Question: How much would you have if you doubled one cent every day for the month of September?
Answer: Read on!
Personal financial planning is more important than ever especially if you are to believe medical experts who predict many of us will live to a ripe old age.
But all too often, financial planning is presented by financial planners as a mathematics exercise.
It’s a love affair, not a scare affair.
Financial services is flooded with archaic terminology which sometimes confuses even the experts. Take ‘Automatic Income’, a feature of unit linked bonds. While the term may signal an income feature, it is instead a cash-out feature, in other words, the customer simply taking their own cash back and NOT receiving an income at all. Within the pensions arena, things get much more confusing with layers of rules, regulations and terminology causing even the most seasoned experts to strain.
Personal financial planning must begin with a regular review of the basics. This can be achieved through five very simple tools: A personal income and expenditure sheet, income documents, bank account statements, credit card (and debit card) statements and receipts. That’s it for a majority of families.
Sweat the detail and the money will take care of itself
All too often, I hear people say how they have too little left over at the end of the month to save to retirement. However, after just three months of tracking their spending and improving their own personal relationship with money, many are surprised with the results.
Following are some simple steps all families need to take in order to improve their personal finances:
1. Identify where they are financially today. This includes analysing all income, outgoings, value of property, cars, pensions, stocks and bonds…everything that informs if one owns or owes more (or less).
2. Set goals. For example, how long do you plan to work…do you have children that will require third level education…have you made arrangements for possible inheritance tax bills for your children…will you need ready access to funds on retirement?
3. Develop a plan. Make sure you have a plan that will minimise future tax liabilities and that your investments are liquid which can be accessed quickly should you need. Illiquid funds like property can take far longer to access.
4. Monitor progress. When we set personal financial plans, we do so on the experience of today and future expectations. But future needs WILL change due a wide variety of factors, including loss of employment, family breakdown and illness. Because of this, it is really important that you review your financial plans to adjust accordingly to meet future needs.
But back to my original point about money. It is all about the relationship you have with it. Checking in often and inspecting it regularly will ensure it remains top of mind and under control.
One last thing, my opening question:
One cent doubled every day during the month of September will yield...€10.7MILLION!
Frank Conway is founder of MoneyWhizz.org, a personal budgeting and financial education resource developed for students and adults.
The Irish mortgage market continues to be extremely weak. This is based on a detailed analysis of mortgage lending statistics published by the Irish Banking Federation for H1, 2014.
On a statistical level, the latest figures look promising; lending is growing. But all is not as well.
On review of the actual number of mortgage units for a house purchase, activity is very low. For this measure, I only use three of the five mortgage categories listed by the IBF, which are first time buyers, second time buyers and investment property mortgages (I omit top-up loans and switcher mortgages).
Combining the 1st and 2nd Quarter figures, a total of 7,463 mortgage units have been completed.
Comparing the combined 1st and 2nd Quarters of 2013 to those of 2014 reveals a significant rate of growth, but such a comparison would be wrong since Q1, 2013 was a mortgage washout following the ending of Mortgage Interest Relief (MIR) in 2012, which ‘sucked’ a lot of additional mortgage business out of Q1, 2013.
A fairer and more reliable comparison would be Q2 and Q3 2013 with Q1 and Q2 of this year. Doing so reveals a more reliable growth trend.
Where all of this is going is what can we expect to see in terms of total lending for house purchases in 2014.
At a very minimum, if the best lenders can do is continue their current rate of mortgage lending growth, we should see in the region of 15,000 – 18,000 mortgages drawn (for house purchases) during 2014. Not too shabby when one considers that at the end of 2011, total units were barely more than 11,000.
But lets say lenders do reach the 18,000 mark, how does that compare to past years?
The answer is a little disheartening.
18,000 mortgage units for home purchase takes us all the way back to 1974, when a total of 18,313 units were originated.
Too Few Lenders
The real problem in the current mortgage market is that of too few lenders. AIB and Bank of Ireland are the dominant players, lending up to 92% of the value of the property. Beyond that, other mortgage participants are active, but much less so with some still hampered by severe mortgage arrears.
The ongoing ‘recovery’ in the Dublin property market is based on the narrow limitations of a significant cash audience. For a more sustained and broader recovery to take hold, we need a more robust mortgage market.
Good news for mortgage holders
For Irish mortgage holders, the decision means that interest rates remain at historic lows resulting in continued record low monthly repayments for the estimated 400,000 residential tracker mortgage holders here.
