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01 Jul 2022

Making Cents: Ideas to beat the cost of living crisis (part 3)

Making Cents: Ideas to beat the cost of living crisis (part 3)

Inflation in the Irish economy is expected to surge to 8.5 per cent or even higher in the coming months, a level not seen since the early 1980s

This is the last article in my trilogy of trying to combat the rising cost of living we’re all experiencing.
In the previous two articles I looked at ways of how we can reduce our existing monthly expenses.
But that’s not all we can do, which is why I want to look at other strategies that perhaps can complement spending less.
And they are looking at ways we might be able to increase our income and/or get lump sum cash injections as well.
And one very quick way of earning more money, tax free, is renting out a room in your property.
You can rent out a room or rooms in your home and earn up to €1,167 every month tax free, provided the letting period exceeds 28 days. There is an annual limit of €14,000 which is exempt from tax, but anything above that, the full amount received is liable to tax.
And it may not be for everyone, but it’s certainly something you could consider, if, you have a spare room in your property and you’re struggling with your monthly cash flow.
I’ve come across many people over the past number of years who’ve rented out a room in their property and it’s worked out very well for them, and others not so much. So, it might not be for everyone but it could be an option for some, nonetheless.
I deliberately didn’t want to only focus on cutting back on the amount you spend each month, because there’s only so much you can reduce your outgoings by, and there’s a floor to how much you can spend, but there’s no limit to the amount you can earn.
By earning more, you can either widen a monthly surplus or reduce a deficit between your outgoings and income, which is why becoming more valuable to your current employer or looking at opportunities with others, that may pay more is worth exploring.
What most people do is a combination of both, i.e. spend less and earn more, but very often people make the mistake of choosing one over the other, thinking that because the numbers are the same, whatever option they choose will have the same impact as the other, but they’re mistaken.
Let me explain.
If you were running an annual deficit of €3,600, and if your effective tax rate was 30%, you must earn an extra c. €5,143 to net down to €3,600. You have to pay income tax, prsi and USC on your earned income.
So, for every €1 you earn you only keep €0.70c.
If, however, you were able to save €1 from your outgoings, the amount you benefit and get to keep is that full €1.
Of course you should focus on increasing your income but do it, in tandem with reviewing and reducing your outgoings if you can.
Okay my next suggestion is triggered by an event that happened 9 years ago.
Back in 2013 when the local property tax was first introduced, people were also trying to find ways they could pay for it, and one of those was selling unwanted items they owned.
And this was something I did myself.
An Argentinian footballer, Daniel Bertoni helped pay my property bill for the first couple of years.
Back in 1978, I collected football stickers for the 1978 World Cup and Mr. Bertoni was the last person I needed to complete the album.
Anyway, long story short, the album was gathering dust in the attic, so I decided to sell it on eBay and I did and it only took me a couple of days. I also sold a coffee machine I bought years before which I’d say I used twice. It was in the shed for years, in good condition and I think I got €200 for it.
There are countless sites available where you could sell things you don’t want or need and of course the other advantage to making some extra money, is the opportunity to declutter your home.
So, have a look around the house at what you have that could be sold i.e. clothes, furniture, toys, CD’s/DVD’s, shoes, books, old TV’s and so on.
Another area that additional monies can be found, but it’s an area people don’t fully explore is the amount they pay each year in tax.
If, for example, a couple earn €80,000 each year, they get to keep only €55,824 of it.
30%, or €24,176 of their income is being taken in income tax, PRSI and USC.
And of course, there are a raft of other taxes that are taken from our incomes, like property tax, VAT, fuel tax and the list goes on and on. It is reasonable to expect we pay about 10% of our gross income each year in indirect taxes, meaning the couple earning €80,000 have an effective tax rate of 40%.
To put this in perspective and into real terms, anything this couple buys, from a litre of milk to a new car, they need to earn nearly double what the cost of the item is, to pay for it. The cappuccino with a price tag of €3 is, actually costing them more like €5. Because they have, to earn €5 to net down to €3.
My point in putting this in front of you is not to discount the amount you pay in tax, as if there’s nothing you can do about it. Perhaps there is. When is the last time you really looked at your payslip to check if the amount you are paying is correct? And if you wouldn’t know what to look for even if you did, well then get some help. There are companies who can review your tax situation and I saw one on-line recently who claim their average PAYE refund is c. €1,067.
So, there could be money to be found here from making sure you’re paying the correct level of tax to claiming for all the allowances you are entitled to e.g. medical expenses, tuition fees, nursing home fees, dental fees, health insurance relief especially if your employer pays this for you, work from home allowance, home carers allowance etc. And if you’re married but you’re still taxed as an individual maybe there’s money to be refunded to you.
Look you won’t know if there if you don’t find out and there is a limit to how far back you can claim tax refunds, and it’s known as the 4-year rule. So, you can go back as far as 2018 and make retrospective claims but no further.
There is lots of research which shows that during periods of scarcity, people tend to focus exclusively on their immediate tasks at hand. Which is understandable and it can have its advantages i.e. dealing with the situation head on, but the flip side is that they could be making very short-term decisions and ignoring other, at times more important decisions.
Part of the solution is taking a breath and trying to figure this out methodically and logically and rather than jumping into changing energy providers or asking for a moratorium on mortgage payments of whatever, get a second opinion or ask someone who has experience in dealing with situations like this i.e., MABS for example.
Getting your finances under control now more than ever requires clear thinking and having a plan that is well thought out, i.e. the first phase is not making decisions too quickly and not panicking or running down a rabbit hole, it’s putting your monthly spend together.
Phase two is looking at those expenses which account for the highest % of your income.
Phase three is fixed expenses, phase four is variable expenses, phase five is earning more, phase six is generating lump sum cash payments and so on.
I think that’s the type of process you need and I think it will set you up for a more successful outcome than just rushing off and doing something without thinking it through. It can be hard to stop yourself I get that, but you must try.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie

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