Your Money: ‘Five ways to shape up your finances for years to come’
Even with the economy booming, it still pays to think ahead for those rainy days, says Louise McBride
Many of us are in a much different financial boat today than we were in 10 years ago – when the country sank into recession. Pay cuts, pay freezes, job losses, debt worries and belt-tightening have become a distant memory for many. Today’s economy is booming and employment is at an all-time high. So with the penny-pinching days largely behind us, make the New Year the time to make some big long-term changes to your pocket – and to deal with issues you’ve put on the long finger.
DRIVE AN ELECTRIC
My husband and I bought a plug-in hybrid last summer. It’s largely my husband who uses this car as he drives it to work every day.
He’s estimated that his plug-in hybrid will save him at least €2,000 a year in fuel. For drivers with a particularly long commute, the savings could be even greater. You could save thousands a year in fuel by switching to an electric or hybrid so changing to such a car would certainly be a worthy financial resolution for the New Year.
Hybrid and electric cars are not without their inconveniences though. My husband and I have found that there aren’t that many public charging points for electric cars or plug-in hybrids and that charging points are often broken – or blocked by people in petrol or diesel cars who have parked there. However, with plug-in hybrid cars, you have the option to switch to fuel when you need it so you shouldn’t be too badly stuck if you can’t charge up your car. You can also charge electric and plug-in hybrid cars at home overnight.
For rural dwellers, a plug-in hybrid would probably be a safer bet than an electric model – until there are more charging points rolled out across the country and maintenance of them improves.
MAKE A WILL
My family and I were in a serious car accident during the summer. My husband and I are both in our early 40s. We didn’t have a will at the time of the accident – we never thought there would have been a need to have had one at such a young age. Like many people, I am also usually more concerned about the more immediate financial matters and I don’t like to think about death.
My children, husband and I thankfully all survived that crash. However, had my young children lost both parents, there would have had a huge amount of financial and other loose ends left for our relatives to tie up – because my husband and I didn’t have a will in place. Much of our savings could have disappeared into oblivion rather than be used for the benefit of our children – because we had not left a record of our savings or pensions with a solicitor or relative. My experience highlights the importance of having a will in place – even from a young age.
So should you be near or in retirement, the parent of young children, or the parent of a child with a severe disability or medical condition, make a will.
By doing so, you are doing what you can to ensure that any children are provided for after your death and that your wealth and possessions are divided as you would like them to be. A will should also alleviate the financial stress and confusion faced by your loved ones after your death – and reduce the chances of a family rift arising.
SORT KEY QUESTIONS
A will is just one of a number of big financial issues and dilemmas which many of us avoid broaching. Another is the long-term sickness of a parent or relative.
Nursing home bills can run as high as €100,000 a year. Private home help could cost between €20 and €30 an hour or more, depending on location, the exact care needed, and whether the care is needed overnight or not. (The Health Service Executive’s home help service is free – however, even if you qualify for it and can get the service, you might still require additional private home help.)
Families can sometimes be slow to realise or accept that an elderly relative needs nursing home care or support around the home. The earlier this topic is dealt with – and the earlier a conversation is had about how the cost of such care will be covered, the better.
The State’s Fair Deal scheme provides financial support to those in need of nursing home care – but this scheme isn’t suitable for everyone so it’s important to consider it carefully before signing up. Addressing how the cost of nursing home care will be funded early on, rather than in a last-minute rush and when dealing with a sick or dying relative, will give you a better chance to explore your options carefully.
You might also need to appoint someone to manage your sick relative’s day-to-day finances (such as their bank account and the collection of their pension). It’s important to choose someone you can trust to do so honestly and fairly.
Failure to address this dilemma early on could leave your loved one open to financial abuse – such as theft of their money and belongings, and pressure in connection with wills and inheritance.
Another awkward money issue which people often struggle to address relates to the division of household bills.
