By Frank Conway. Founder of MoneyWhizz – financial education
In personal financial planning, there is what is known as the ‘Life Cycle’. Generally, this is a list of the personal financial needs we all need as we grow and grow older, as we develop and have families and work our way through those various life stages. In general, there are five needs: savings, borrowing, protection, investing and retirement.
Borrowing is part of modern life and there is little getting away from the fact that for the vast majority of people will require one form of borrowing or another to provide basis life needs at various stages of their lives. A mortgage is a case in point that most people will be familiar with, it serves to secure a house and provide shelter. Car finance, student loans, overdrafts, credit cards…all are various forms of borrowing. All are also granted based on current income and as everybody knows, sources of income today are no guarantee of sources of income in the future… this is where debt can become a problem and ‘indebtedness’ becomes a critical problem. As we approach retirement, most people will plan to pare down on debt as they anticipate that regular income will cease post retirement.
This is where planning comes to the fore.
Following are six steps that anybody with debt or planning for their future financial well being should consider as a way of keeping their finances in check and on track.
1: List all your existing debts. First, gather and document how much you owe (or place a call to your debt provider to get and up to date account balance), the rate of interest you pay on each loan (credit cards provide this on the monthly statements) and how much money you currently pay to debt reduction each month.
2: Set your debt reduction goals. This can be a process of trial and error if you are not sure what you want to achieve so best be well organised before you start assigning funds to different debts. For example, are you looking to reduce any particular debt to a particular level by a specific time…for example, are you thinking about kids going to college and you want to have the car loan repaid. If this is the case, then plan accordingly. Set this as your goal. Do you want to be completely debt free by 50? Well, if this is the goal, how do you plan to manage your personal finances to achieve this.
3: Bringing some extra cash – if you are really tight for cash, the bills are arriving hard and fast and you feel that life is getting a little out of control, it may be time to check out some nuclear options (no, I’m not talking about doing a runner). There are some services like consumer surveys opinion monitoring and mystery shopping services that are always recruiting which can help being in some extra cash and sometimes this is all that’s need to keep your finances on track.
4: AVC withdrawals – this is probably bordering on the nuclear option if and when things get really tight but the Government does permit AVC holders a once-off withdrawal from their AVC fund of up to 30%. The option is only available up to 2016 and will provide some with financial relief at a time they need it most. No PRSI or USC is applied to the amount withdrawn but income tax is. This can be one way of slashing expensive borrowings.
5: Claim what’s yours– tax relief on qualifying medical expenses is 20% and you have 4 years in which to reclaim after which point, the benefit is lost forever. Relief is normally given by way of a refund. An individual can also claim tax relief on fees paid for Third Level courses in respect of any person as long as he or she has paid the qualifying fees. Qualifying fees means tuition fees (including the Student Contribution, post 2011), but not examination fees, registration fees or administration fees, in respect of an approved course at an approved college. Tax relief is available at the standard rate of income tax (20%) for qualifying tuition fees. The maximum limit on such qualifying fees for the academic year 2013/2014 is €7,000, per individual per course. These monies can be used to get any debts under control and keep your finances on an even keel.
6: Plan for your next financial goal. Once you’ve accomplished your debt-reduction goal its really important to keep your long-term debt levels manageable. Compare your spending with your income to make sure it’s sustainable. Also, if and when your finances permit, establish a personal rainy day fund, this will serve to bypass your need to rely on borrowings if and when needed. Saving even a small amount can make a difference.