you think.

After deducting tax, national insurance and minimum required employee pension contributions (5% on annual income of between £6,136 - £50,000) the average net monthly take home pay amounts to £1,905. From this let’s deduct a contribution towards average housing costs (buying or renting) of, say, £605. That leaves net monthly income of £1,300.

Our long-term regular monthly savings target is £370 (£29,588 x 15%/12). But from this we need to deduct both the personal and employer pension contributions (assuming employed) already paid to the workplace pension as required under Auto Enrolment rules (which are respectively 5% and 3% of salary above £511 per month), amounting to £157.

So, now we need to find a further £213 a month to meet our target savings goal. If we increase contributions to the workplace pension, then the monthly net personal cost, after deducting the government bonus of £43, will be £170. That’s equivalent to £5.66 per day. And it might be the case that your employer matches some or all of your increased contributions, thereby lowering the cost to you even further.

A little pain for a lot of gain

Here is what that £370 per month for 40 years might get you:

• Total invested @ £370 pm for 40 years = £177,600

• Total fund value (assuming investment returns of 8% pa nominal) = £1,122,684

• Accumulated growth = £956,084 (£1,122,684 - £177,600)

• Total fund value in today’s terms adjusted by inflation @ 2% pa = £579,537

Just finding £5.67 a day to add to long-term retirement savings - less than the price of two coffees – for 40 years and letting compound interest do its work, could generate nearly £1M! Even after allowing for inflation, and the fact that future returns might well be lower than in the past, that’s a lot of potential return for not a lot of outlay.  

And the earlier you start regular long-term saving, the more money you’ll accumulate, as shown in my earlier post - How to lower the cost of building wealth.

Don’t put it off. Start saving more NOW!