Personal finance they say is boring. For me, the only boring thing about money is not having enough of it. As Sophie Tucker once said I have been rich and I’ve been poor. Rich is better !
There are 4 areas that we should be addressing each year, 4 areas that I highlight as a workshop exercise for attendees in the corporate seminars I present entitled Surviving the recession – simple steps to transform your finances Those 4 areas are
- Savings & investments
- Borrowings and financial viability
- Retirement planning
57% of American households have never budgeted. They earn income and randomly pay out on bills, direct debits and weekly costs as the cash flow allows. We here in Ireland are worse in some respects with less than 40% producing a budget plan. Wilkins Micawber was David Copperfield’s landlord – both created for the eponymous Charles Dickens’ 8th novel in 1850 – and came up with the budgeting enthusiast’s mantra
“Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and six pence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six pence, result misery.”
It is imperative that we know how much money is coming into the household and how much money is being spent. Only when we have this information can we plan, as it will affect
- Maslow’s Hierarchy of Needs ..food, shelter and clothing – the basic needs of life and whether we can afford same.
- Whether we can pay household bills as they fall due
- Saving for a Rainy Day Fund or just the regular outlay of birthdays, anniversaries, Christmas, mini holidays etc
- Retirement planning… one of the basic questions when investing in a pension plan is whether we can afford the monthly contributions.
Keeping the budget simple is important. For example, the TV license is € 160 per annum and payable sometime between January and December each year. Allocating € 13.33 each month from your income for the license means not only have you provided for this item of expenditure but it also does nt matter when the bill is presented – you have it covered. Now do the same exercise for ALL your expenses.
At the end of this exercise ( and those readers who would like to be sent a simple yet detailed Budget planner spread sheet that tots itself up please email me at email@example.com ) all the monthly expenditure will be deducted from the monthly income. You will have a surplus or a deficit and you will have three choices if you are spending more than you are earning
- Cut costs ( do you need Sky Sports, gym membership, etc ? )
- Earn more ( a second job maybe, a promotion, overtime ? )
- Prioritise ( that is why over 300,000 people have stopped their health insurance over the last 5 years )
Only when you have detailed every item of expenditure can you know if your income will be sufficient to meet those costs. That detail includes casual spending – lattés, newspapers, magazines, sweets.. they can really cause havoc with your loose change. To track this casual spending, download the free Money Doctor APP, simply type in MONEYDOCTOR on your itunes or playstore and record all spending for 3 to 4 weeks to receive details of that casual spending and see where it’s all going..
Whatever you do, do not go another year without creating your own budget.
2. SAVINGS & INVESTMENTS
Saving comes naturally to some people, and is extremely difficult for others. Like any skill, the best way to learn it is to practice. I don’t suppose you will find a self-respecting personal finance pundit who would recommend anything other than saving part of any money you receive. To what end and for what ? So that you have cash on hand for emergencies, major purchases and irregular expenses. You will also need savings if you want to buy property, perhaps up to 20% of the purchase price. How big should your savings pot be? Opinions differ. I would say enough to support yourself and your dependants for between three and six months. So that’s about three to six months net annual income in a Rainy Day Fund (RDF ) Where should you keep your savings? Where you can get your hands on them quickly – an accessible, on demand deposit account. Remember with savings up to € 100,000 per person, you are covered by the Deposit Protection Scheme via the government via the taxpayer – you and me.. The two best demand accounts currently are
- Permanent TSB – 2% ( net 1.18% )
- KBC Bank – 1.75% ( net 1.0325% )
Investments differ from savings in that they represent money you either don’t need in a hurry or, if you are a risk-taker, you don’t mind losing. All investment involves risk. This is because:
- either you are giving your money to someone else to make money for you, and so there is always the chance they will turn out to be crooks or idiots (or both)
- or you are buying something that may be worth less when you come to sell it.
