No matter how wild the credit card excesses at Christmas, it is possible to shift the fiscal blues of January and to turn over a new leaf this new year by prudently using the boost in income from the Budget income tax changes and the thriving economy
Embarking on the new year on a sound financial footing may be a hollow prospect for anyone with a flood of credit card bills on the hallway this week.
But credit card debt is usually a minor player in the wider game of debt repayment, which, along with wealth creation should be the main priority for households this year. The increasingly strong economy, and the improvements in personal taxation that will start filtering through in 1998 mean than there is greater scope for setting
and keeping personal financial New Year resolutions. The following list is a compilation of best advice from the financial advisers and sources Family Money relies on throughout the year, and from readers' letters.
The order of importance is based, mainly on the needs of families, but includes some suggestions for young singles and older people too.
Make a Will. A straightforward Will should cost no more than £50-£100 and will ensure that an estate is passed on as the deceased would wish it to be and without unnecessary legal delay and expense.
Review your personal finances. Take the time to sit down with the shoebox-full of personal papers, investment and insurance policies, deposit books and bank statements and bills. Buy a notepad and write down exactl y how much the family earns and how much it spends. This is an unnerving experience. It can be a reminder of just how close to the line you are living, but it should also show areas where cashflow can be recovered. For example, paying off credit cards on the drip can be very expensive over 12 months. Are there any spare funds say, a commission payment or bonus that could clear that debt, or other small personal loans? Consider converting the credit card statement into a small personal loan that carries a lower interest rate. Then cut up the card for the next six months.
The same question should be asked about mortgage debt. The faster a homeloan is paid off, the less future interest it will incur. An extra £30, £50 or £100 a month paid into a mortgage can save thousands of pounds over a longer period. Also, check to see if the correct interest rate is being paid on your home loan (and bank loans) or if it is worth while to break a higher fixed rate at this point. (Penalties apply to fixed-term mortgages that are redeemed early but they may be relatively low towards the end of the term.)
With deposit interest rates low and expected to drop further in the coming months any savings accounts should also be reviewed. If the return of interest is lower than any borrowing rates, it is worth considering using the savings to pay off the debt, especially credit card and hire purchase balances.
Aside from ensuring that you are receiving all the appropriate tax allowances (for example, medical and dental refunds are often overlooked) you should try to improve cash flow this year by taking some basic steps. [SBX]
Include all the family. Set out a family spending budget for essential and nonessential items. Include older children in this exercise in an attempt (however optimistic) to show them that overheads need to be controlled. Telephone and hot water bills may be of particular relevance to them. Teenagers who earn regular money from part-time jobs should be encouraged to save a portion of it and to make a token contribution to the household expenses. [SBX]
Cut back spending. Consider reducing the family budget by a modest 3-5 per cent this year. Instead of spending £75 a week on groceries usually a family's largest outgoing along with a mortgage try to reduce the bill to £72.75 or £71.25. Over a year this can amount to savings of £195. Similar reductions in utility bills can double that saving, which for many families is the equivalent of their Christmas outgoings, or the rental of a summer cottage or caravan.
Spread bills over 12 months. Sign up for the bank or building society's budget plan. This involves listing regular income and outgoings and spreading the bills, large and small, over 12 regular monthly periods. The months in which more is spent than is in the account such as when car insurance or school fees are due, summer holidays or Christmas will result in an overdraft facility being triggered the cost of which can be recouped in lower spending months. This is one of the best ways to gain some control over spending.
Buy life insurance. If your financial review has shown that income will not be replaced by the life insurance cover (minus the value of the mortgage which will be paid off by compulsory mortgage protection insurance and by occupational and state pensions for your spouse), then contact a broker or financial adviser. Term and convertible life insurance is cheap in this country and is a top priority for anyone with dependent children. Even if you don't have children at the moment, the cost of cover is cheapest when the purchaser is young.
Buy health insurance. The cost of VHI cover is going up, but with BUPA's arrival, benefits have improved, albeit at a price. Private health cover is relatively cheap in this State (just ask anyone who has lived in the US).
Take the time to compare the companies' main plans and decide which scheme suits you and your family's needs best. Keep in mind that while BUPA is cheaper at the moment, its rates cannot be maintained forever at today's levels. You can switch back and forth between the two companies, though pre-existing conditions may not be covered each time.
If there is spare cash you should also consider taking out one of the popular hospital cash plans, such as the HSA (Hospital Savings Association) and HSF (Hospital Saturday Fund). For a few pounds a week, an entire family up to certain limits will receive cash payments for in-patient and out-patient treatments, dental and optical cover, homeopathic and nursing care, etc. There are even lumpsum maternity benefits.
Buy a pension. The self-employed, those who work for someone who does not offer a pension scheme, or those who joined a scheme late, should all consider taking out a personal pension plan or topping up existing ones with an Additional Voluntary Contribution (AVC). Don't take the first pension you see advertised. Try to find an adviser who will carefully discuss the pros and cons and the impact of any charges on the investment fund. Arrange the contract on a no-initial-unit, no-commission basis and be prepared to pay the adviser a fee.
Make your spare cash work for you. If there is money to spare each month, think about using it to reduce expensive debt or put it towards the mortgage. Conventional savings plans are a good idea for long-term savings goals in excess of 10 years but if saving is for a short-term need, such as for school fees in, say, five years, it is far better to put the spare £50 or £80 into repaying the capital off the mortgage than into a conventional savings plan.
The return from an accelerated mortgage payment is a guaranteed 7 or 8 per cent (i.e. the mortgage interest rate) and lenders will allow the additional amount paid to be drawn down to cover items like school fees. The advantage of reducing a mortgage early is the amount of compound interest which is avoided. An independent adviser or even a lender can produce a simple spreadsheet to explain the effects of accelerating mortgage payments.
If you prefer to buy a bank or life assurance-related savings plan, make sure it has low initial costs and gives the flexibility to stop and start payments without penalty. Most require minimum monthly contributions of £50£80. Make sure to check out An Post savings schemes as well, but be conscious that deposit rates are quite low at the moment and likely to drop further. So-called "education fees plans" have proved to be a financial disaster for many parents, so be wary of any which claim to cover fees in less than a 10- or 15-year savings' period.
An elderly person should shop around for the best deposit rate possible for their capital. Medium- to long-term investment policies are usually unsuitable for the elderly since they need a steady income or a capital draw-down facility. National Deposit Brokers (tel 01 2989211) provides an up-to-date deposit rate table as well as a tracker bond information service.
Consider an equity related investment. Stock markets have been extremely strong over the past three or four years, and while the bull market may be finally peaking, over the long term, equities are certain to outperform deposit-type investments. If you have a lump sum to spend, consider buying a short-term tracker bond, a longer-term mainly equity-based bond from a leading life assurer, a low DIRT special investment account that is mainly invested in Irish equities or an international equity investment in the form of a unit trust. Seek out professional, independent advice before making a choice.
Buy some shares. The halving of the Capital Gains Tax from 40 to 20 per cent makes direct stock market investment considerably more attractive in terms of realising potential gains. Top companies on the Irish stock market continue to look promising, but keep in mind that the fainthearted and those who cannot afford to lose their stake should not consider investing directly in stocks and shares.
You should ideally have at least £10,000 to spend and spread between a couple of different companies. Family Money recently mentioned in another column that the larger brokers are not particularly interested in punters with less than £10,000 to spend, but one, NCB promptly wrote back to say that most of its private clients had stakes of less than £10,000. This view was endorsed by a few readers who added that the big brokers they dealt with were very helpful, even though they had only small sums to invest.
