How Do I Get That Golden Egg?

Well no doubt there were those who were highly organised and had their Easter Eggs bought for their loved ones before they were stuck with the horrible, pricey left overs, and then there was those left with nothing; the good news for those last minute purchasers is that you probably improved your sales techniques with the old, “I got you the chocolates you preferred rather than succumbing to the traditional egg route” or “I thought a beautiful plant you loved that would last the whole year through was a much better idea”.Regardless of which of these you bought or didn’t buy, it got me thinking about Easter Eggs, Nest Eggs and Eggs in Baskets which linked in with some year-end questions I had been getting lately:- Should I invest some profits in my pension? How much should I put back into my own business? Which is the best investment out there? How can I be sure I’ll have enough to retire? So I thought it may be a good idea to share what successful investors do to achieve Golden Nest Eggs rather than relatively empty Easter Eggs. An old adage states if you cannot explain it simply you don’t understand it so even though these steps are basic, remember knowledge is not what gets results its how you use that knowledge.

Here are seven steps to building that nest egg (The Magnificent Seven):-

1) Spend less than you earn, this will enable you to save for the future. It’s a pre-requisite for successful saving, as Berthold Brecht said “How sorely they are mistaken who thinks that money doesn’t count as fruitfulness turns to famine when the kindly stream runs out”.

2) Figure out what you want. If you want to live the life you do now when you retire then you need to quantify the pot you need. The “Trinity Study” simplified this nicely as twenty five times your current spending. If you had a pot that size on retirement you could withdraw 4% of the pot per annum without it disappearing over time.

3) Start with the Emergency cash fund:- In an ideal world you will build a fund that will allow you to last one year should you run out of work or hit an emergency, but six months is more common and we should all aim to have at least 3 months emergency cash. So how much do you need to save to achieve this? Save 8% of your monthly take home profits/salary and in one year you will have one months earnings set aside, with a three month pot in three years.

4) Start now and reinvest the interest, dividends or profit as Einstein explains: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it”. There is always a reason not to save and always those who save something regardless of the situation, it is a habit that you need to create if you do not have it already. But how much should I be able to save? No two people’s situations are the same, Mr Money Moustache – an American money advice blogger who retired aged 30 lived on 25% of his income and saved 75% during the nine years he worked. This is extreme and a goal that would certainly put most of us off but the “50:20:30 rule” is much more achievable, 50% to necessities, 20% for financial goals and 30% for lifestyle. The fun starts with your definition of a necessity.

5) Reduce expensive debt. A mentor of mine when I was training lent me a book on good and bad debt and I now see The Money Advice Service uses a similar definition. Good debt allows you to earn money such as business loans, property loans, investment loans, student loans while bad debt encourages you to spend money you cannot afford. Tackle the bad debt first and repay those loans with the highest APR. (Mr Money Moustache provides an example where missing $25 a month on credit card payments turns into $50,000 debt in ten years.)

6) Passive investment. Your long term investments involve investing in Property, Business, Stocks and Shares. If you don’t know what you are doing here you should take advice as Investments are not there for pleasure they are to generate a “passive return on your money” but make sure you don’t put all your eggs in one basket with this one.

7) The pension wrapper. Two huge aspects here:- Firstly if you are saving tax you can be getting from 20% to a 60% saving on your money by investing through a pension wrapper, huge returns even they do nothing else. Secondly the egg in the basket from someone else costs you nothing so if you save £1 and your employer saves £1 you have doubled your money already; do not miss out on this no brainer, but again take appropriate advice.

We are all different and there are loads of very valuable systems and techniques out there, invest the time to find a system that works for you, remember to enjoy the journey and I hope you get the egg you always wanted …. or chocolate …… or plant.

Julian McKeown