Your partner, spouse or flatmate for example might not pay their bills on time or at all, or they might pay a much smaller portion of the bills than they should.
Money is one of the biggest sources of friction of couples living together. Failure to address any tension over money from an early stage could seriously damage your relationship.
So should there be an issue with how expenses are divvied up in your household, have an open and honest conversation about it early in the New Year. Consider using a mobile phone app which keeps track of all the household bills – and which records who has paid their share of the bills. Splitwise is one app which could prove useful here. Should you find yourself arguing regularly with your partner because of his or her overspending or other poor financial habits, consider meeting a financial planner or adviser.
Otherwise, sit down with your partner and work out a realistic and honest budget for each month. You might find it useful to use an app which helps people to plan and manage their budgets, such as the You Need a Budget app.
Some of the biggest bills you’ll ever face will be the purchase of a home and car, and college education for your children (if you’re a parent). The earlier you start saving for these big-ticket bills, the better – the more savings you have to fund them, the less you will have to borrow.
It’s expensive to borrow money – and it’s never a good idea to get too heavily in debt.
So no matter what stage you are in life, have two savings accounts: a long-term savings account which you cannot access easily and a short-term savings account which you can dip into for day-to-day and other one-off bills (such as car insurance). This approach should help ensure that you have money in the bank for the big financial commitments and any emergencies which arise throughout your life – as well as your day-to-day and annual bills.
Have a clear idea of how much your big-ticket bills are likely to come to too – and save up accordingly. For example, it currently costs about €51,000 to put a child through college for four years – if he or she is living away from home and renting in Dublin for nine months.
You’d need to be saving about €200 a month for 15 years to hit that €51,000 target.
The other big long-term financial commitment which you should address is your pension.
Should you be working and paying income tax, start saving into a pension if you have not already done so. Taxpayers qualify for tax relief on the money saved into their pension and so pensions are one of the most tax-efficient forms of saving.
Even if you are already paying into a pension, check that you’re saving enough into it – and increase your pension contributions if you’re not. Otherwise, you could struggle to make ends meet in retirement and you could even have to work into the traditional retirement years. Now would certainly be a good time to boost your pension contributions if you’re paying the top rate of income tax.
Higher-rate taxpayers get 40pc tax relief on their pension contributions; those paying the lower rate of income tax only get 20pc tax relief. “It’s worthwhile maximising your pension contributions if you are a higher-rate taxpayer – as you may not get the higher rate of pension tax relief after 2022,” said Trevor Booth, head of financial planning with Mercer.
The Government plans to introduce auto-enrolment in 2022 and higher-rate taxpayers could lose out on pension tax relief from then because under its pension reform plans, the Government has suggested slashing the top rate of pension tax relief.
MAKE SAVINGS PAY OFF
Make 2019 the year to check out a number of life assurance savings plans. Too many of us have savings sitting in deposit accounts which earn little or no interest.
Should you have savings in a demand deposit account, the interest rate could be 0.01pc or even zero. The interest rate on Bank of Ireland’s standard demand deposit account, for example, is zero. Inflation will eat away at your savings over time if you have money sitting in such accounts.
Interest rates are at an all-time low and European interest rates are not expected to increase now until autumn 2020 (if they do).
The best rate you can currently expect to secure on a lump sum deposit is 1.5pc a year (through the State Savings’ 10-year National Solidarity Bond) or 1pc (through the State Savings’ Five-year Savings Cert).
Both of these products require you to squirrel your lump sum away for a number of years. Interest rates paid on regular savings accounts are slightly higher – for example, EBS’s Family Savings account pays 1.75pc a year; KBC’s Regular Saver account pays 1.5pc a year (if you have a standard current account with the bank).
You might make a better investment return by putting your money into a good life assurance savings plan. Before signing up to such a plan though, be sure you understand and are comfortable with the investment charges on the product, the investment risk you are taking on, and how long you must keep your money tied up for.
Otherwise it could be the wrong move.