Ten steps to financial happiness

"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." Micawber's advice to David Copperfield holds as true today as it did 170 years ago, but with one important caveat – much of the misery can be avoided by regular, step by step financial planning.

Step 1: Educate yourself

The journey to happiness begins with education. "Nobody really likes talking about money," says Davy financial planning specialist Fiona Haughey. "They don't even talk about details with their friends. But the less people talk, the less educated they are."

She advises people to carry out research and other sources to educate themselves about financial matters. "Be honest about the gaps in your knowledge. Google the topics you're not sure about. Tune into social media feeds like femolutionist. Type the topic into Spotify or another podcast provider and you'll find information on it."

Step 2: Take time out to plan

It takes more time than you think to review your finances. “We have some clients who schedule a family agm to discuss their household finances,” says Haughey. “If this requires taking a half day off work to do, so be it. You need to review it continuously after that.”

Step 3: Know what you spend

“Knowledge is power,” Haughey notes. “There are apps out there to help you keep track of your spending. Some banking apps can do that. Go through your card statements. Look at the big ticket items like car insurance that might come up just once a year and budget for them.”

Step 4: Know what you want

It is important to decide on your goals when reviewing your financial plan. In the short term that might be buying a new car. In the longer term it might be planning for retirement. And goals can change over time, according to Bank of Ireland head of pensions and investments, Bernard Walsh. "You may have had certain goals in the past, but circumstances may be different now," he explains. "Maybe you had young kids or no kids back then and you need to reset your goals."

And harmony is not guaranteed. “If you are part of a couple you need to recognise that goals may not always be shared and some compromises might be required,” Haughey advises. “You should also ask yourself what you are saving and investing for. You are more likely to build up savings and investments if have an end goal in mind.”

Step 5: Plan your savings

Ad hoc savings just don’t work and Haughey advises setting up a standing order to put away a certain minimum amount each month, but within reason. “Be realistic and don’t leave yourself short.”

A rainy day fund is an essential part of the plan, says Killian Nolan, head of product with Cantor Fitzgerald. "Depending on your circumstances you should have between six months and two years income held in cash in the event that you lose your job or get sick."

Step 6: Review your pension

If you don’t have a pension, set one up if at all possible. “That’s the only tax incentive that’s left in the Irish market for savers,” says Nolan. You can get tax relief of up to 40 per cent on what you put in and the assets within the fund grow tax free. It makes a lot of sense to maximise your pension contributions, but you need to be cautious about it as you won’t be able to access the money until you reach retirement age.”

If you do have a pension, make sure you know how much is in it and how it’s invested. “Look at the investment strategy and make sure it’s appropriate for you,” Haughey advises.

She points out that the lifestyling strategies which people sign up to at the start may no longer be appropriate as time goes on. “If you are 58 and planning to live to 98 that’s a 40-year investment horizon and switching assets into cash and bonds now may not be the best option.”

Step 7: Utilise your allowances

There are some tax allowances that can help people maximise the return on their investments. For example, everyone is entitled to a €1,270 annual capital gains tax (CGT) allowance. This would allow people with shares to sell some of them and take profits up to that amount each year with no tax liability.

Step 8: Personal protection

Protection and insurance are also very important. “This is about the what ifs in life,” says Haughey. “If you can’t work or if you die prematurely what would happen to your family? If you are a business owner, what happens if something happens to you? It’s about protecting you, your family and your business if you get sick or pass away. People often have income protection through their employment, but entrepreneurs may not have got around to that if they have recently set up a business.”

Step 9: Planning for what you leave behind

Most people don't want to leave an inheritance tax headache for others to deal with. "This is a key area to deal with for co-habitants," Haughey points out. "The inheritance tax treatment for them in Ireland is quite penal. You should educate yourself on the CGT thresholds and look at taking out section 72 insurance to cover the tax bill. Financial planning and estate planning go hand in hand and making sure you have a valid will is key."

Walsh advises people to look at opportunities to transfer wealth in the here and now. “There is the small gift exemption to children for example.”

Step 10: Turning intentions into actions

“The fortune is in the follow up,” says Haughey. “You can have lots of good intentions but poor outcomes if you don’t follow through. Personal finance can often be more personal than financial, and it can be helpful to bring in a financial adviser to help take an objective view and explore the various issues involved.”