Welcome to this, our last On The Money newsletter of 2023.
It’s been a really tough year for a lot of people. Interest rates rising at a record pace alongside a substantial rise in the general cost of living means that money simply has not stretched as far as it did a year ago.
And, as we approach Christmas, the bills keep rising, especially for families with children whom they want to treat at this time of year.
There are also regrets for all those things we meant to do that we simply never got around to doing, such as implementing the advice that platforms like On The Money give about building up pensions funds, saving on your energy bills, investing for the future, whatever.
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The most important thing you can do at this time of year is to give yourself a break. Be kind to yourself.
Life is a challenge and it can be very stressful. Beating yourself up over all the good intentions that just slipped away like sand through our fingers will do no good. What’s done is done or, more appropriately, what hasn’t been done is not worth dwelling on.
2024 will be another year, another new start and an opportunity to try again on those things that you feel are really important to you. With luck, you’ll have a few days over the coming week or two to yourself, away from the relentless demands of a job or the humdrum chores of life. Take some of that time to assess your priorities in terms of your family finances.
Perhaps it is about drawing up a budget framework so you know better what is going on, or paying off debt, or maybe investing in the future – both yours and that of children or even grandchildren.
If I had to give just one bit of advice, it would be not to try to do everything in one go, especially if this is not an area you’ve been particularly organised about until now. Overreaching leads almost inevitably to disappointment when it comes to making changes in our lives and occasionally to despair, prompting people to abandon all good intentions rather than simply pulling back a little and focusing on one or two things at a time.
Prioritise. If you have debt other than mortgage debt, it can cost you more than you can ever make in interest or investment return – unless you catch an investment surge in crypto, and that’s more luck, and therefore gambling, than investment.
Credit card debt, in particular, can be usurious. A good starting point in the new year would be to try to commit to paying down any outstanding credit card debt and to get yourself to a position by the end of 2024 where you spend no more on your cards than you can pay off at the end of each month.
If you cannot do that, you might consider staying away from credit altogether. Take out a personal loan to pay off the existing debt – the interest rate will be much lower than anything you are paying on the outstanding credit card balance – and then cut up or return your card to the bank.
After credit card debt, look at any other outstanding debt you have – car loans, overdrafts, store credit etc. All are costing you more than you will earn in the sort of savings most people are likely to consider.
If you have no such debt, the chances are you are already reasonably good at budgeting, consciously or unconsciously, managing your personal finances so that your income matches your outgoings. Congratulations.
If, like many people, you are not, spending a little time examining what bills fall due and when should help you realise how much of your monthly income is really available to other things – like weekends away, drinks or a meal out with friends, or any other entertainment.
It’s not about being a killjoy but about understanding how far your money has to stretch and then making conscious, informed choices about how you spend any discretionary income. That includes deciding to borrow against next month’s income to spend on something that is important for you this month – like perhaps a family wedding – but with an awareness that next month will involve a little more skimping to get back on track.
This can all sound daunting and possibly miserable but it isn’t. There is great satisfaction in being in control of your finances, just as most people consider it important to be in control of other elements of their lives. And very few things are as stressful as being out of control financially and deep in debt.
Rainy-day fund
Once you have your spending on an even keel, one of the next things to consider is building up a rainy-day fund – a pot of cash that will cover unexpected expenses like the car needing repairs, someone falling ill, or work slowing down or drying up altogether.
The general advice is to try to build up a fund that amounts to about six times your monthly outgoings. Once you get to grips with a budget, you’ll know your average monthly outgoings and that can inform your decision on how much you need to try to set aside.
But there is also a need to plan for further out. If you don’t have a pension, it is really worth looking at starting one – both because of the tax relief that is available on any contributions you make alongside the possibility of your employer adding to the pot, and also because we are all likely to need some savings to see us through what is an increasingly long retirement.
As of now, people in Ireland are living to just shy of 83 years of age, on average. With most people retiring at 66, that is 17 years that we need our retirement income to last. The State pension will provide the base for many people but, even allowing for the fact that we would all hope to have paid down our mortgages by then, that amounts to just in excess of €14,000 a year. Making ends meet would involve a considerable tightening of belts for many people without some additional pension income, and that takes time to accumulate.
Only after you have these top level “savings” in place should you realistically look at investing any surplus you may be lucky enough to have, whether it is to accumulate greater wealth down the line, create an education or college fund for children or grandchildren, or to allow you to achieve some specific goals like, perhaps, retiring early.
Even running through a descending order of priorities as we have done above can easily seem overwhelming. Remember, you’re not obliged to do everything. Start modestly by trying to pay down any expensive debt and then assess which of the other options is most important to you.
And what if you simply do not have any money left after meeting your day to day expenses?
How many people are running round buying lunches rather than bringing their own food into work, or having several cups of coffee a day at €3-plus a pop? And when you go through your other expenses, are they all really essential? Mortgage, childcare, food, transport and certain utilities are for sure, but we don’t need multiple watches or the latest smartphone and almost all of us could save money with a review of our energy bills – either by switching provider or simply taking more care with what we use.
One trick that can help you build up a rainy-day fund or invest in a pension is to allocate some or all of any pay rise to it before you have had a chance to spend it elsewhere. Some people argue all of a pay rise should be salted away before we get used to spending it, but that ignores the reality that some of that money will be needed to cope with cost-of-living increases in our essential daily expenditure.
The good news is that analysts suggest 2024 will, on average, bring pay rises that are ahead of inflation, so that allows many of us some wiggle room.
Other tips we all need to consider include switching providers more generally. It is an easy and sensible money-saving habit – whether it is on insurance; your phone, broadband or TV provider, or even your bank or mortgage lender.
Separately, claiming back any tax reliefs is another thing too many people never get around to doing – especially on medical expenses, but even on their rent, with recent Government figures showing many tenants are still not claiming money specifically provided to help with their finances as they cope with rents that remain close to record highs.
Keeping records of such spending in one folder makes claiming this relief much easier and the process of filing a return to claim any money owing really is a lot easier than most people fear. In my experience, the Irish Revenue Commissioners are one of the most user-friendly around.
Finally, look at moving some of that money you may have on deposit out of demand deposit accounts. The banks are laughing at you - and counting their profits as they pay you a fraction of 1 per cent on that money while they earn 4 per cent on the same cash by parking it with the Central Bank. Irish banks may be miserly next to their European peers but they are offering much better rates on fixed-term deposits than anything available on demand deposit, where almost 95 per cent of the €150 billion currently on deposit from Irish households sits.
But that’s all to look forward to in 2024. For now, congratulations if you have got to the end of another year hopefully more or less financially intact. Unless you’re one of those healthcare and emergency service workers or retail and hospitality staff who will be working to make the lives of the rest of us easier, make the most of the few days off with family and friends, take it easy and recharge your batteries for the new year ahead.
Thank you all for subscribing to this newsletter. I hope it has been informative over the course of the year and relevant to you on at least some occasions. Enjoy the break and do feel free to let us know areas you would like us to look at in the future. We’ll be back in your inbox on January 12th.
You can contact us at OnTheMoney@irishtimes.com with personal finance questions you would like to see us address. If you missed last week’s newsletter, you can read it here.
