EOIN McGEE reveals the key to securing your future WEALTH
From mortgages and loans to pensions and shares, f inancial wizard and host of RTÉ’s How To Be Good With Money has ALL the answers
Ihost an Insta Live every Saturday, during which people can submit financial questions and get an immediate answer. I often receive the same questions week in, week out – and sometimes regular watchers ask if I’m not bored getting exactly the same query over and over again. But the answer is, I’m not. If people are asking, it’s because they don’t know the answer and if I can help, I want to. There’s nothing boring to me about that. Below, I’ve tried to take the most common questions and group them into sections; you can read through them all or jump to the section that interests you (although I hope you don’t find any bits of them boring either!). You might even find yourself so interested that you tune into my next Saturday Insta Live (@eoin_mcgee).
MORTGAGES
Q: Should I pay a lump sum off a mortgage to reduce term or up monthly payments?
A: Most probably neither, though it depends on each situation. Very rarely is it a good idea to do either of these, due to the opportunities lost – that is, there will likely always be something else you could have done with that money that would have better benefited your long-term financial future.
Q: For a mortgage of €350,000 how much should I save each month?
A: A €350,000 mortgage will cost under €1,500 per month (for 30 years) so I’d suggest you would need to be saving at least €2,000 per month to price ability to repay.
Q: How much do you recommend spending on monthly mortgage repayments as percentage of salary?
A: You shouldn’t spend more than 35%.
Q: When a bank is looking at the ability to repay a mortgage, do they look at savings potential/rent?
A: The bank will take the total of savings and rent into account when looking at your ability to repay.
Q: Ireland has higher mortgage rates compared to EU, why?
A: Banks here suggest this is due to several factors, which include:
1. Regulations: mortgage providers have to hold cash against money they give out. Banks here are required to hold more than some countries in Europe.
2. We have one of the highest default rates in Europe.
3. It takes longer than average to repossess a house here.
SAVINGS
Q: I have savings sitting in the credit union to build my house, should I move it?
A: If you’re going to build in the next five years leave it where it is. If not, then get it invested in a longterm vehicle.
Q: What should I do with my savings?
A: Apply the five-year rule. If you’re going to spend it in the next five years, put it in a bank/credit union account. If you’re not, then invest it (60:40 portfolio: see ‘investments’).
Q: Should I have a joint account with my husband? All of our savings are in my personal account.
A: Sounds like you’ve control of the run-away money/f***-off fund – why would you want to change that?
Q: State savings to save long term for children’s college education, yay or nay?
A: Saving for kids’ education is a long-term goal. State savings are a short-term vehicle.
You don’t use a short-term vehicle for a long-term goal.
Q: I’m very bad at saving money, any advice on how to be a better saver?
A: You’re in the habit of saving or you’re not. It’s a choice you make.
Decide today to start saving, anything, it doesn’t matter how small. Just start!
Q: Just paid off the mortgage, any tips on the best way to save the rest of our money?
A: Don’t allow yourself to adjust your life (that you start using what was the mortgage money on ‘stuff’). Get stuck into saving it straight away; maybe get advice on putting it into a pension.
Q: Are prize bonds worth buying?
A: How long will the money be ‘resting in the account, Ted?’ If it’s less than five years then they are harmless enough. But only because bank deposit rates are crap anyway.
INHERITANCE
Q: Inheriting money, would it be better to lump that into a pension or drip-feed it in?
A: A well-constructed, well-diversified investment/pension will go up in three to four years. Obviously, we don’t know when a good or bad year is going to fall – they might even run one after the other. If you dripfeed money into an investment/ pension and things go down as you’re putting it in then it was a good idea. Based on the odds above, there is a 75% chance a lump is the right thing to do in any given year. I prefer straight in, but I do use dripfeeding when a client is very nervous.
Q: If you receive more than €335,000 from a parent, do you pay tax on the remainder or total?
A: You pay tax on the remainder as the first €335,000 is tax free.
Q: I was left shares by a late family member, am I liable for tax?
A: Depends who the family member was to you; if it’s your parents and they are worth more than €335,000 then yes, you are. If it’s an uncle or aunt, then anything above €32,500 will be taxable and anybody else will be taxed above €16,250. If you have got a gift/inheritance in the past from any of these groups, this needs to be taken into account when working out the tax.
