Someone once defined Economics, or Political Economy as it should more properly be called, as maximising the usage of scarce resources. Put simply, this mouthful means getting the best use of your money which in these recessionary times is certainly a scarce commodity.
Over 165 years ago, a certain Mr Wilkins Micawber quipped “Annual income - £20, expenditure £19.19s.6p – result happiness. Annual income £20, expenditure £20.0s6p – result misery.” Charles Dicken’s great character from David Copperfield was spot on all those years ago.
Whether you are a government, business, a family or an individual, the philosophy is the same. If expenditure exceeds income, you have two choices – earn more or cut costs. For some, earning more is currently a bridge too far and cutting costs is also a major challenge – pare ‘til you can pare no more – so whatever your situation, even bankruptcy, you have to manage your way through it. The final choice is prioritisation – which is why over 300,000 people cancelled their health insurance over the last five years.
Presuming you have completed an annual household Budget (email me for simple spread sheet) your expenditure can be broken into 3 categories, the ABC of expenditure:
A - Fixed Outgoings
B - Discretionary Spending
C - Savings
A - Fixed Outgoings consist of such things as mortgage/rent, loan repayments, electricity, gas, telephone costs, transport, educational, childcare, food and essential clothing, insurances etc.
B - Discretionary Spending covers all non-essentials such as entertainment, holidays, other sporting and leisure activities. Includes everything from alcohol, tobacco, birthdays, anniversaries, christenings and bereavements.
C - Savings would include the provision of a Rainy Day Fund. Remember the ideal is to have three to six months annual income in an accessible account - pension contributions, educational plans or other sums set aside to meet future expenditure for you, your partner and/or family.
Your spending should have mapped out on a monthly or weekly basis. Look at your fixed outgoings to see if there are cheaper alternatives. Electricity (the Big Switch), gas (Bord Gáis Energy’s new HiveHome.ie – save €120 pa on your heating/hot water via your smart phone), telephone / broadband and cable television are items that should immediately come to mind but there could also be substantial savings to be achieved by shopping around for cheaper car and household insurances and reviewing your life and health insurances.
For example, interest rates both for loan and savings products constantly change and what might have been the highest rate for your savings last year could very well be the lowest this year. Check and recheck your interest rates. Albert Einstein stated Compounding is mankind’s greatest invention as it allows the reliable systematic accumulation of wealth – this affects both lending and savings rates.
Now have a look at your net monthly income and see how it matches up to your outgoings. Remember also that while you would normally reckon on budgeting on a monthly basis, some of your bills such as electricity or gas are payable twice monthly or quarterly. However both of these utilities run budget plans which allow you to make monthly payments which are reviewed regularly based on metered usage.
All of these steps may achieve some savings but essentially they merely consist of a tidying up of your finances and something you should do every year, in good times or bad. That is why you need to spend about two hours EVERY month on your finances.
An area where savings can be achieved is in the field of discretionary spending but this requires discipline. Consider this! You go to the ATM on Friday afternoon and withdraw, say, €300. Monday morning check your pocket to see how much, if any, remains. How much of this spending can be accounted for, or has it just fallen through a hole in the pocket? This is where the diary or a ‘Track Your Spending’ APP will help (download the FREE Money Doctor APP from itunes or Googleplay). Find out what you are spending. Then you will know whether it was frivolous and unnecessary. You may have more important things to do with your money. Prioritising is key - as the amount of casual and probably valueless spending can be frightening.
I once worked with a newly married couple who had recently bought a house and earned relatively modest salaries. They had their spending mapped out to such an extent that they operated a daily budget and anything more than the cost of a daily newspaper required a council of war. However, they lived comfortably within their means and managed a very good holiday each year.
KNOW YOUR POSITION:
By now you will know your position and whether meeting your monthly commitments is causing or is likely to cause you problems. You should be totally honest with yourself because the early acceptance of difficulties can be crucial. Remember also that life can also throw up mini financial crises on a regular basis so factor some unexpected outgoings into your calculations. It is after all, about obtaining the best value for your hard earned money.
EXAMINE YOUR OPTIONS
Your mortgage repayments are likely to be your biggest commitment but in terms of interest rate they are also the cheapest. If you are fortunate enough to have a Tracker Mortgage (tracked to the European Central Bank - ECB rate, currently 0.05%), do not be tempted to switch to any other product. If however you are on a Standard Variable Rate Mortgage, some of these vary from lender to lender. Check where your rate is comparatively and certainly if on the high side, you should first of all consider switching to a cheaper lender but contact your own lender to see if they are willing to match. If you are not offered an attractive rate, you could shop around if you qualify:
- Less than 80% loan to value (so no negative equity switches).
- Have sufficient earning to justify such a switch (generally three times your annual income for BOTH applicants).
- Most lenders will now approve a mortgage up to age 70 – this has to be borne in mind if switching.
- You have a good credit history – no missed payments or judgments. Check your record with the Irish Credit Bureau in Newstead, Clonskeagh, Dublin 14. They track all loans, record missed payments – the record stays there for five. Years. If there are judgments – the record stays there for life. Call them at Dublin T: 01 - 2600 388 for details of your credit rating.
You may also have car loans, furniture or home improvement loans or overdrafts. The Sniper Approach. This is where you pay off the most expensive debt first… if you can. Some of these personal loans can attract interest rates over 16%. The greater the risk, the higher the interest rate.
These are hugely expensive – personal overdraft interest rates start at c.13%. Secondly the set up charges, referral fees, unpaid fees, surcharges (an additional amount of interest, could be 1% per month and are chargeable if you exceed the overdraft limit without permission ) are simply not worth it. Managing without an overdraft is the ideal. Remember also the requirement for overdrafts is that they must be in credit for 30 days each year.
So you have “maxed out” your credit card/s, where you have used the full credit limits in your cards. What are your options? Paying 3% of the balance each month effectively will create a 20-year loan for you based on the high credit card interest rates. If your credit rating is good enough however and you are still in satisfactory employment, then you could switch to one of the three credit cards that offer 0% on transferring you balance over to them for six months. Gives you time at least.
Overdrafts and credit cards are by far the most expensive borrowing so it makes no sense to use these to bridge the gap between income and expenditure.
You should establish your priorities in terms of debts and look at all your options. If you have an asset you can dispose of in order to reduce your borrowings, such as a holiday home you rarely use or even a second family car you should be prepared to swallow your pride and take the hard decision. It may not be conducive to sell, either inability to sell or not attaining the right price. Your option here is to negotiate with the lender in the first instance. Deferring any further borrowings until your finances are back on an even keel is of course essential.
If you are sitting on any substantial level of savings it would make sense to use some of them to pay off your most expensive borrowings, particularly credit cards or personal loans. Also, if you are making monthly payments to a savings plan and you have sufficient Rainy Day Funds, you should consider suspending the plan for a period and diverting the payment in reduction of your debts.
If your mortgage is sufficiently low and you have good equity in your home, you may be able to convince your mortgage lender to let you top-up the mortgage over its remaining term. However such loans are getting more difficult to obtain with some of the bank lenders only accepting their own personal loans for limited consolidation.
John Lowe, Personal Insolvency Practitioner & Fellow of the Institute of Bankers, is managing director of Providence Finance Services Ltd trading as Money Doctor and based in Stillorgan Co Dublin. He is author of The Money Doctor 2015 (from Gill & MacMillan). For consultations and corporate seminars, call (01) 278 5555 or email firstname.lastname@example.org Follow John on Twitter (@themoneydoc), Linkedin & Facebook