Six ways to tackle debt and improve financial health
IN personal financial planning, there is what is known as the lifecycle.
Generally, this is a list of the personal financial needs we all need as we grow and grow older, as we develop and have families and work our way through those various life stages.
In general, there are five needs: savings, borrowing, protection, investing and retirement.
Borrowing is part of modern life and there is little getting away from the fact that the vast majority of people will require one form of borrowing or another to provide basic life needs at various stages of their lives. A mortgage is a case in point that most people will be familiar with. It serves to secure a house and provide shelter.
Car finance, student loans, overdrafts, and credit cards, and are all various forms of borrowing. All are also granted based on current income and, as everybody knows, sources of income today are no guarantee of sources of income in the future. This is where debt can become a problem and "indebtedness" becomes a critical problem.
As we approach retirement, most people will plan to pare down on debt as they anticipate that regular income will cease post retirement. This is where planning comes to the fore.
The following are six steps that anybody with debt, or those planning for their future financial wellbeing, should consider as a way of keeping their finances in check and on track.
1 List all your existing debts
First, gather and document how much you owe (or place a call to your debt provider to get an up-to-date account balance), the rate of interest you pay on each loan (credit cards provide this on the monthly statements), and how much money you currently pay to debt reduction each month.
2 Set your debt reduction goals
This can be a process of trial and error if you are not sure what you want to achieve, so it is best be well organised before you start assigning funds to different debts.
You may want to reduce a particular debt to a particular level by a specific time.
You may be thinking about kids going to college and you want to have the car loan repaid. If this is the case, then plan accordingly. Set this as your goal. Do you want to be completely debt free by the time you turn 50? Well, if this is the goal, how do you plan to manage your personal finances to achieve this?
3 Bring in some extra cash
If you are really tight for cash, and the bills are arriving hard and fast and you feel that life is getting little out of control, then it may be time to check out some nuclear options.
There are some services - like consumer surveys, opinion monitoring and mystery shopping services - that are always recruiting, and these can help bring in some extra cash. Sometimes, this is all that's needed to keep your finances on track.
4 AVC withdrawals
This is probably bordering on the nuclear option if and when things get really tight, but the Government does permit AVC (additional voluntary contribution) pension fund holders a once-off withdrawal from their AVC fund of up to 30pc.
The option is only available up to 2016 and will provide some people with financial relief at a time when needed most.
No PRSI or USC is applied to the amount withdrawn but income tax is. This can be one way of slashing expensive borrowings.
5 Claim what's yours
Tax relief on qualifying medical expenses is 20pc and you have four years in which to reclaim this, after which point the benefit is lost forever.
Relief is normally given by way of a refund.
An individual can also claim tax relief on fees paid for third-level courses in respect of any person as long as he or she has paid the qualifying fees.
'Qualifying fees' refers to tuition fees (including the student contribution, post 2011), but not examination fees, registration fees or administration fees, in respect of an approved course at an approved college.
Tax relief is available at the standard rate of income tax (20pc) for qualifying tuition fees. The maximum limit on such qualifying fees for the academic year 2013/2014 is €7,000, per individual per course.
There is no tax relief for the first €2,750 spent on tuition fees (including student contribution) for the 2014/2015 academic year. For part-time students, there is no relief on the first €1,375 spent this year.
These monies can be used to get any debts under control and keep your finances on an even keel.
6 Plan for your next financial goal
Once you have accomplished your debt-reduction goal, it's really important to keep your long-term debt levels manageable.
Compare your spending with your income to make sure it's sustainable. Also, if and when your finances permit, establish a personal rainy day fund.
This will serve to bypass your need to rely on borrowings if and when needed.
Saving even a small amount can make a difference.