Saturday 27 December 2014

Crack the whip and make your money work hard for you

Fergal O'Leary

Published 31/08/2014 | 02:30

Illustration by Tom Halliday
Illustration by Tom Halliday
Fergal O Leary, National Consumer Agency. Photo: Conor McCabe

Now the tan is fading and the beach towels are packed away, it's a good time to turn your attention to your finances - particularly if you have splurged over the holidays. There is still time to get your financial house in order before festive season spending begins in earnest.

Setting out to manage your money can seem like a very daunting task, but a good way to start is to identify some goals to help you stick to your plans. They could be short-term - like planning for Christmas 2014 - or longer term, like planning for your children's education or maybe your own retirement.

The very first step is to avoid spending money unnecessarily. Recent research conducted by the National Consumer Agency shows that although many consumers shop around for services such as car insurance, gas and electricity and groceries, almost 40pc of us don't.

As a result, it is very likely that these consumers are paying more than they need to by not checking regularly to see if better deals are available to them.

For example, the research showed people could save up to €292 per year by switching mobile phone providers; €252 per year by switching electricity suppliers; and €180 per year on gas. Spending a little time and effort in researching what options are available to you could mean really significant savings in the longer term.

Getting better value for money is not just confined to day-to-day services and expenses either. Earlier in the summer, research from the National Consumer Agency showed how consumers could save up to €421 per year on their home insurance. So as you start thinking about a budget, find some time to ensure that you are getting value for money across all your household bills.

Another area which tends to cost people money is overdrafts and credit cards. An overdraft allows you to spend more money than you have in your current account up to an agreed limit, and while it is flexible and useful for short-term credit, it can prove to be very expensive if not managed correctly.

The amount you owe on your overdraft goes up and down depending on how much you spend - however, the more you use the overdraft facility, the more interest you pay. The interest is charged on the amount you owe at any one time, and is usually higher than the rate charged on personal loans - ranging from about 11pc to about 15pc, depending on your bank. In addition to interest, an overdraft facility can have other charges, for example, if you exceed your overdraft limit you will be charged additional interest and fees.

Credit cards are another accessible, but very expensive, form of short-term credit. Clearing any lingering credit card debt should be an absolute priority in terms of managing your money.

Even if you can't afford to repay your debt in full each month, paying more than the minimum payment by a small amount could dramatically reduce both the time it takes you to repay your credit card debt and the total cost of your debt. Increasing repayments by even a small amount can significantly shorten the length of time it will take you to clear your balance, and with it, the interest and fees.

For example, if you have credit card debt of €1,000 and the interest on the card is 17pc, it will take seven years and four months to clear the debt if you stop using the card immediately and pay off €20 a month. However, if you increase the repayments to €50 per month, you could clear that balance in two years. That will save you more than five years of interest payments.

There are tools available on www.consumerhelp.ie to show how you could pay off your debt more quickly by increasing your monthly repayments, so check it out if a lingering credit card balance is preventing you from getting on top of your finances. In the case of both clearing overdrafts and tackling credit card debt, one option to consider is to take out a personal loan with a low interest rate to clear the debts with a higher interest rate. It is critical, however, that if you do this, you stop using your credit card and/or overdraft facility immediately. If you don't, you could end up with a continuing credit card balance, on top of your loan repayments.

You can find out more about the current interest rates on the loan cost comparison section on consumerhelp.ie

The next step is to create a budget tailored to your own personal circumstances. Setting out and sticking to a realistic budget is important, regardless of how much you earn. One of the key benefits of taking control of your finances is that you will be less stressed and in a much better position to manage your money, week to week and month to month.

For some people, they like to consider all the money they have coming in and out across a whole year, but if that seems a little ambitious, you can also work it out over a shorter time period, taking care to average out once-off annual expenses, such as motor tax or home insurance. When you know what you are spending, and where, you can take steps to get better value or reduce non-essential expenses.

You may be pleasantly surprised to discover that your budgeting allows you to put something aside at the end of every month.

If that's the case, don't let that money sit in your current account - make it work and earn interest for you.

No matter how small the sum, there is value in researching where to put it - both to earn interest, but also to help you reach your savings goal sooner.

Even though interest rates on savings have fallen in recent months - and they are quite low when compared with a few years ago - there is still a substantial difference between savings providers.

For example, the savings comparison section on consumerhelp.ie shows a difference between providers of between 1.6pc (or €52 in interest earned) and 4pc (or €130 if you were saving €500 every month). So, it pays to compare before you choose an account.

The savings comparison section also helps you compare savings accounts, and shows you how much interest you could earn in a year based on how much you save.

By making changes in terms of tackling your high interest debt, looking for better value on regular expenses, reducing unnecessary spending, and making your savings work harder, you will be a few steps closer to reaching your financial goals

Fergal O'Leary is director of public awareness at the National Consumer Agency

 

Ask yourself what is your attitude to taking risks

Recent figures from the National Consumer Agency show that its lump-sum and regular savings comparison tools on its consumer website (consumerhelp.ie)  received over 114,000 visits in the last year.

If your budget allows, and you can put some money aside, it may make sense to spread your savings and put some money in accounts which you can access immediately to meet short-term needs.

You should put the balance in longer term accounts - where it can potentially earn more interest over time.

Before you start saving, work out how much you can afford to set aside and for how long.

Try to pay off some (or ideally all) of your loans and credit cards first, as this will give you a better return than other forms of saving, as well as helping you clear your debts quicker.

Draw up a savings plan, list your savings goals and think about your own attitude to risk to decide what savings and investment products will suit you best.

Compare savings and deposit accounts by checking the compound annual rate (CAR) or annual equivalent rate (AER).

The greater the AER or CAR, the more interest you will earn - but when researching, ensure you are comparing like with like, and not confusing the two.

You can check out consumerhelp.ie for current interest rates on lump sum and regular savings accounts and for more information on saving and investing.

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