Q: Can parents gift you money to use towards a house deposit? Is there a maximum amount?
A: You can get a total of €335,000 in your lifetime from your parents. They can also give you €3,000 a year (€3,000 from Mammy and €3,000 from Daddy).
PENSIONS
Q: I am going to be made redundant in a year, what pension questions should I be asking?
A: You put money into your pension for the previous tax year if a certain date has not passed (October 31 following tax year). Given you’ll be getting a lump sum from redundancy, if you have the cash now I would ask your HR/payroll to calculate your max contribution for last year and I would suggest that you pay that now. Do the same for the following years until you leave the company.
Q: Is it worth setting up a private pension if on agency work?
A: Yes, and bring it with you to your next job.
Q: If you pay into your pension, do you play less tax?
A: If you’re on the higher rate of tax (40%) and you pay €100 into your pension you’ll pay €40 less tax, which means your take-home pay will only go down by €60. If you pay 20% tax, then it costs €80 to put €100 into your pension.
Q: Does my employer have to give me a pension?
A: Your employer is required to provide access to a PRSA and to facilitate deduction from your salary to pay into it but they are not required to pay into it themselves.
Q: When should I start my pension?
A: You’re never too young or old to start a pension.
Q: What is the difference between putting extra money into an investment fund vs into a pension?
A: Put your money into a pension, then your pension into an investment fund.
LOANS AND OVERDRAFTS
Q: I owe money on a student loan, should I replay loan solely or split between loan payment and savings?
A: Depends on the rate on the loan, but without getting too bogged down I’d suggest you kill the debt first.
Q: If I have enough money to pay off a car loan in one go should I do it or continue to pay it monthly?
A: Don’t leave yourself short of savings in case ‘life’ happens
next month and you end up having to borrow to cover it. In general, loans are bad.
Q: Should I pay all of all my loan with my savings? They will clear roughly half the loan.
A: You have to be careful about clearing savings completely. I’d also feel a bit robbed if I wasn’t getting to clear a loan in full.
CREDIT CARDS
Q: €4,000 on a credit card, should I get a loan to clear or pay off what I can as I go?
A: Firstly, do you really hate debt? If you hate it and you’re tackling it aggressively move it to an interest-free credit card. Never use the new one and clear it down before the new credit card’s interest kicks in.
INVESTMENTS
Q: What is a 60:40 portfolio?
A: 60% global shares, 40% global bonds, no fuss.
Q: Easy way to invest – US stock market (S&P 500 fund)?
A: Standard and Poor’s 500 is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States. But why only invest in the US stock market? It represents 54% of the financial world but what about the other 46%?
Q: What is the best way to save for a child’s future?
A: That is a long-term goal, use a long-term vehicle like the nobrainer 60:40 portfolio.
Q: If investments are more likely to go up over the years, why not take only high-risk investments?
A: Most people can’t handle the ups and downs of higher risk and end up pulling the plug at the wrong time.
Q: Do you pay Dirt or other tax on a 60:40 investment?
A: Generally you pay exit tax at 41% of the profit. If you’re paying tax then you’re making money.
Q: Is five years long enough to get a decent return from a 60:40 investment?
A: Based on history there is a 99.6% chance of a positive return over five years in a 60:40 portfolio.
Q: Do you pay exit tax on gains made from a pension investment fund?
A: You don’t pay tax on the growth in a pension.
LIFE ASSURANCE
Q: Life assurance policies when buying a house?
A: Get the cheapest of the cheapest to satisfy the bank and then invest time and money into getting the right one for you and your family. Don’t put the family one off until you ‘get settled’ into the house.
Q: Should you go for life assurance if you already have it with work?
A: Yes, if you need it. If you died yesterday, how much salary will you no longer earn that your family will have to go without?
INCOME PROTECTION
Q: Does income protection cover redundancy?
A: It doesn’t cover redundancy; it pays out if your doctor and the product provider’s doctors say you’re unfit for work due to illness or injury.
SHARES
Q: Should I sell my work shares when they mature each year or hold onto them?
A: I’ve a strong belief that you shouldn’t tie your income and wealth to your employer. This is not to get better returns elsewhere, it’s to dilute the risk you’re taking with your life!
■ Eoin McGee’s new book, How To Make Your Money Work, is published by Gill Books and is available in all good bookshops and online, priced €16.99