Liam Croke: Five-point plan for financial health in 2015

I know tackling money issues isn’t exactly a fun exercise, but believe me I know how important it is to get your financial house in order and I want you to start off 2015 with that goal in mind.

I know tackling money issues isn’t exactly a fun exercise, but believe me I know how important it is to get your financial house in order and I want you to start off 2015 with that goal in mind.

Resolve to make 2015 the year you get a grip on your finances, from finding and making more out of what you have, to what most of us want out of money: building lasting security for ourselves and our family.

To help you achieve this, I am going to give you five things that you can start off looking at implementing in January and I will follow this up with another five next week.

Try out MILO

One way of trying to improve your monthly cash flow is following a rule called MILO, which stands for More In Less Out.

It can be patronising to start talking about spending less than you earn or living below your means when there is only so much that can be cut out or reduced. So if you start thinking about earning more than you spend, it puts you in a different mind-set because it isn’t about what’s next to be cut, but rather what can you do to earn more money.

People don’t realise that they have valuable skills that people would be willing to pay them for. Get on-line and look at sites where people are advertising their skills and see if there is an opportunity for you to sell or do something you are good at.

Earning an extra hundred euros each month can help you increase your savings or pay off debt faster.

Forget about the Joneses

I was talking to a friend of mine over Christmas and he was telling me about a cousin of his who, based on her daily posts to her Facebook page, is living the life of someone who is incredibly wealthy. But she doesn’t work and her husband has a job that you would have thought wouldn’t pay enough to be leading the type of lifestyle they appear to have.

Looking at what they have and are doing is actually getting my friend down; why can’t he have what they have? Where is he going wrong? With sites like Facebook, it makes it easier for us to compare ourselves to others, but what Facebook doesn’t tell us is the likely debt people have supporting their lifestyle or the financial pressures they might be under.

Please do not be influenced by what your friend, brother, sister, neighbour, work colleague drives, what they post on social media, what they wear or how many holidays they go on each year or how many “investment properties” they have. Make your lifestyle and purchasing decisions based upon what you can afford and not what your friends are buying.

Pay off expensive debt

If you have any debt whatsoever, now is the time to create a fast track debt repayment plan. Even if you can’t pay everything off in one year because that is just unrealistic, developing and working on a long-term strategy will help make serious inroads into what you owe.

Did you know, by the way, that if you overpaid €100 each month on a €250,000 variable rate mortgage, it would knock four years three months off a 30-year mortgage, saving you €33,347 in interest payments?

And remember the less interest/payments you make on debt, the more money you have to save.

So, get out a piece of paper and write down all of your debt, starting with the debt with the lowest balance outstanding.

I prefer to work on clearing the loan that has the lowest balance first rather than the debt with the highest rate, because I want quick wins.

Psychologically, if you clear one loan in a relatively short period of time, you are more motivated to keep going as you can see your hard work paying off quickly.

Once that loan is repaid, then use that repayment as an extra payment on your next loan and keep this going until all of your loans are repaid in full. This is called the snowball method of repayment as the amount available to repay gets bigger as each loan is paid off.

Review your pension

The first thing you should do with your pension this year is to set 20 minutes aside to review (a) how well your fund has performed over the past 12 months (b) how much you are on track to accumulate when you retire and (c) increase your contributions if you can. You are likely to be well under the maximum contributions allowed so if you can make extra contributions to say an AVC plan then do it. When tax relief is applied to your contributions the amount taken from your salary is a lot less than you think. For example if you are taxed at the higher rate then for every €100 lodged to your pension fund, just €60 is debited from your salary.

If someone offered you €100 every month in exchange for €60 would you take it? Of course you would, the same principles apply to pension contributions.

Automate your savings

Saving money is the foundation to financial security. It separates the rich from the poor and it isn’t all about how much you earn, it’s about how much you keep.

Saving money isn’t easy – it is much more easy and natural to spend it than save it – so we must continuously work at it, be aware of it until it becomes second nature to us. To help us with this we need to automate it because most people spend first and then save what’s left over. The best savings plan is to save first and spend what’s left over.

So, rather than making the decision to save each month, you should automate your savings. What I mean by this is once your salary is lodged to your account, set up a standing order so that the same day your salary is lodged a percentage of it is transferred automatically to your savings account.

Every month, money is debited from your account and after a while you won’t even notice it’s gone from your salary.

Start small – 1% or 2% of your salary is fine - as the key right now isn’t the amount but more that you have started a savings plan.

After, say, six months you can increase your savings by another 1% and after another six months by another 1% and so on.

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