John Lowe shares his 5 point guide to financial happiness for the under 35s.
The Economic and Social Research Institute (ESRI) produced a report recently stating among other things that people under the age of 35 are likely to pounce in the property market now that the confidence has returned, confidence that has driven up the market in some areas, especially the key urban areas of Dublin, Cork and Galway.
The report indicated house prices, as opposed to apartment prices, are rising rapidly – 10% in the first 6 months of 2017 and that 4 out of 10 people currently renting, could also afford a mortgage with the majority of those tenants under the age of 35.
The semi detached house and townhouse in the three cities are now much in demand as apartments become totally inadequate for family life. It also means the apartment market is currently stagnating especially as we are back into a baby boom cycle.
While the Central Bank lending guidelines plus the lenders’ own punitive parameters (why do they stress test mortgages with an additional 2% interest when interest rates are probably going to remain static for the next 5 years?) are barriers to first time buyers, yet the positive approach to own a home remains for this sector.
Are you in this sector?
Under 35 years of age, no responsibilities, good permanent employment with the whole world at your mercy
Then a word of caution – think first, plan carefully and implement slowly before embarking on decisions that will affect the rest of your life. For instance, you may be thinking of getting married or moving in with your partner and buying an apartment as they are far cheaper than houses - it is after all the first step on the property ladder.
But when the children come along and you have outgrown your apartment, will you be able to offload this apartment?
You may need the equity for the new purchase or you may not be able to afford both mortgages. Even buying an apartment today does not guarantee the value – it may still depreciate.
So what should you consider before embarking on these decisions? Here is a 5 step guide to point you at this vulnerable time in your life in the right direction:
Whether you are a government, a business, a family or individual, the books still have to be balanced and if expenditure exceeds income, your two choices are to earn more or cut costs.
There are still many in our society who are trying to emulate Oscar Wilde’s boast: Anyone who lives within their means suffers from a lack of imagination!
It is absolutely essential therefore to plan your life and your finances. A simple monthly budget can start the process to determine the surplus, if any, for planning purposes. Spread sheets, budget word documents, there are many aids to help you.
To streamline your budget and irrespective of whether you have a surplus or deficit, run through your expenditure and ask two questions
a. Do I need this item of expenditure?
b. Is there a better or cheaper alternative?
Your number one asset. Ideally, you have permanent and secure employment or if self-employed, a few consecutive profitable years – lenders work on NET INCOME for self-employed not the gross income.
If you want to work out mortgage affordability as an employee, the better method is Net Disposable Income (NDI). 35% of your net pay each month – that is after tax – should be the maximum spend on financial commitments including your mortgage.
Paying rent regularly will not influence lenders on your ability to repay a loan. In other words, say as a couple if you earn a net €4,500 per month, then 35% i.e. € 1,575, is the maximum allocation each month for your mortgage, car loans, credit union loans, personal loans, credit card payments etc.
Certain professions enjoy a more favourable consideration – accountants, solicitors who ordinarily earn greater income and generally as they age.
Do not be misled or persuaded that you can afford a mortgage – it is you who has to pay the mortgage, not your adviser or lender and these parameters are there for a reason.
65% of your net income is earmarked for your current and future living costs. You do have to live outside of repaying debt! Life is for living.
At 35 years of age, you should not only have saved a decent sum at this point but you should be saving a certain percentage of your net income every month.
The ideal Rainy Day Fund (RDF - for emergencies, sudden loss of income or that investment opportunity e.g. the 10% deposit required for your home) should have between 3 and 6 months annual net income in a completely accessible account.
So as an example a couple on €4,500 net each month, the ideal RDF amount is €27,000 which might need a supplement for that 10% house deposit if they are looking to buy after a year.
Many of the deposit takers operate regular saver accounts where you can save from €100 to €1,000 every month for 12 months with an attractive and potential rate of up to 3% (email me for details).
Deposit rates are at an all-time low and apathy reigns supreme when the average depositor is looking to invest so shop around and keep tabs on the maturity of your deposits – they normally gravitate to a 0.1% rate!
Security wise, the Deposit Protection Scheme covers depositors up to €100,000 per person with every deposit taker.
If you are in home purchase mode, there is also no point in locking this money away as you will need this for that deposit, costs, furniture, the RDF etc so here are the best DEMAND accounts - totally accessible - currently in Ireland
- Rabodirect – 0.4% (net 0.236%)
- KBC Bank – 0.45% (net 0.2655%)
4. Baby Boom
Yes, it is that time again…and we are in the middle of another cycle. Saving for future children is now more important than ever. The cost of raising children is higher than it ever was to maintain and care for them. From birth to the completion of 3rd level education – and without school fees – the costs run at a total of €247K (source: LV Insurance) while the cost of sending your child to 3rd level alone (again without fees) runs to €42K (source: Bank of Ireland) so planning is essential.
Investing the current €140 Child Benefit per month into an account attracting an interest rate of 3.5% annually (and you would be lucky to find a deposit taker offering this) for 18 years will reap €41,940 and fund that 3rd level education.
This means not touching the Child Benefit for 17 years and funding the 18th yourself! Most families sadly need it and use it as part of their monthly income.
There are though so many areas in your children’s lives where we can economise – and do not be afraid to include them in this exercise.
One other necessity is life cover when you DO have dependents. The recommended cover outside of mortgage protection is 10 times your net annual salaries until completion of your youngest’s 3rd level education. Income protection should also be considered – the only type of insurance outside of unassignable pension life cover allowing tax relief at your marginal rate.
5. Retirement Planning
There are currently over 677,000 Irish citizens over the age of 66 and by the year 2050, there will be 1.8million citizens over this age - 767,300 by 2026, meaning that 9 years from now more than 16% of the population will be in retirement.
In 2010, for every person who retired, there were 6 workers. In 2051, for every retired person there will only be 2.
Another fact is that half of the current earning population of Ireland does not have a pension.
They are obviously hoping that the State Pension (currently €238.30 per week) will be enough to tide them over at that stage and that the government will still have the funds to be able to pay it when they eventually reach retirement age at 68 and counting.
Pensions still make sense – even at 20% tax rate, contributions into a fund mean that the fund would have to drop at least 20% before a loss is incurred. All growth in the fund is also tax-free and you can take 25% of the fund or € 200,000 – whichever is the greater – on maturity as a tax-free lump sum. Still a sweet deal!
From age 30 to 39, to maximise the tax relief on pension contributions, you can invest up to 20% of your net relevant earnings and receive relief at your marginal rate.
In five words let me give the final piece of advice to the under 35s… spend less and invest more.
For more information click on John Lowe's profile above or on his website.