Wednesday 19 June 2019

Make sure your finances add up: Sinead Ryan shares five money terms you need to know to save your cash

Boosting knowledge of terms and methods helps you cash in when comparing

Stock image
Stock image
Sinead Ryan

Sinead Ryan

Women are pretty bad at sums. Men are too. Actually, financial literacy in Ireland is terrible. Despite our highly educated workforce, and the emphasis on Stem subjects in school, research from the ESRI has found that we find the application of simple mathematical concepts very difficult to relate to everyday life.

The study, carried out for the Pensions Authority and Pensions Council, revealed that we find understanding things like compound interest, or how money grows over time, very difficult. Women are less confident in their knowledge.

Please log in or register with Independent.ie for free access to this article.

Log In

The Central Bank finds that we are also poor at terminology and that can lead to bad value when it comes to making comparisons. I'm looking at some of the ways poor financial literacy matters.

Bank terms

Do you know your AER from your APR? No? You're not alone. The Annual Equivalent Rate shows interest earned on savings. It's better than just the 'interest rate' at properly comparing accounts which pay monthly or annual interest. Annual Percentage Rate is used for borrowings but takes into account additional charges on top of interest. That's what makes it valuable. Don't just look at the headline rate; it's misleading.

Mortgages

Tempted by those up-front cashback offers? They can be worse value long-term. A €300,000 loan over 30 years at 3.5pc costs €184,968 in interest payments. Take 3pc 'cash back' right now, but with a 4pc interest rate on the loan, and you'll pay €206,608 by the end of the term. It's not worth it.

Insurance

€40 a month or €480 a year. It's all the same, right? Wrong. When it comes to insurance contracts, many companies charge you to split the payments over 10 or 12 months by as much as 15pc. It's (a bit) more hassle for them to collect it that way, but you pay the price. That could mean as much as €46 a month or €552 over the year.

Personal contract plan (PCP)

Buyers are attracted by low interest rates to credit offered by garages for new cars. However, the Competition and Consumer Protection Commission says the small print can be confusing.

"PCPs can appear very attractive because they usually have low monthly repayments. However, they are very complex compared to other types of car finance and it's important to understand all the terms and conditions before you sign up," it says.

"[It] is similar to a standard Hire Purchase (HP), but the major difference is that you pay less of the amount owed during a PCP agreement than with HP, meaning you will still owe a considerable amount at the end.

"If you agree to act as a guarantor for someone taking out a PCP you are in fact a joint hirer and missed repayments will also show up on your credit record."

Credit card

Interest rates of 20pc are really expensive, but sadly normal in the surreal credit card world. But interest piled on interest is where the charges really rack up. The minimum-payment loop is vicious, but if you understand the basics of compounding, you'll find it works both ways.

Banks want you to pay the lowest amount; they make more money that way. This is why they'll offer it first on the bill. Paying in full makes them no money at all, but doing so saves you thousands.

A debt of €5,000 at 20pc at the minimum payment of €125 a month would take five years, seven months to clear - and that's if you put nothing else on the card ever. But just doubling that to €250 clears the bill in two years; a massive difference. Double it again, and it's gone in a year. Research by TotallyMoney found 46pc of people don't know they still pay interest even if you make the minimum payment.

Irish Independent

Also in Business