However, there are lots of investments that aren’t really risky. Normally, the more money you stand to make from the money you invest, the higher the risk. As a general rule, if you do invest outside of deposit accounts, you should at least be aiming for double the return of the best deposit account ( best 12 month fixed rate – Permanent TSB 1.9 % gross ) to justify this decision.
You will often hear people describe investment as being a case of ‘risk versus reward’. What they mean by this is how much risk they want to take for what sort of reward. The key things to remember about investment are that:
- You should diversify. In other words, don’t keep all your eggs in one basket but make sure you are spreading the risk by investing in different areas – cash funds, stock market, commodities, property, art, even rock ‘n roll and sporting memorabilia ( Rory McIlroy’s Royal Liverpool Open golf ball thrown into the crowd last July fetched over $52,000 a few weeks after the event on eBay ! )
- Over the long term, the highest returns have come from the stock market.
- The majority of your money, say 90% for most people, should be in relatively low-risk investments, as in some of the recently launched managed funds where with ratings of 1 to 5 / 6 or 7 depending on the insurance company, the higher the number your money is invested in, the greater the risk but also the greater the possible return. If you want growth, you have to accept a little risk. Email me for details of these options.
Start saving if you have nt already and once your RDF coffers are full, you can then plan an investment strategy to suit your needs.
St Paul was the originator of the saying Money is the root of all evil but Mark Twain added the lack of money is the root of all evil. Until a better system replaces “money” we are stuck having to save it so we can spend it. On your marks, get set, start saving.
3. BORROWINGS AND FINANCIAL VIABILITY
Let’s start with the basics. If there is something you want to buy and you don’t have enough money to pay for it, then you may be tempted to borrow.
The person or organisation that lends you the money (known as the ‘lender’) will charge you for the privilege. The money you give to the lender is called ‘interest’. The amount of interest you pay will depend on how much you are borrowing, in what form and for what purpose. While this may all sound very simplistic, it is really important to restate.
Lenders are worrywarts and fret that they may not get their money back. The more risk they feel they are taking, the more interest they are likely to charge you. If you can give them security, the right to sell something of yours if you fail to repay them, then you should enjoy a lower interest rate.
Some borrowing makes sense. For instance, without mortgages it would be impossible for most people to buy their own homes, and without student loans it would be impossible for most students to continue with their education. But all borrowing is based on YOUR ability to repay and you must prove it. Income is after all, your number one asset. Loan terms, deposits and conditions are also becoming more onerous.
Other borrowing is positively toxic, for instance loans taken out to pay for day-to-day living expenses (like food) or to pay for luxury items (like holidays).
If the thing you are borrowing money for won’t last longer than the time it will take you to pay for it…don’t borrow ! Borrowing money to go on holiday is, therefore, probably a bad idea because the holiday will only last a week or two but it could take you months if not years to pay for it.
In recent years, due to relatively low interest rates and the huge availability of money, many people in Ireland have borrowed considerably more money than was sensible. It is vital therefore, if you want to make the most of your money that you don’t borrow recklessly.
- Unsecured loans – your own bank and credit unions will offer the best terms and flexibility. You will still need to show ability to repay and they will check your credit history ( with Irish Credit Bureau – they record all credit transactions. A missed payment stays on record for 5 years while a judgment is there for life ) Typical rate is 10.5% so a € 3,000 loan over 3 years will cost € 97.51 per month. Stay well clear of authorised and unauthorised moneylenders. There are 45 authorised by the Central Bank operating in Ireland and can charge up to 188% per annum ! Some other instant money providers – as advertised on television – can charge an APR ( annual percentage rate ) of 1,734% !
- Secured loans – principally mortgages for homes. To work out borrowing eligibility, I prefer the Net Disposable Income (NDI) method : 35% of your net monthly disposable income i.e. after tax, should be your maximum monthly outlay on financial repayments to include the mortgage repayment itself. So if you earn between you up to € 3,800 per month, then € 1,330 is the maximum per month you would be eligible to repay on all financial commitments, providing you have no adverse credit history and you are in permanent employment. If this € 1,330 amount was your only financial repayment, then at 4.3% over 30 years it would repay a € 269,000 loan. The Central Bank new income guidelines for mortgage eligibility are up to 3½ times both annual gross incomes. Presuming you have the 10% deposit ( € 30,000 plus costs ) it may be 20% if the Central Bank get their way,, you could be buying a home in the region of € 300,000. So you need to start saving.
