For many, the first few months of a New Year is a time of inflated waistlines and shrunken wallets – not to mention the bills piling up until they can no longer be ignored. If this describes your position right now, keep on reading…
Many people start the New year in arrears, stretching just to pay the minimum balance on credit cards. Unless you up your repayments to clear that debt, you may find yourself in the same position – or worse – next year. And keeping it up will result in repaying these debts for the next twenty years. Here’s how you can keep your head above water and reduce your debt.
DEVELOP A REALISTIC BUDGET
Start by drawing up an annual budget. Knowing the exact running costs of your monthly household bills will help you plan your budget properly and if there is a surplus, you can plan for that too. Avoid unrealistic budgeting or setting too tight a budget that will be impossible to stick to. Track your spending using a notebook or on your phone so that you can learn to budget realistically. Keeping a comprehensive budget will also help you to prioritise your spending and identify areas where you could economise. Perhaps you can even create a surplus fund that will allow you to save towards short- and long-term goals, and develop a savings programme. EBS offers the best regular saver programme in Ireland, allowing you to save €100 to €1,000 per month for an agreed period of up to 12 months at 3%. Make the mental shift to understanding that your goals – everything from next Christmas to the exotic trip and the deposit on your new home – require planning and savings.
Economics 101 teaches us about the difference between ‘‘needs’’ and ‘‘wants’’, but it is hard for most people to put that into practice. It’s much more fun to spend money on wants than on needs. If you absolutely need it to survive, it is a want. If the item fits comfortably into your budget, by all means, go get it. However, if you can’t afford the latest gadget (and you can survive without it), you will have to set aside the money until you’re able to afford it.
DON’T COUNT YOUR CHICKENS UNTIL THEY’VE HATCHED
Few things in life are guaranteed, so don’t spend your money until it is in your account. You may have received a bonus last year, but that doesn’t mean it will happen again in 2018. A bonus is really nothing more than a windfall and should be treated as such. If you receive one, that’s wonderful, but do not factor it into your budget until you receive it. Develop a mindset of counting only on your monthly salary or your business’ net profit at the end of the year.
THINK BEFORE YOU BUY
Studies have shown that emotions influence spending decisions by 95%. The cost only influences decisions 5%. Personal finance is influenced 20% by knowledge and 80% by behaviour. When it comes to spending your hard-earned money, make your decisions based on what you need and not on want. Leases and loans will lock you into a monthly recurring payment that may influence the amount of money you have available for emergencies such as car repairs, medical costs or replacing items that break in your home. Thinking before you buy can help you avoid becoming overextended financially. Examine your budget and expenditures to ensure that you can easily afford something you wish to buy before you commit. This principle applies to all types of investments, including phone contracts, new cars, homes or investments. Most lenders will not approve loans with repayments that exceed 35% of your net monthly earnings. The rest should go towards your other living expenses.
KEEP A TIGHT REIN ON YOUR FINANCES
Don’t put yourself at risk by allowing someone else to control your money. If you earned it, you need to know how it is spent. Understanding your family’s finances – including income, investments, retirement savings and debts – will help you navigate negative situations such as illness, divorce and death better. These situations can put married individuals at risk, and it can add financial strain to an already emotionally strenuous situation. Much stress and tension could be avoided by knowing the details of one’s finances. On that note, it is important to prepare a will. For elderly people, insist on enduring power of attorney. Single individuals should know exactly where all their money is and what financial consultants or brokers are doing with it. By being involved in the process, you can negate any questionable activities that might negatively impact your future finances. Always avoid anything that sounds too good to be true, or that you do not understand.
SPEND CASH – NOT CREDIT
If you spend more than 20% of your monthly net income on loans and credit cards – excluding your rent and mortgage – you need to make a few changes. This is a major red flag signalling potential future financial problems. When you buy items on a credit card and you fail to pay off the balance, it will cost more in interest charges and that will impact on your savings over time. Instead, only use cash or only buy within your means. In a perfect world, paying off your total credit card bill every month will help you avoid large credit card debts that may prevent you from achieving financial security.
BE CREDIT SAVVY
Credit is a great backup plan that must be used wisely. You can avoid some of the unexpected pitfalls by reading the fine print on your credit agreement and by paying on time. Ultimately, it is best to limit the amount of credit you have. Remember that every late payment is recorded by The Irish Credit Institute (ICB) and it will soon also be in the all-new Credit Registry. The majority of credit card companies charge 20% and more on balances. While you may not be able to clear your maxed out credit card just yet, you may be able to transfer your balance to them at 0% for six months. This should give you some breathing space. Use this time wisely by coming up with a solution to your debt repayment. All lenders will always check your ICB credit standing on home loans, car finance, credit union loans, and switching banks.
The sooner you start saving for retirement, the better. When you start early, you will need to put away less every month as it will give your savings more time to grow. You should ideally save 15-40% (age depending) of your income if you wish to accumulate enough wealth to live comfortably in retirement. Ireland is home to 677,000 citizens aged 66 and over. This number will increase to 1.8 million by 2050. In 2013, there were six workers for every retiree, but by 2050, each retiree will represent two people in the workforce. Our lifespan has increased, and we have become healthier. That means that we need more money for retirement. Recently, the ESRI recommended that the age of retirement be increased to seventy and government will gladly delay auto-enrolment, which forces employers to contribute to employees’ pensions until 2021. That means that now is the time to start contributing to a pension scheme. Speak to a registered financial adviser about the best options for your needs. Since not all savings are guaranteed, it is important to choose an option based on your risk category with which you are comfortable. A good financial adviser will be happy to check your fund with you every year and provide explanations of its performance.
WEIGH UP YOUR OPTIONS
The longer the repayment term on a home loan, the more you pay. In the long-term, you can end up paying two-and-a-half times the value of the purchase. Save money by opting for a 15year mortgage and start building wealth. Lending institutions will soon offer 15- and 20-year fixed term interest rate options, which will make it worth your while to shop around.
ROLL OVER YOUR PENSION
If you have a pension and decide to change employers, find out about the options that are available to you. You should be able to take back your contribution if you have been paying for less than two years. Then you may either transfer the money into a self-managed pre-retirement bond that will give you control, or you could transfer it to your new employer. Either way, understanding your options now will ensure that you are prepared for retirement.
If you need help with your finances for 2018, just give us a call on 1890 60 65 70 or send us an email.