Pandemics may come and go, as will lockdowns, but education will continue. Whether school-going or home-schooled, when it comes to financial education our children know very little.
When people bemoan the Irish education system, they tend to go on about the same things: the impracticality of rote learning; the pressure of exams; the expense of grinds, uniforms, books... But what really annoys is that between all the languages and mathematics, the basic principles of finance appear nowhere in our core educational structure.
Not only does this contribute to a lack of prudence when many young people start college and their first part-time job, gaining personal freedom and financial freedom all at once; but it also means we have a swathe of young professionals who don’t understand the basics of what they’re earning, or the potential for where that money could go.
My own son when he was 19 years of age in his first year in college – he’s now a chartered accountant with a Masters in Finance – asked me "what’s an overdraft, Dad?"
So, where do we start? John Lowe of Money Doctors.ie gives 4 quick insights into the after-school finance lesson….
1. Understanding your payslip
This is a basic one, but wages can be confusing. You may have an idea that you will be charged tax on your earnings, but your first payslip can be disappointing if you don’t know what to expect. You will see three tax terms on your payslip, the biggest of which is PAYE (Pay As You Earn, often referred to as plain old income tax), USC (Universal Social Charge) and PRSI (Pay-related Social Insurance).
USC is a tax introduced in 2011 and currently does not apply to those earning less than €13,000/annum; while PRSI is a tax paid by almost everyone in the State under the age of 66, which goes towards funding national social insurance costs such as social welfare.
If you pay into a pension, you should also see this, often referred to as PRSA (Personal Retirement Savings Fund) or AVC (Additional Voluntary Contributions). I was quoted in a national newspaper recently when I regaled the story of a young 26 year woman who had a face to face financial consultation with me (Zoom is now considerably easier) and was visibly upset at the end when she discovered she had missed out already on two years’ pension contributions!
The rates of tax that you pay are affected by factors like your salary and marital status, so it’s important that you keep Revenue up to date to ensure they have these details correct – and that you understand your payslip so that you know how to spot any potential anomalies. You can find out all about the tax rates, bands and reliefs that apply to you on www.revenue.ie.
2. Saving for a mortgage
'Mortgage’ is almost a dirty word in Ireland at the moment, with many young people feeling as though they will never have the opportunity to own their own home.
This is why learning about managing your finances at a young age is vital: the sooner you understand how being financially aware can help you in the long run, the easier it is to prepare; and the earlier you get into the habit of saving, the quicker it will become natural to you. Imagine you work part time and begin saving €100 per month from the age of 18; this will enable you to have a lovely nest egg of over €6,000 plus interest by the age of 23.
Up that to €250 per month from then on, and by 30 you’ll have a comfortable deposit of just over €27,000 plus any interest – and with the average price of a house in Ireland currently sitting at around €290,000, that’s exactly where a first-time buyer should hope to be with a 10% deposit unless you are fortunate to have parents who firstly are solvent and secondly wish to give you a leg up the mortgage ladder up to €335,000 tax free inheritance (the threshold from parent to child) now rather than when they die.
Of course, if there are two of you saving…
3. What interest rates really mean
Another simple-sounding point, but it’s important for young people to know the impact interest rates can and should have on their money choices. For instance, if you ever intend to apply for a credit card (which shouldn’t be a first, or even second port of call), will you understand the interest rate on the money you will owe – and how long it could really take to pay off your debt if you only pay the minimum payment due each month? Mortgage interest rates similarly need scrutiny.
The best deal doesn't come to you – you have to find it. Do you also understand how DIRT (Deposit Interest Retention Tax) can reduce the interest earned on your savings by so much that it is often rendered nearly negligible? As interest deposit rates rise over the coming years, remember Albert Einstein’s famous comment: "Compounding is mankind’s greatest invention as it allows the reliable systematic accumulation of wealth !"
There are many consumers who will have to borrow to pay the recent festive fun. Here is an example: borrow €2,000 from your local credit union (rates 6.9%.. can be higher with some credit unions as they are all independent) and the monthly repayment over 12 months (no point in having it any longer – Christmas comes round every year) is €172. Borrow the same amount over 12 months from an authorised moneylender (check out the Central Bank website) at 187% interest rate, and the monthly repayment is €378 - €206 more per month…
4. Loyalty to a bank is rarely rewarded
The free flights, money and gifts from banks trying to entice first-year college students to open an account are tempting indeed – but don’t be fooled!
Do a little digging online before committing to anything and you could find that what is being offered by the banks in question – or even your current bank – doesn’t suit your needs at all. Sadly we are creatures of habit – how many 3rd level students 40 years later still have their bank account opened in the bank when they were a 1st year fresher?
Sites like bonkers.ie or itsyourmoney.ie are brilliant for laying out the benefits and pitfalls of every mortgage, savings and current account option available on the Irish market right now – so get smart with where you keep your money. Or simply go to www.ccpc.ie.currentaccounts (former National Consumer Agency - a government body now called Competition and Consumer Protection Commission) to compare the various different bank offerings on current accounts.
Advice from an independent financial adviser at the start of your working life is simply the best thing you could do – but pay for that advice otherwise you might be buying an unnecessary product…email me for details.