Liam Croke: Know the magic numbers or you’ll be in dark

Liam Croke

Reporter:

Liam Croke

Liam Croke: Know the magic numbers or you’ll be in dark

Getting to know your risk profile is important to how you manage your finances

As promised last week, I am following up with six more numbers you need to know when it comes to your finances.

I would encourage you to find out what your numbers are under each of the 12 headings I have referred to - they can be game changers.

They can move you from being reactive to proactive and even if you don’t like what they are telling you right now, they are yours, so own them and start making changes to improve them.

Risk Profile Number

Does the pension fund you are investing into each month, match your risk profile? The European Securities and Markets Authority (ESMA) risk rating methodology uses a seven-point scale which is designed to rank an individual’s risk profile. And the higher the number on the scale, the higher your appetite for risk is.

It would be interesting to see what your number is and whether it is aligned to your current fund.

To find out, you need to complete a risk profile questionnaire which is available on most pension platforms and it will take you five minutes to complete. It’s an important exercise because it helps align you with a fund that is best suited for you.

Income Earned Per Hour

Do you know how much you really earn per hour? This is an important number to know for many different reasons and you can calculate it very easily by first multiplying your net monthly income by 12.

You then work out how many hours you work each year, by multiplying the hours you work each week by 46 (when you factor in public holidays, and, say, 25 annual leave days, you end up working c. 46 weeks every year)

So, if your net take home pay is €3,000 (€36,000 over one year) and you work 40 hours per week (1,840 over one year i.e. 40x46), your hourly earning rate is €19.56 (€36,000/1,840)

If your mortgage is costing you €1,200 per month, then you are working 61 hours each month to pay for it. Knowing the number of hours you spend every day that goes towards paying things like your mortgage, savings, clothes etc. is something I like to do with my clients. It is a strong motivating factor to make changes, and it certainly helps to put things into perspective for them.

AER

This stands for Annual Equivalent Rate and is a really important number to know when looking at any existing savings and investments you have, or those you are considering investing into, because it will show you what compounded return you are going to earn over a 12-month period.

You might see an investment offering an interest rate of 2% over a four-year period, but you need to look at what the AER is as well, because it will break that rate down for you and show you what it means on a yearly basis.

APR

You also need to know what your APR numbers are because they are the interest rates charged on debt like credit cards, mortgages or term loans. The APR will show you the amount of interest you may end up paying. Knowing what this rate is, is important because you can compare different providers on a like-for-like basis.

There can be a slight difference between the interest rate quoted and what the APR is and the APR will always be equal to or greater than the interest rate because all fees and any other costs associated with the loan are included in the APR figure, so always look at that rate and the lower the APR the better.

Runway Number

This is how many months of emergency funds you have in place to live off, if for some reason, your income was to stop or decrease significantly.

Ideally you should have between three and six months of your net monthly income in reserve. If you divide your savings by what income is lost if you were unable to work, that’s your runway number. If you have €10,000 in savings and you spend €3,500 on absolute necessities each month, your runway number is 2.85.

Percentage invested in one asset class

A question I am asked often is how much should, I keep in one particular stock? And predominately it is asked by people working in a company who have share purchase programs. And it’s important to know because if you are over reliant on one share, you are much more exposed because too much of any, magnifies a loss in a portfolio should that companies share value fall.

You preserve your wealth by diversifying in multiple investments and yes you can still have exposure to the company you work or worked for, just make sure what you hold has less exposure to your overall net worth. Keeping between 15% and 20% of vested stock as a percentage of your total net worth is deemed acceptable.

Liam Croke is MD of Harmonics Financial Ltd,

based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie.