I have to admit; my mother’s voice is getting louder and louder. I think she was right; managing money really does matter.
I spent my 20s completely ignoring my finances. When I got my first job, it was after a life of student living and slaving to simply survive day-to-day. So, work was a release. Extra cash, a social life that I could afford and destinations I could visit. Yes, I enjoyed my 20’s, a lot! I didn’t have zero in my bank account, I had a big fat, red negative when my student debt was added back in.
So, here I am, in my early 30’s and mother catches up. Except I won’t tell her that! But seriously, I think it is time to get serious about money. I want to eventually own a home of my own and have some bit of financial security (I’d like to meet someone nice but that might be something you can help me with.).
Where do I begin?
John – Dublin
There is nothing wrong with how you have lived to date, life is about living. Along the way, the important thing is to find a way to also build some financial security too!
The following are some of the main issues you need to give some consideration to as you begin your money journey.
1. Your Take-Home Pay
A big mistake a lot of people make when it comes to their income is they think in the context the gross income, not the net, this is the money remaining after all of the other stuff, likes taxes, charges and other deductions are taken out; this is a very common mistake.
Depending on your rate of pay, your employer etc, a lot of that gross pay can reduce to net or take home pay pretty quickly. For example, in addition to income tax, PRSI, USC and other deductions, including even a pension, you might find that the money you have left over to pay rent, food, travel, heating etc can be less than you might have bargained for, or need, especially if rents are increasing. So, it is important to understand this and plan accordingly.
If you’re freelancing or working as part in the so-called gig economy, review the last six months of income and take an average.
If you have medical expenses, claim them back from Revenue, you can use a Med1 form for expenses over the last 4 years and the process is relatively straight-forward. Also, as you live in an urban area, you should look at the Tax Saver option for public transport. This is one of the many ways of keeping a little more of your income for you!
2. Your Private Pension Contributions
Although your retirement is still far off in the future, most people in their 30’s may not think of this as a priority; this would be a big mistake. Employers will often provide the option of making retirement savings contributions directly from wages. You will see the money leaving your pay and that is why it can be tempting to consider it almost as a form of tax. In fact, you have the option of paying a minimal amount or paying none at all (employers have various rules on this). But opting out would be a major financial mistake that you’re likely to regret in the future.
“Starting early with any retirement savings plan triggers the enormous growth potential of compounding and compound interest” says Mr. Frank Conway, personal finance expert and Founder of MoneyWhizz.org.
While it might be a little early to start any attempt to project how much you’ll actually need to live on in retirement, keep in mind that by starting early, you will have built up a very significant nest egg that will remove having to work a lot harder to achieve the same result if you delay until your 40’s or 50’s.
Plus, in addition to the actual money you put aside, keep in mind that many employers will also put money into your nest egg and even the Irish Government does by way of tax back, also called tax relief. So, if you were targeting to save €5,000 per year, this may in fact only cost you between €2,000 – €2,500 a year depending on your tax bands, age, employer etc.
3. Your Debt (and Interest Rates)
A range of recent reports here in Ireland reveal that people don’t fully understand the cost of credit on a wide range of borrowings. On a Personal Contract Plan (PCP), many car buyers remain unaware of the true amount of the final balloon payment. On credit cards, people often assume the minimum payment is the set monthly repayment and then choose to repay using the minimum payment option –one of the most costly mistakes they can make.
The cost of any debt is determined by 2 things; the rate of interest charged and the term of the debt; months / years they have chosen to repay it. The longer the loan term, the more interest paid.
Example: A €10,000 car loan at 7% rate of interest will cost €1,100 less if repaid over 2-years than over 5. Naturally, the monthly repayments will be higher but this is the price you pay to slash the total cost of interest.
Credit cards are even more expensive. A €500 debt on a credit card can cost almost another €500 in interest charges if only repaid using the minimum payment option. So, if you have credit card debt, prioritise its early repayment as it will just keep creeping up and take years to repay.
The trick with any debt, especially credit cards is to pay them off quickly to reduce the total cost of interest and charges you’ll have to pay. This ultimately puts more money back in your pocket!
4. Your Credit Profile
Many people may have heard of their credit report but not enough fully appreciate the enormous power and potential of the data held, especially how we manage debt.
When you borrow, it is vital to absolutely stick to the repayment schedule, no matter how tight money gets. This is because all debt is part of a legal contract between you and your lender. If you don’t pay on time or full each month, this information is recorded by your lender and reported to each of the 2 credit reporting companies in Ireland; the Central Credit Register and the Irish Credit Bureau.
And it case you might think that a bad credit record might limit your chances of getting a loan at just your existing lender next time, think again! It will severely limit your chances of getting a loan approval at any lender. This is because every regulated lender in Ireland must consider your credit profile as part of your application. So, if you forgot to pay your student loan to a local bank or credit union, just because you apply elsewhere, the new lender will still see that missed repayment and it will be counted against you.
5. Your Savings Account Balance
Each one of us will run into some form of financial emergency at some point in our lives. So, it is really important to avoid getting into debt just to get out of a temporary money emergency. Building up a small emergency fund not only makes good money sense; it also allows you to keep more of your money in your pocket.
I recommend at least 3 months living expenses saved for those little emergencies, like a car breakdown. Make your money goal achievable; one that you know you can reach by matching it to your income and expenses. If you want to save €1,000, you could do that over 90 days by saving €11 per day. If you don’t think you can squeeze €11 per day, adjust your money goal or the time to achieve it.
Once the emergency fund is sorted, move onto the bigger ones, like saving that 10% deposit for your first home.
Also, being able to demonstrate you have the discipline to save regularly is really important. It works in your favour when applying for a mortgage. Lenders look for evidence of financial discipline, so, those small savings steps can lead to big money success in the long run.
Btw – sorry, I can’t offer any advice on the dating matter – good luck!
Frank Conway is a Qualified Financial Adviser and Founder of MoneyWhizz.org