Bad news for savers
For Irish savers, the news should be less welcome. Over the course of the last 12 months, savers have been hit with a steady reduction in the amount of interest income they can expect to earn on their money. Additionally, the very significant rise in DIRT payable on interest earnings means that savers are being harshly punished for their prudence, a trend that is expected to continue as more and more banks reduce the rates of interest they are prepared to pay.
Across the savings spectrum, only one bank pays 4%, which is Nationwide UK on a regular savers account with a broad majority of banks paying, in some instances, fractions of a percent to their customers. Savers, who were broadly courted a few short years ago by banks, many of which were struggling to repair their capital ratios have now pushed those very same customers into the persona non grata category.
Credit card users will end up paying significantly more in interest charges when they use them for cash advances compared to using them for purchasing goods.
This is the latest finding of an analysis of credit cards conducted by MoneyWhizz.org, the financial literacy website.
Within the Irish market, consumers that sign up for so-called ‘sweetener’ deals at zero percent interest on balance transfers will be liable for interest charges of 20% or more when they use their cards for cash advances. This higher rate of interest is charged from the point of the cash advance, there is no grace period and payable until the bill is paid in full. Card users could have be paying two rates of interest, one for purchases and one for cash advances until the bill is fully paid off.
“Consumers need to look beyond the interest-free periods and factor in what their credit borrowings will really cost them, particularly now as the holiday season is about to begin” said Mr. Conway.
For this analysis, MoneyWhizz.org compared the leading credit cards on offer from Bank of Ireland, AIB, Permanent TSB, Tesco Bank, KBC and Ulster Bank.
It analysed the cost of repaying a balance of €1,000 using a minimum payment formula popular with most card issuers (3% of the outstanding balance).
AIB’s ‘Click’ card (statements must be accessed online) offered one of the best deals in the market on purchases while the Tesco Bank Club Card offered one of the best deals on cash advances.
Bank of Ireland and Ulster Bank were highly expensive on their ‘Student’ cards for cash advances with interest charges exceeding 21%.
Additional fees and charges
Cash advances also typically incur various other charges and fees which impact on the card’s overall cost of borrowing, measured as the cards annual percentage rate or APR.
Full analysis as follows:
Some important tips on reducing cash advance fees and charges:
As outlined above, one thing to keep in mind when considering a cash advance on a credit card is the higher cost of interest (and APR). Also, users generally will not have a grace period before interest starts accruing. They also typically have transaction fees so it is important to know what this will be before making any withdrawal. Users will have received a copy of the fees from their card issuer or can access the same information on the issuer website (moneywhizz.org was able to access fees data on all issuers for this analysis).
• Transaction fee: You will pay a transaction fee for credit card cash advances
• APR: The APR for cash advances is often higher than for credit card purchases
• Interest-free period: Cash advances often begin accruing interest at the time of the withdrawal, meaning there’s no grace period
Some easy ways to limit the fees associated with a cash advance
• Limit transaction fees. Some transaction fees are a percentage of the overall advance; in that case, you could limit the fee by withdrawing only as much as you need. Other transaction fees may be a flat rate or a combination of a flat rate and percentage of the transaction. In this case, if you take all the cash you think you’ll need at once, instead of making multiple smaller transactions, you only pay the flat fee once.
• Plan your repayment. Remember, your repayment will be accruing interest until the amount is paid off. Always try to have a plan for how and when you’re going to pay back the advance.
How to avoid taking a cash advance
• Make purchases with your credit card. If you have the option, you can often limit interest and transaction fees by charging purchases to your card rather than getting a cash advance.
• Avoid unnecessary purchases. Ask yourself if the purchase you intend to make with your cash advance is worth the extra fees, or if it can wait.
• Check your balance. Don’t use a cash advance as a buffer just because you’re unsure how much money you have in your bank account.
• Create a budget. A budget will help you compare your income to your costs, so you know how much you can save to cover unexpected expenses in the future (to learn more on how to structure a personal budget, check out this free website: http://www.irishfinancialreview.com.
• Build an emergency fund. Occasionally you’ll need to pay for things that aren’t in your monthly budget, such as car repairs. By building an emergency fund when things are going well, you may be able to avoid having to use credit card cash advances for these transactions.
Why do cash advances cost card users more?
In a nutshell, risk! Bank all over the world use what is called risk profiling to assess the patterns, behaviours and risk factors associated with card users. Those that have come to rely on their credit cards are determined as a high risk category of potential default, which is why card issuers charge more. So, for users, they just need to think about the financial consequences.
Frank Conway is the founder of moneywhizz.org, the financial literacy initiative developed for students, young adults and not-so-young adults.