Posted 18 December 2015. Updated 19 December 2015.
This page has two basic goals:
As my personal profile shows, I grew up in a very poor family in Manchester. Obviously I have known many other very poor people.
Conversely, my professional career meant that in my latter years as a partner in PricewaterhouseCoopers I was in the top 1% of income earners in the United Kingdom. My career also brought me into contact with many other high-income people, both within my firm, and amongst my clients.
This page shares what I have learned about managing one's money, generosity and happiness.
There is a very famous truism in English literature.
“'My other piece of advice, Copperfield,' said Mr. Micawber, 'you know. Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and—and in short you are for ever floored. As I am!'”
"David Copperfield" by Charles Dickens
My parents, although very poor, always lived by this philosophy. Accordingly we almost always had some money in the bank “for a rainy day.”
Despite being frugal, we were unable to avoid occasional consumer debt in the form of hire purchase. However I can count the number of occasions on the fingers of one hand, and there were always very specific reasons associated with buying a capital item such as a television or a car. My parents would never dream of borrowing money for such frivolous expenditure as going on holiday. Furthermore, they were always keen to repay such borrowings as soon as possible and were acutely conscious of interest paid being a wasted cost.
Accordingly I am always surprised by the willingness of some people to pay astronomical rates of interest on short-term consumer debt as if the price of the borrowing (in terms of the interest rate) were irrelevant.
Many people find themselves unable to save because they regard saving as a residual. Their approach is that, if there is money left over at the end of the month, they will save it.
Such an approach is fundamentally flawed.
Saving should be your highest priority because in the long run it will help to transform your financial position. Accordingly, I recommend setting a fixed amount that you wish to save each month and transferring this by standing order to another bank account immediately upon receipt of your monthly income. Such savings should not be spent except in real emergencies. It is your regular expenditure that should be the residual, not your savings.
Financial advisors use the phrase "Pay yourself first."
With most young people, your income will grow over time. The secret is to increase the amount you save more rapidly than your income grows. It is possible to limit the growth of your expenditure if you are disciplined. Conversely if you allow yourself to become used to spending your extra income in full it is then hard to reduce your expenditure. Towards the end of my working career, I was saving over 50% of my income.
The financial discipline recommended above will mean that when you retire you have more savings than if you had spent a higher proportion of your income.
It also means that the annual level of expenditure you have become accustomed to is lower than if you were in the habit of spending most of your income.
The combined effect of both factors is that you will have a much more comfortable retirement financially, and are therefore likely to have a happier retirement.
None of the above comments denies the importance of increasing your skills and ability and thereby increasing your income.
To become wealthy you will need to dramatically increase your income over your career compared with what it is in your youth. However having a high income will not help your personal finances if you spend all of it. That is the reason for developing and retaining personal financial discipline. I have known many high income earners who were unable to save.
There are many sources of stress in modern life. There is no reason to add to these by being short of money.
If you live in any advanced economy such as the United Kingdom, being short of money is almost always a consequence of allowing your expenditure to exceed your income, which arises from financial indiscipline as explained by Mr Micawber.
All the religions that I know well, Judaism, Christianity and Islam, require their adherents to give to charity. Accordingly it is impossible to be a good Jew, Christian or Muslim without giving to generously charity.
The result is that if you have a religious belief and fail to give to charity, you will know that you are not living your life in accordance with your beliefs. This becomes a source of stress and unhappiness.
We all learn from our parents. One essential thing I absorbed from my father was that, even though he was very poor, he always gave generously to charity. The very last cheque he ever signed was an unsolicited charitable donation.
The relationship between charitable giving and personal happiness is less immediately obvious in the case of people who do not have a religious belief. However in my opinion your self-esteem goes up if you give to charity since you see yourself as a more noble human being.
Conversely if you spend all of your income upon yourself, you will be aware that you are being selfish and this will erode your self-esteem, becoming a source of stress and unhappiness.
My experience from knowing many people over my lifetime is that people who are generous are happier than people who are selfish.
Your personal financial management becomes easier if you allocate a set proportion of your income to charitable giving. The standard amount for me due to the influence of the Old Testament has always been 10%.
Accordingly I have always given 10% of my income to charity. (More now I am retired.) This charitable giving comes ahead of both saving and spending. The effect of this approach is that you cease to think of this 10% as yours, and the charitable giving therefore becomes painless.
If you can live within 100% of your income, you can get used to living within 90% of your income. As your income grows, which for most young people it does, you continue to regard only 90% as yours. The effect will be that as your income rises the absolute amount that you give to charity each year will increase significantly but painlessly.
As with saving, the easiest way to manage this charitable giving is to set up a standing order of a fixed amount which increases every time you get a pay increase.
From my twenties I have had an account with the Charities Aid Foundation. My monthly donation goes to the Charities Aid Foundation and they add on the gift aid recovery. I have a book of vouchers, rather like cheques, which enables me to send "one off" donations to charities without having to think about my charitable budgeting or to keep track of many separate donations for gift aid purposes.
In simple mathematical terms, if you give £100 away, you have £100 less in your own bank account. Accordingly if you add up all the charitable donations you have made in your lifetime, that will come to a large amount of money that you no longer have, but could have had.
However, human psychology does not work that way. Once you have decided to always give away 10% of your income, you no longer think of it as yours. Therefore you never have any concerns about how much you have given away in total. Instead, you think about the good that it has done.
The great American philanthropist Andrew Carnegie, said in this quote from his only known recording.
“The day is not far distant when the man who dies leaving behind him millions of available wealth, which was his to administer during life, will pass away un-wept, un-honored and un-sung . . . Of such as these the public verdict will then be: 'The man who dies thus rich dies disgraced."
The principle is even stronger for those who have a religious faith. Islam teaches that if a person gives generously, God will reward him. (That does not make charitable giving into a selfish act!)
In my own life I have always been conscious of God’s generosity to me. It would be presumptious of me to attribute God’s bounty towards me to my own actions in the form of charitable giving, since God gives to whoever He wills. However the teachings of Islam that giving to charity will be rewarded by God are quite clear.