All lenders require you to prove your ability to repay whichever type of loan you require – it’s in your interests too ! If in doubt, remember the wise words of Polonius ( Shakespeare’s Hamlet ) to Laertes his son .. neither a borrower nor a lender be…
Essentially it is back to your budget to determine can you afford the repayments of any loan you wish to take out. Remember at the end of the day it is you who has to make the repayments NOT the lender.
4. RETIREMENT PLANNING
There are currently over 420,000 Irish citizens over the age of 65 and by the year 2050, there will be 1.8million citizens over this age – 767,300 by 2026, meaning that 16 years from now more than 16% of the population will be in retirement. In 2010, for every person who retired, there were 6 workers. In 2051, for every retired person there will only be 2. If you are happy to live on the current State pension of € 230.30 each week or whatever it will be when you retire, then do nothing. But you cannot discount the notion that by the time you retire, there may not be enough money in the government kitty to pay your weekly pension.
Even if you are only on the lower rate of tax ( 20%) it STILL makes sense to invest in a pension
- For every € 100 invested, it is only costing you € 80 – meaning that the fund would have to drop by 20% before you actually start losing money. On the higher rate of tax, it makes even more sense and though there are signs of the relief being reduced over the coming years, even at the 20% rate it makes sense.
- All growth in the fund is tax free.
- When you retire, 25% of this fund can be taken by way of a tax free lump sum up to a maximum of € 200,000. You can still take the full 25% of the fund, but if that is over € 200,000 you will have to pay 20% tax on the next € 300,000 if you are fortunate to have a pension fund of € 2million !
All companies are now obliged to both nominate an insurance company for pension contributions and have a facility to make deductions for such contributions directly from your salary. There is a € 15,000 potential fine if they have nt.
Depending on your age, the government allow you to invest a certain percentage of your annual income into a pension fund to avail of the tax relief. The thresholds are :
Up to 29 years of age 15% of net relevant earnings
30 up to 39 years of age 20% of net relevant earnings
40 up to 49 years of age 25% of net relevant earnings
50 years plus 30% of net relevant earnings
55 years plus 35% of net relevant earnings
Over 60 years 40% of net relevant earnings
There are four main components to a pension plan that should be considered :
- The strength of the insurance company where the pension fund is based
- The performance of both that company and the specific fund where the pension funds are maintained – though you would have to discount the last year or two owing to the credit crunch impact.
- The annual management charges associated with the pension fund by the insurance company
- The commissions or fees payable to the intermediary / broker who sets up the pension plan.
Do not rely on the State to support you in retirement – it may not be able to. There are still benefits to setting up your own pension now – the younger the better. Email me for specific and individual advice.
Finally let me touch on the one subject on everyone’s mind – WATER.
With the recent relentless rain storms and flooding, we could be forgiven for thinking that here in Ireland we are not short of water. Actually we are not but we are, like everyone else on this planet, short of clean, drinking water. Samuel Taylor Coleridge wrote the Rime of the Ancient Mariner in 1797 and was somewhat prophetic when writing water water everywhere, nor any drop to drink. Just over 70% of the Earth is covered by water but only 1% is usable. It is the new gold and we in Ireland are about to experience just how precious it is when like most of the western world we start to pay for the fluid.
Wastage is one of the critical issues that must be addressed. More water evaporates in reservoirs than is consumed by humans while the average leakage in Irish public water networks is 41% ( twice the OECD average ) We have approximately 25,000 km of pipes carrying water. These pipes, mainly made of iron, were originally installed in the 19th century and need replacing, this apart from the lead poisoning risks.
