Making Cents: What’s your financial combination code?

THIS WAS the combination code for a client of mine that was going to unlock what financial freedom meant to her.

And in this article I’m going to tell you how we discovered these numbers and what each stand for.

As an aside, you can have 1 million unique permutations for a 6 numbered lock, this combination just happened to be hers.

And we discovered it, because financial freedom for her, was being mortgage free and being able to retire full stop at 60 if she wanted to.

Because these two areas were somewhat intertwined, we needed to work out both in tandem with one another because it would be more difficult for her to retire if she still had a mortgage. And being mortgage or debt free always makes things easier whether you retire full stop or not, because obviously you can earn less.

Anyway, she’s a smart lady but didn’t know how to make this dream of hers happen which is why she reached out for help.

Initially I only knew one number to her lock combination, and that was the % her employer was contributing to her pension fund.

And that number was 6, but before we could start figuring out the other numbers, we had to work backwards to find out what income she’d need at 60.

And using her current outgoings as a benchmark we believed it would be €2,400 per month. It could change but it was a good number nonetheless and about what I’d see others spend in retirement where she was living.

But rather than aiming for this amount, I thought we should include and create a buffer for unforeseen amounts that may be required, because everyone tends to underestimate the amount they spend in retirement. So we set a target of €2,800 instead.

Knowing what this number was, I could work out what size fund she needed to accumulate and how much she personally needed to be saving each month.

And that amount was 10% of her current annual gross salary.

That % when combined with her employers’ contributions would be enough. And just to be sure to be sure, we had built in a margin of error as well just in case things happened that were beyond her control i.e. returns on her funds were 25% lower than what they historically earned.

So, retiring at 60 was possible with 6% contributions from her employer and 10% from her.

We had her first three numbers.
610.
We now needed the remaining three. And these were easier to figure out.

The initial term of her mortgage was 30 years and that would bring her to 65, so we needed to reduce the term by 5 years. She was 3 years into it so factoring that in and the interest rate being charged, we could work out that a monthly overpayment of €158 would take 5 years off the term and she’d be mortgage free at 60.

The other way of taking 5 years off the term was a lump sum lodgement of €35,000 but she didn’t have that amount in savings and even if she did, the monthly overpayment made more sense knowing what I did about her finances.

We had the last three numbers to the lock and when added together with her pension numbers that combination would open up what financial freedom meant to her and they were 610158.

And they were just numbers, but from now on they were ones she’d always remember.

It was a pin number of sorts but they made sense to her and I like delivering numbers that are memorable and have meaning and aren’t complicated. If success for her from a financial perspective is being able to remember 6 numbers, and what each stand for, then how great and simple is that.

She needed to know where they came from, and how to use them and knowing them is one thing but doing something about them is another, and she has.

She has notified her employer to deduct 10% from her salary every month and she has a standing order set up where she will send an additional €158 to her lender every month as well.

Job done, which took 5 mins but it does take some sacrifice and discipline and commitment and perhaps she could have used that money on other things, but once she knew what was possible, she had a choice to make it happen or not, and she chose to make it happen, and fitted them into her monthly income and outgoings and made the numbers work, she just did.

My lock number by the way is 582711.
And your combination can have more than 6 numbers, you can have 2, you can have 8 or 10 or whatever number that makes sense to you.

What I like about the combination lock analogy is that you can have all of your most important numbers together in a format you can remember. You’ll have your own combination number and the make-up will apply to whatever areas are most important to you i.e. it could be monthly income number, a monthly savings number, an investment return number, a net worth number etc. but they make sense to you because there is a purpose and story behind each number.

We can remember our Eircode numbers easily, we can also remember our mobile phone and our online bank pin numbers as well, and maybe putting our most important financial numbers in a similar way might help?

I don’t know, maybe.

Look, remembering your finances through a combination like this might work for some people. I know people I have used it with and they’ve found it beneficial and that’s because they said it’s something they can recall with ease and something that reminds them about what they need to be doing and aiming towards.

And because most of our finances are interconnected, doing one thing can and will impact the other, which is why you shouldn’t look at them in isolation. You need to know that if you want to be mortgage free at 60 and retire at 60 with a big enough fund, do you have the resources to fund both?

If the lady I was telling you about focused only on retiring at 60 and ignored becoming mortgage free, she wouldn’t have been able to retire without working. She’d have had to earn c. €34,800 to fund the mortgage repayments because that was what it was costing her each year before tax.

Regardless of the reason behind the numbers, I’d say make things simple for yourself, and find out what they are because when you do, things will become much clearer and much easier for you.

And money isn’t just a numbers game, it’s about people and their lives but you still need to know your numbers and there are lots of them, and you want to know what the most important ones for you are. And once you know where they came from, and how you will use them, and how you can achieve them, if putting them in an order that will help you remember them, then I think that’s useful.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey, Co Limerick. He can be contacted at liam@harmonics.ie or www.harmonics.ie