When January rolls around wellbeing is the hot topic for most people, and with good reason. In a recent survey, Grant Thornton found employees in the workplace all suffer from stress. They also found that 70% of that stress was financial.
January is a really brilliant time of the year to address your finances as we cope with pandemics, global economic uncertainty and changing financial circumstances. We need to face reality, we need to plan and complete that plan.
Ultimately, financial planning is about tailoring a solution to meet your precise requirements. Having said this, there are a number of 'universal' needs that most of us face.
So to start you off on your plan, here are John Lowe of Money Doctors’s 10 universal financial needs:
1. Having an emergency fund to cover unexpected expenses
Usually three to six months net annual income in a totally accessible deposit account (best demand rate currently is 0.01% gross or net after DIRT tax 0.0067%!) for emergencies, sudden loss of income or that investment opportunity.
2. Paying off any expensive personal loans and credit card debt
If you only pay the minimum balance of your credit card debt each month, it will take you up to 20 years to totally clear that debt. A sobering thought… Transfer your card balance at 0% - best of them is An Post Money at 12 months.
3. Short-term saving for cars, holidays, and so forth
Holidays come around every year so there is no point in taking a three year loan for your summer holiday unless you plan to sit at home for the next two years after the holiday! Christmas loans should only be for one year.
4. Income protection, in case you are unable to work for any reason
It also has then added benefit of being the only type of insurance (outside of a life policy in your pension) that attracts tax relief at your marginal rate of tax. This especially for sole earners in families.
5. Life assurance for you (and, if relevant, your partner)
Very few now smoke but an added incentive is if you do smoke to give it up for 12 months – your insurance premium will be half the cost apart from the health benefits. If you have dependents, they need to be protected in case anything happens to either parent right up to completion of their 3rd level education.
6. Starting a pension plan (in my opinion it is never too early)
I could write a book on this, there is such a problem in this country. In 20 to 30 years’ time, I believe the government will not have the money then to support the State pension for the 1.8million pensioners at that time. We all need to address this now whatever your age. More than half the country’s working population are hoping to rely on that state pension when they retire as they have nothing else.
7. Buying a home with the help of a mortgage
It is still difficult obtaining mortgage approval and finding the 10% deposit (20% for 2nd time borrowers) is as difficult meeting the income requirements of 3.5 times your income. There are 10 lenders who will consider giving you more than this as they are allowed under the exemption rule ... but be quick as these lenders run out by March/ April. Thirteen years ago that was five times and in some cases even up to eight times. Those with mortgages should be reviewing their rates to see if they can obtain a better deal – don’t be afraid to switch!
8. Saving for major purchases
We all need to save but especially for those larger items like a car, deposit for a house or extension. Falling into the Personal Contract Plan (PCP) trap means you have a revolving loan that never ends unless you save for that lump sum to pay off on maturity of the loan.
9. Planning for education fees (if you have children), whether for private school or university
It costs €42,000 to send one child through third level education in Ireland, and that’s without fees that are bound to be introduced in the coming years (outside of registration fees) Saving your Child Benefit from day one (€140 per month) and earning no interest will yield €28,560 when it stops on the 18th birthday. Most families use this money for living purposes.
10. Building up your personal investments
The buzz word is "diversification" – don’t put all your eggs in one basket. While the stock market is the best return of all asset class over any period of time, timing is essential. The 26th BULL (rising) market - only 2 years shy of the longest … 1987-2000 stopped by the DOMCOM bubble bust – was matched last March by the 26th BEAR (falling) market and has been volatile since – gold is a good barometer of the volatility. Five years ago you could buy the precious metal at $1,000 per troy ounce. Today it is double that.
To this, I suppose I might add long-term care planning if you’re worried that your pension and/or the state may not provide for you sufficiently in retirement. For example, those with ARFs and AMRFs still need to manage their monies as they need to produce at least 5.5% return on their pensions each year otherwise they will run out of money. Caveat emptor.