It's something we can all be slow to do, but as some of our financial advisers recommended last week, financial planning should be on everyone's money agenda this year.
"People just put it on the long finger; they don't really plan ahead and don't think about the consequences of not planning," says Dara Fitzgerald, head of investment advice with Bank of Ireland, who adds that "a little bit planning can go a long way".
If you do the work now, putting some points down on paper or in a spreadsheet, you can easily return to update it on a regular basis,without enduring too much extra work. “It should really be a living document,” says Fitzgerald of your financial plan. “It shouldn’t be there to support a particular transaction and then put in a bottom drawer and never looked at again.”
The more engaged you are with your financial health, the better your finances are likely to be.
It's also about taking the time to take a high-level view; and not worrying too much about your take-away coffee habit. "It's all well and good watching the pennies, but you also need to ask yourself, 'what high-level financial decisions can I make?'," says Jonathan Sheahan, managing director of Compass Private Wealth.
Getting started
So how can you get started? Here is an (almost) pain-free approach to getting your year off to a good start.
Step 1: Know what you’re worth
Yes, you might know what your salary is but do you know how much your actual after-tax income is each month? Do you know what your essential spending is each month – ie on mortgage or rent, car insurance etc? And how much you have left over? Or do you spend too much too early and then hang on for dear life until payday?
If this sounds familiar, your first step should be to consider your financial situation like a business owner would, working out how much you actually earn what your outgoings are and identify areas that could be ripe for cutting back.
“Understanding your net capital position at all times is very helpful when making future financial decisions. Having a clear awareness of your cash flows (income vs outgoings) is also very worthwhile,” says Sheahan.
It can also be a positive exercise. While you may have little left over at the end of each month, if you're putting money into a mortgage or a pension, you will be actually boosting your net capital position and overall financial health. It will also identify potential problem areas, such as a lack of savings or too much expensive debt, which you can then address at a later step.
Step 2: Build up an emergency fund
There's possibly no point in building up a rocket-fuelled retirement plan if a broken boiler sends you into paroxysms of fear. Most advisers suggest your first step should be to ensure that you have a rainy day fund in place before you start considering the bigger picture elements of your finances.
This should be in an easily accessible current account. Advisers typically recommend you keep up to six months of expenses – enough to cover mortgage, day-to-day to living expenses, childcare etc.
“Don’t invest this in stocks/shares/investment funds,” says Fitzgerald, adding: “You may be giving up returns, but what you’re getting is certainty.”
As Sheahan describes it, it’s like a quasi-personal insurance fund for yourself, something you can dip into when things – as they inevitably do from time to time – go wrong.
For Fitzgerald, it’s all about habit building. “It’s important to save your first €1,000; once you’ve got that you’ve got the habit,” he says.
Step 3: Take charge of your debt
If you have outstanding credit card, money-lending loans, or personal debt of any kind – even your mortgage – the new year is as good time as any to start getting pro-active about paying this debt down.
Paying an extra €20 off your credit card each month for example can significantly cut both the cost, and the term, of a loan.
And as Fitzgerald notes, if you do have savings in excess of your rainy day fund, using this cash to pay off your debt as quickly as possible will have a positive impact on your overall finances.
One approach is the “debt avalanche”, which means that you start paying the most expensive debt off first. So, if you have credit card debt at a rate of 20 per cent, and a personal loan with an interest rate of 8 per cent, you’ll put any spare savings you have into the former, just meeting the minimum repayments on the latter. When the credit card debt is repaid, you put what you were repaying on this debt into your personal loan to pay it off quicker and save on interest.
If you have credit card debt of €2,000 for example at a rate of 20 per cent, and repay just the minimum payment, or €40 a month, it will take you nine years and €4,336 to repay the debt: if you can repay €100 a month, the amount you pay in interest will shrink to just €453.
Looking to refinance credit card debt can also be financially prudent. You can do this by swapping your debt to a personal loan, or locking into a 0 per cent rate for a period of time, and then switching again. Both Chill and Bank of Ireland for example offer 0 per cent credit cards for up to nine months.
Something else you can consider, if you have a mortgage, is to start over-paying it, or to increase your over-payments if you already make some.
Making this decision should probably only be done as part of a broader assessment of your finances however, as if you’re on a low-cost tracker, you might find you’re better off putting the money into a pension or paying down more expensive debt.
Switching your mortgage to a lower rate should also be a consideration. “It’s probably the easiest low hanging fruit out there,” says Sheahan.
Step 4: Identify long-term saving goals
Saving for a deposit for a house? For your children’s third-level education? For a dream holiday to the other side of the world? We all have dreams and goals but if you want to achieve them, it can be helpful to put a monetary goal on them.
“It’s about answering the question ‘what do you really want to achieve for your life and family?’ If you start planning now, you have a much better chance of achieving these goals in the future,” says Fitzgerald.
You’re going to need to build up an additional fund to that in your rainy day account. Again you can consider deposit accounts but, if you want to get as high a return as possible on your savings, you might need to look elsewhere.
Equity markets (despite recent volatility); peer-to-peer lending (if you can understand the risks); US treasuries and property based investments can all offer better returns.
Step 5: Check your protection
Do you have life insurance? Do you have enough? What about if you end up out of work due to illness – do you have any protection cover in place?
The first step here should be to review what you already have. Do you know what your death-in-service entitlements are for example? Many employers offer up to four times salary for an employee who dies while still working. If you have this, as well as mortgage protection on your home, then your requirement for additional life cover might be minimal.
Similarly, you may also be entitled to a work-related income protection policy.
Before you talk to an adviser about life assurance, be sure you’re clear on what you’re already entitled to – it will save you being over-insured.
And some of it may be pointless. Most income protection policies for example, only pay out the difference between what you’re insured for and what you get from other entitlements. So if, for example, you have protection of €1,000 in place, but you get €400 from social welfare and €500 from your employer, the policy will only give you €100. So you may not deem it to be worthwhile.
Step 6: Are you retirement ready?
Part of reviewing your finances should be to give your current pension savings a "NCT". To do this, you'll need first to check how much you're currently putting in, and what your employer is putting in. If you put in an extra 1 per cent of salary perhaps, will this mean your employer will match it? If so, and you can afford it, it might be foolish not to.
Remember pension contributions are subject to tax relief, so every €100 you put in will only cost you €80 if you’re a lower-rate taxpayer, or €60 if you pay tax at the higher rate.
You should also consider performance and the fees you’re being subjected to – is there a way of avoiding or mitigating these? And, if you can afford it, should you be making additional voluntary contributions? If so, remember the limits that can apply to your pension; 15 per cent of salary is eligible to tax relief up to the age of 30; 0 per cent between 30-39; 25 per cent between 40-49; 30 per cent between 50-54; 35 per cent between 55-59 and 40 per cent up until retirement.
If you have several different pension plans, it might also be worth considering consolidating them; or you might need to consider a transfer on a defined benefit scheme; or even cashing in a former pension from the age of 50.
Step 7: Start all over again
By the time you’ve reviewed your finances, it may well be the end of the year – and time to start the process once more! Remember, as Sheahan says, “a financial plan is only as good as the follow-up and regular reviews that need to be carried out”.
Technology can also help with this. Fintech providers such as Revolut and N26 have made it much easier to keep track of both your spending and savings, while Bank of Ireland has recently linked up with Ignition Advice to help with your financial plans.
