Q: Like lots of folks, I've been working from home since Covid-19 and I've been managing for the first time to save loads of money, not least from cutting out the cost of commuting, coffees, takeaway lunches etc, etc. I've long since built up a reasonable rainy day fund, and want to keep saving and maybe start paying into an investment fund. However, I'm worried that I'll lose the savings habit when things get back to normal, as I can be a little impulsive. Can you suggest any tips, tricks or even a good online budgeting tool that could help me stay on track? Caroline, Navan, Co Meath.
Hi Caroline. I enjoy a 6oz flat white. I buy one regularly from a coffee shop near the office. This is very irresponsible behaviour according to some so-called experts. What next, they might ask? Smashed avocado and poached eggs on sourdough? Heaven forbid.
To believe some of the blogs and articles on personal finance out there is to believe that my coffee habit is scuppering my chances of having a comfortable retirement. According to 'personal finance guru' Suze Orman, a US-based financial expert and best-selling author of 'Women and Money', I am missing out on a seven-figure sum.
Orman recently claimed on a CNBC blog that if you were to save the money you typically spend on fancy coffee, you would amass a tidy sum that many people would be happy to retire on.
Specifically, she said if you spent $100 a month on coffees but could instead save that $100 a month into a standard US pension fund, the fund would have grown to $1 million (€850,000) after 40 years - assuming a 12pc rate of return. And that even with a 7pc rate of return, you'd still have around $250,000 (€213,000).
There is no doubt that good habits are everything when it comes to personal finance, but can you imagine it - 40 years of depriving yourself from one of those little things that makes your day better?
But do I need to lose the lattes? I'm not convinced. We tend to sweat the small stuff, and in turn create a negative relationship with our personal finances.
Where Orman and I fundamentally disagree is in this notion that making proper provision for our retirement is about years of deprivation. It shouldn't be. Yes, it's good to start planning early, but it's the big things - your income, earning potential, living arrangements, your children, their education, your health - that you need to give thought to.
At the end of the day, it's all in the plan; what's on your radar. Start by clearly outlining your financial goals and objectives and you'll soon find the impulsiveness will diminish.
As for me, I'm going to continue to purchase, and savour, my 6oz flat white.
Q: I've been putting money into a conventional, actively managed investment fund for a number of years and it's been performing OK, but I've been looking more closely at the types of assets and equities and there are a few that seem questionable from an ethical or sustainability point of view. My perception of ethical investing is that the returns are never quite as good as more traditional stocks, but is that really true? James, Dublin 6w
The fund manager in popular culture has a mythical status. Think of Gordon Gekko and Bud Fox in Wall Street, and more recently, of Jordan Belfort in The Wolf of Wall Street.
We know that this is Hollywood and everything is a little exaggerated, but we do expect real fund managers to beat the market - to predict which stocks are undervalued, to buy them when they're cheap and sell them when they're expensive in order to make some money for our funds.
We're also nervous that they will mess up and lose our money, a fear heightened no doubt by recent crashes, including in March this year. But we like the idea that there is an expert combing the web for the tiniest piece of information that might help him predict how a stock will perform. It makes us feel like we have some control.
The same can be said for ESG (Environmental, Social, and Governance, also known as Ethical) funds. If we are solely concerned about returns, we must look through the fund to understand the likely returns.
Academics have studied the stock market for as long as it's been in existence and they have found that the rate of return of even the very best fund manager is not consistently better than the market's own fluctuations.
Where this gets interesting for you, the investor, is when you look at fees. Consider that each time a fund manager buys or sells a share, there is a cost. Consider, then, a fund where your carefully chosen mix of stocks is left to do its thing. It is not tinkered with much; occasionally the portfolio is rebalanced to reflect the ratio of high-risk/low-risk or stocks/bonds that was agreed at the outset. The fees clocked up by this approach, known as passive investment, are much lower than those associated with an actively managed fund.
So next time you get a statement from your pension or investment fund and you see an actively managed fund, think about all the money you are losing because of this ill-conceived investment strategy.
Q: I've had the opportunity to put some money aside based on a small inheritance and regular savings over the past few years. I am now in a position to start making some decisions, and I'm just wondering what is the best option: pay down the mortgage or invest long term? I'm in my mid-40s and time is ticking by. Patsy, Kilbannon, Co. Galway
In the world of personal finances, there are very few questions that can be answered with a straight yes or no. Factors such as the mortgage interest rate, the term of the loan, cashflow, what other financial needs are competing with the mortgage and what their objectives are all come into play.
Paying a lump sum off an expensive variable rate mortgage is a no-brainer, unless you are nursing car loan repayments at 9.50pc APR.
Of course, you don't necessarily have to have a lump sum for this strategy. Last week I advised a client to increase her mortgage repayments by €500 per month. It will reduce the term of the mortgage by 12 years, which will make a massive difference at that stage of her life in about ten years' time. It will contribute to her being able to retire early, which was one of her main financial objectives.
But then there are circumstances in which it would not make financial sense to overpay the mortgage by that €500 or lump sum. For example, if you are lucky enough to have a tracker rate.
It is worth considering what that €500 or a lump sum would earn in a pension fund or perhaps as a way to pass on wealth to the next generation in good time.
If you wanted to put it in an investment fund, it would need to be making more, after fees and charges, than your mortgage interest rate for this to be a logical thing to do.
Sunday Indo Business