LAST week I wrote about financial priorities and what six areas, in order of importance, you should concentrate on. My top three were saving for retirement, building up an emergency fund and paying down expensive debt.
As promised, this week I am going to cover the final three areas, so, next on my list, at number four, is having the right insurance cover in place.
In the financial services industry, there is a term known as the Law of Three. The logic behind this principle is if you want to achieve financial independence or improve your financial wellbeing, you need to focus on three things i.e. saving, investing and protecting.
We rightly spend a considerable length of time planning for our future after we finish our working life, but we fail to put plans in place if our working life has to end sooner than anticipated. If you don’t have insurance or enough of the right insurance, everything you aspire to achieve and own could be in jeopardy.
A single sickness or accident could wipe you out financially. And if you don’t think it could happen to you, think again. In Ireland, 56% of people over the age of 30 will be diagnosed with a serious illness in their lifetime, and the average age of people who make a serious illness claim in Ireland is just 47.
What happens if you don’t suffer a serious illness, but you can’t work for a period of time. How long would your employer pay you for? Would they pay you anything? This is an area where the statistics are even more frightening. For example: Only 15% of private sector employees would get paid for six months or more if they were off sick
Some 36% of employees believe their salary is protected when, in fact, it is not
Worst of all is that less than 10% of the Irish workforce has any form of income protection cover.
If you have no income, you cannot save for retirement, you cannot pay off debt, you cannot put a child through college, you cannot pay your mortgage off early. If you have to rely on the state to pay your income, then best of luck trying to live off €188 per week.
Sure, some people may have savings that can be called upon if needed, but could they sustain the level required if they were out of work for two years or more?
Whether it’s serious illness or income protection, people underestimate how common it is to be unable to work because of illness or injury, so please make sure you have enough cover to protect your life and income. By doing so, you are simply protecting the ones you love from something unexpected happening that could jeopardize their financial security.
One of the sad facts of life is that things do not always go as planned. This is where assurance and insurance comes into play. They provide you with the financial assistance in the event that misfortune should strike. This is an incredibly important area not to be taken lightly. My advice is to seek independent advice from a qualified financial advisor who will go through these types of products with you so you can make an informed decision as to whether you need them or not.
Next up at number five, is to pay your mortgage off early. Some people argue against paying off a mortgage, because they think they can get a better long-term return if they invest in the stock market rather than paying down their mortgage.
But for me why take the risk? If you overpay on a mortgage at 4%, you know you are getting a guaranteed net return of that percentage on your money. If you invest that same money in the stock market, you would need to get an annual return of c. 7% before charges.
Another reason is that when your mortgage is paid off, the gap between your income and outgoings gets wider i.e. you don’t need to earn as much anymore.
Having that freedom allows you to make all sorts of career changes, if you wanted to. So, once you have steps one to four covered, any surplus funds in place, direct them to overpaying your mortgage.
Finally, whether you believe a child needs a college education or not, the overwhelming evidence, from a financial perspective, is that it is very important.
If you were to measure success purely by how much a person earns over their lifetime, those who have a 3rd level qualification are expected to earn €750,000 more than those who don’t; there are, of course, exceptions to this.
We all would like to give our children the best chance to succeed in life but this opportunity comes at a cost, because the average cost of putting a child through 3rd level education can run up to €10,000 per year. If they are in college for four years and maybe five if they want to do a masters, then the cost is obviously significant.
So, how are people able to do this? For many they can’t, they have to rely on grants and scholarships to fund the cost. For others it will come from savings, monthly income or borrowings. And for many it is probably a combination of all three.
A study was carried out by Bank of Ireland who looked into this issue, and they discovered that 43% plan to fund college expenses through savings, 23% availing of grants, 19% from monthly income and 15% will have to borrow.
The best way to save for your child’s third level education is to save well in advance. How well in advance? For me, from the moment they are born using the children’s allowance payment.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie