Wednesday 20 November 2019

Five resolutions for 2015 which should tidy up your finances

FOLLOW YOUR DREAM: If you've always wanted to live by the sea, this is how you go about achieving it
FOLLOW YOUR DREAM: If you've always wanted to live by the sea, this is how you go about achieving it
Louise McBride

Louise McBride

The New Year is the ideal time to cast off your bad money habits - and to stop putting those inevitable decisions on the long finger. Here are five worthy financial resolutions for 2015.

Make a will

Should you pass away before making a will, it can make things very stressful for the loved ones you leave behind.

A will records your assets, such as bank accounts, life assurance policies, shares and property - and where those assets are. It will be up to your loved ones to track down these assets should there not be a record of them when you die - this can be a particularly difficult task when dealing with bereavement. Furthermore, unless your descendants are aware of all your possessions and assets, there is a chance that some of your wealth will never be recovered by your loved ones - and simply lost forever. Foreign properties, overseas bank accounts and investments, valuable paintings, and life assurance policies are some things which could easily slip under the radar.

It is important to make a will early on should you have a child with special needs or a serious illness - a child who needs a lot of financial support or medical care could find it very hard to cope and get on in life should you pass away before making a will, which ensures they are provided for.

By drawing up a will, you also have a better chance of ensuring that your prized possessions go to those you wish to leave them to. Otherwise, it is ultimately the law that decides who inherits your wealth.

You can also cut the inheritance tax bill that your loved ones could be hit with when drafting a will as it gives you the opportunity to leave money or assets to them in a tax-efficient way.

Save for your dreams

Whether it's a house by the sea, a round-the-world trip, or the thought of seeing your children graduate from college, the sooner you start saving for your dreams, the better your chance of realising them.

Be realistic about how much you should save though. You need to squirrel away about €1,250 a month to get a €30,000 deposit together for your dream home in two years - €500 a month won't get you there. Start saving for your child's third-level education the minute they come into the world.

It could currently cost more than €40,000 to send one child to college - and this bill will likely be larger the further into the future your child will start third-level education. You would need to save €185 a month for 18 years to hit a target of €40,000, though your lump sum should be worth a bit more than that after 18 years, depending on the interest rate paid on your savings.

Start a pension

The longer you leave it to start a pension, the more of a hit it will be on your pocket to save into one - and the slimmer your chances of getting enough money together for a comfortable retirement.

Leave it until your 40s to start paying into a pension, and you could have to save two-fifths of your salary a year just so you can retire on a reasonable pension.

Leave it until your 50s and you would need to pay more than half of your salary. Leave it until your 60s and you will have to pay more than twice your salary into a pension.

Start your pension at the age of 20, however, and you should be able to secure a reasonable pension by saving about 15pc of your salary into a pension scheme.

So if your boss offers a company pension scheme, join it this year. Although they're not obliged to, employers often save into your pension on your behalf - which will make it easier for you to save for retirement. Self-employed individuals should consider opening a personal pension, a Personal Retirement Savings Account (PRSA) or a small self-administered pension.

Don't rely on the State pension. At about €230 a week, it is about a third the average wage - an income like that could come as a big shock if you've earned an average salary (or more) throughout your working life. Furthermore, not everyone is entitled to the full State pension.

Start a rainy day fund

Most of us only consider day-to-day expenses when budgeting or making big financial decisions. Once-off expenses, such as milestone anniversaries and birthdays, car insurance, the TV licence and property tax are often overlooked. So too are unexpected (yet major) costs like a new car engine to replace the one that's just died, a funeral, or a long stint in hospital.

Having an emergency fund in the wings is vital if you want to avoid lobbing bills like this onto your credit card - and the massive interest that comes with that.

Some financial experts believe that your rainy day fund should be the equivalent of a year's salary. That might be beyond the reach of most people but it is a good target, so get saving.

Clear expensive debt

It could take more than two years to pay off a €1,000 credit card bill, depending on how you repay it. At as much as 23pc, the interest rate on credit cards could easily be more than five times the interest you pay on your mortgage.

Cutting your credit card up isn't always practical as you might need it to book a concert or hotel room. However, you can avoid getting hit with hefty interest by paying your bill in full by the time it is due to be paid. This will only work when you use your credit card to make purchases, so be careful about using your credit card to withdraw cash. As many credit card providers don't offer an interest-free period for cash withdrawals, you will be charged interest from the date you withdraw the cash.

Don't fall for the minimum payment trap - where you typically pay between 2pc and 5pc of what you owe off your credit card a month. It could take years to clear a credit card bill if you do this.

Credit cards aren't the only expensive debts out there. So too are overdrafts, in-store credit, loans from moneylenders, and personal loans which charge more than 10pc interest. Avoid falling into such debt - and if you have already done so, clear it as soon as possible.

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