With 1.6 billion litres of water treated daily at a cost of € 1billion each year, you can see how costly it is to produce. There are 1.4 million households and 4.6 million people where the average family uses 436 litres per day or 150 litres per person. Dublin alone uses 540 million litres every day.
So we need to conserve and minimise the wastage of water. Now more than ever, not just because of the cost but because this resource is becoming scarce.
Untreated water carries disease-producing bacteria. Despite the recent storms, the fact remains that regardless of how much it rains, our treatment plants have a limited capacity with which to make the water that we do have, safe to drink.
Now that the residential water meters are coming, our finances as well as our fitness offer more compelling reasons to start saving water. We all can use a timely reminder of ways to cut back on our water consumption around the house in time to cut our looming water bills when they arrive.
With the average person using up to 150 litres of water per person per day, this can easily be reduced by at least a third. Water saving devices can cut consumption by around 25% with some products cutting consumption by 50%. There are many practical things that you can do at low cost or no cost at all that will save you lots of water and so, lots of money.
Water conservation can require sacrifice and lifestyle changes but with water becoming increasingly precious isn’t it time you thought how you can help your purse as well as the environment? Most people know of the deteriorating condition of our leaky water infrastructure. In uncertain times however, one thing is absolutely certain, water is going to cost more in future.
Despite our poor record in water management, Ireland has actually had some stunning successes on other environmental fronts to date, e.g. the almost elimination of the use of plastic carrier bags. Ireland has also led Europe with the first total No Smoking ban and its success has been emulated worldwide. This and other examples show that we can change if shown how! Why pay more than you need to? Save water today and both your purse and the planet will benefit tomorrow. You will find over 100 ways to save water in the latest Money Doctor edition.
John Lowe, Personal Insolvency Practitioner (PIP) is founder and managing director of Providence Finance Services Ltd trading as Money Doctor based in Stillorgan Co Dublin. He is author of The Money Doctor 2015 ( from Gill & Macmillan) tel +353 1 278 5555, email firstname.lastname@example.org for seminars or consultations ( only € 65 for 20 minutes). Web www.moneydoctor.ie – Twitter (@themoneydoc) Facebook & Linkedin
10 Do’s and 10 Don’ts to make life easier – financially
- Plan your finances – be positive.
- Put two hours in every month to sorting out your money issues
- Claim all your tax reliefs and allowances ( medical expenses, rent relief, pension relief, bin charges etc )
- Ensure you have a Rainy Day Fund ( 3 to 6 months annual income in an accessible and best interest-bearing account ) and at best interest rates
- If you have dependents – older or younger – protect them by protecting your life and income.
- Make sure you are providing for your retirement outside of the € 230.30 weekly State Pension you can look forward to at up to age 68 – depending on your age now.
- Cut down your banking bills – avoid overdrafts, never have a cheque returned, keep your current account in credit and receive interest rather than pay it.
- Use the internet for your accounts – you’ll never have to visit your bank branch !
- Check and recheck all your interest rates on a regular basis both for borrowings and savings.
- Diversify any surplus cash or savings across the different sectors.
- Do not presume your institution is loyal to you – yesterday you were a prospect, today you are a client.
- Don’t leave your surplus cash in a current account or low interest bearing deposit account. Email for free fact sheet on best interest rates in Ireland.
- Don’t exceed overdrafts – in fact avoid overdrafts if at all possible
- Don’t exceed your credit card limit ( and remember to pay on time, never take cash on the card and be careful using the card in non-EU countries – it will cost you. Use your credit card like a charge card )
- Don’t wait for your lender to call you in if you cannot honour the agreement – face full on and enter into an agreement.
- Don’t fall prey to the three reasons we neglect our finances – apathy, ignorance or lack of time.
- Don’t ignore your responsibilities or core values – respect for the commitments you undertook being right up there.
- Don’t pay tax needlessly – know your rights
- Don’t follow the herd – just because the Jones next door have bought an apartment in Turkey does nt mean you have to..
- Don’t invest in a project if you do not understand what it is you are investing in or it’s too good to be true.