This week, John Lowe shows us how to appraise our finances and take control of our debt. The steps are quick and easy - plus thorough!
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.
Here in the first of 3 Parts, I will help you fix your finances as you set out on your journey for the rest of the year.
Over 165 years ago, a certain Mr Wilkins Micawber quipped "Annual income - £20, expenditure £19.19s. 6p – result happiness.
Annual income £20, expenditure £20s. 6p – 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 similar – pare til you can pare no more – so whatever your situation, even bankruptcy, you have to manage your way through it.
Negative equity: When you owe more than the value of the property – only comes into play when assets HAVE to be sold to meet debts. Remember you were approved on the basis that you had sufficient income (your number one asset ) to meet your loan repayments. If you still maintain that income, and it is sufficient to meet the agreed payments, then the value of the property is irrelevant especially if you intend to stay and pay.
Debt management is not just a simple matter of setting aside a certain sum each month to meet the mortgage, loan and other fixed repayments. It requires planning, prudence and a degree of discipline which many of us may have lost sight of during the boom years.
New Year is often the time for reflection and now that we’re in the second decade of the 21st century, this could be the time to take control of our lives. There are two keys that will unlock the maze of personal finance - organisation and control. Let us, first of all, understand some of the issues:
What is Debt?
Debt comes in many shapes or forms but can be divided into 3 simple categories.
1. Long Term Debt. This would mainly consist of mortgages but can also include any other debt with a span of greater than 7 years.
2. Short Term Debt. Borrowings which would run for less than 7 years and can include borrowings for car purchase, furniture, holidays, educational or other family purposes. Increasingly this also includes conversion of hard-core overdrafts and credit card borrowings.
3. Running or Current Debt. Typically this would include recurring bills which have to be settled every 2/3 months i.e. utilities such as electricity, gas, telephone/broadband etc. Credit cards used for day to day expenditure would also be included here.
The explosion in the availability of easy credit from 2002 onwards changed most Irish people’s attitudes towards borrowing.
The escalating wages/prices-spiral lead people to believe that borrowings could be comfortably repaid from ever-increasing disposable income. Most of us, therefore, thought nothing of taking on levels of borrowings that would have horrified the previous generation who had suffered through the lean years of the 80’s.
For many of us, we became the 'Must Have generation' and although core values and overt religious beliefs have sadly disappeared from many of our lives, we adopted a 'God will provide' attitude towards coping with debts. Isn’t there an old Irish saying 'God helps those who help themselves…..'?
The crash of 2007/2008 has meant that most people who have been fortunate enough to hang onto their jobs have suffered sizeable reductions in real income through a combination of pay cuts and income levies.
Add to this the interest rate increases for all but holders of tracker mortgages and the pressures on borrowers are all too obvious.
Therefore for many people, the long-term benefits of creating and implementing a financial plan as described in an earlier chapter must take second place to facing up to the demands of the here and now.
The immediate problems of many people are: -
- how to bring up their families with decency
- live their day to day lives with dignity
- maintain a measure of optimism for the future
If you are on top of your debts and are able to meet all your repayments, lucky you!
However, nothing is forever and if your circumstances were to change, my suggestions in this piece could be your saviour.
Where are you now in your financial life and where do you intend to be at the end of this year? 5 years time?
More importantly, where are you now in relation to 12 months ago and what steps have you taken to prevent any further drift?
As I said, debt management is more than meeting your loan repayments as they arise. It should be an active rather than a passive exercise and should form part of a strategy of constant review. If you are in control of your finances now, it’s important to stay there.
Where to Start
1. Look at your families’ net monthly income and while you may not be able to increase your gross earnings, it is important to ensure that you avail of all the tax allowances and credits etc.
For instance, have you claimed your medical expenses, dental costs, bin charges, even your rent or pension relief? For the last few years? Well, now there are Irish companies who specialise on refunding the tax you have paid from the relief you should have been allowed – and up to 4 years of a refund!
To find out if you are eligible for any refund on a no refund - no fee basis, you could contact the likes of www.taxback.com or www.redoaktaxrefunds.ie and you will be contacted within 48 hours to start the ball rolling. Both those companies charge a percentage of any monies recovered.
Social Welfare and Child Benefit payments, additional jobs, and any other forms of income should all be included in your net monthly income.
2. Now consider your expenditure. A monthly budget template should help you with this. Many of us have no clear idea of our spending on such things as groceries, travel, entertainment or clothing. On the other hand, we know only too well how much we spend on utilities, heating, insurances etc.
Over a typical three or four week period try to keep a record of all your spending - use a diary or notepad - and involve your partner and family so that a full picture of family expenditure can be determined.
The initial shock of how much you spend on casual unwanted items will wear off, I promise you! That latté, that bar of chocolate you munch every time you fill your car with petrol, the magazine bought you don’t have time to read – the list goes on.
3. Go through your bank statements for three months and have a look at all Standing Orders and Direct Debits. Are you still continuing to pay club subscriptions or making donations to charities which you no longer wish to continue? Consider each and every financial commitment – are they all necessary? Is there a cheaper option?
Remember the Money Doctor mantra:
STOP SPENDING, AND IF YOU MUST, ENSURE BEST VALUE
The Budget template can then be completed and your expenditure can be broken into three categories, the ABC of expenditure:
A - Fixed Outgoings.
B - Discretionary spending.
C - Savings.
Fixed Outgoings consist of such things as mortgage/rent, loan repayments, electricity, gas, telephone costs, transport, educational, food and essential clothing, insurances etc.
Discretionary spending covers all non-essentials such as entertainment, holidays, other sporting and leisure activities. Includes alcohol, tobacco, birthdays, anniversaries, christenings and bereavements.
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.
Next week in Part 2 we analyse your spending and examine your options. Stay with me….
For more information click on John Lowe's profile above or on his website.