'Financial Resolutions' for the New Year

[gnf_ireland]

Similar to New Years Resolutions, I am wondering do many people make 'financial' resolutions for the year ahead, and if so what type of things do they consider?

Over the last 2 years, I have evaluated and switched both my mortgage and my pension to get substantially better deals, as part of my 'New Years Resolutions'. I will continue to keep an eye on the mortgage situation, and switch again if it is financially worth by while to do so.

This year my 'financial resolution' is to engage an independent (fee paying) financial planner/adviser to evaluate by financial position and incorporate any suggestions/proposals they make into my financial plan for the year. Being 20-25 years out from retirement, I think it is a good time to do this.

This will include determining a replacement 'investment' for my children's education fund - currently monthly contributions with Rabo-direct but this is coming to an end from April.

I also plan to review all relevant 'insurances' as a self-employed person should, including death in service, income protection, critical illness etc, and re-quote for existing life cover and mortgage protection cover just in case it is available cheaper elsewhere.

Anyone else do similar things, and if so what do you consider?

 

[Bronte]

Gnf why don't you post your details on here so we can have a look and maybe spot something you are missing.

 

[cremeegg]

Gnf why don't you post your details on here so we can have a look and maybe spot something you are missing.

And then compare the advice you get free here with the advice that your broker gives you. At the least you can keep the broker on her toes !

 

[Brendan Burgess]

This will include determining a replacement 'investment' for my children's education fund - currently monthly contributions with Rabo-direct but this is coming to an end from April.

Well let's start with this one. This is one of the biggest mistakes people make "compartmentalizing" their money.

You have a mortgage with KBC which is on 3%. So you can get a guaranteed, risk free, tax free, return on your money of 3% by paying down your mortgage.

So cash in your education fund and pay down your mortgage.

As you are, in ten years' you will have a mortgage of say €200k and an education fund of, say, €50k.

Assuming the same returns, if you pay down your mortgage, you will have a mortgage of €150k which is the exact same net result.

But it's very likely that the net return on your fund will be less than the interest you pay on your mortgage, so you will probably end up with a mortgage of, say, €145k.

Brendan

 

[Brendan Burgess]

And then compare the advice you get free here with the advice that your broker gives you. At the least you can keep the broker on her toes !

I love this idea.

Many people on askaboutmoney give questionable advice. But it's usually quickly challenged. Alternatives are offered. Conventional ideas are challenged.

Many professional advisors give questionable advice and there is no scope for challenging them.

Brendan

 

[gnf_ireland]

You have a mortgage with KBC which is on 3%. So you can get a guaranteed, risk free, tax free, return on your money of 3% by paying down your mortgage.

So cash in your education fund and pay down your mortgage.

As you are, in ten years' you will have a mortgage of say €200k and an education fund of, say, €50k.

Assuming the same returns, if you pay down your mortgage, you will have a mortgage of €150k which is the exact same net result.

But it's very likely that the net return on your fund will be less than the interest you pay on your mortgage, so you will probably end up with a mortgage of, say, €145k.

@Brendan Burgess Absolutely agree with this, to a degree. I believe there is merit in 'compartmentalizing' money with a specific goal. In my particular case, it is highly likely that my children will be attending a fee based secondary school, which means access to the funds would be needed in 8 years time.
There is not much benefit in having a lower mortgage, if the funds are not available when needed.

It is a similar discussion to pension contributions - there needs to be a balance between short term, medium term and longer term financial commitments. When looking at a 20 year financial projection, there may be demands in the short/medium term that does not necessarily mean overpaying the mortgage is the best option for everyone.

It is worth noting that when people go onto the investment forum and talk about investing money, they are often asked the financial objective and associated time frame. In my case, the 'compartmentalized' funds for the kids education tie into this discussion - rightly or wrongly.



For the record, I 100% subscribe to the theory that the best university savings plan is to be mortgage free by the time the kids start university but I do wonder how many people genuinely achieve this goal.

 

[gnf_ireland]

And then compare the advice you get free here with the advice that your broker gives you. At the least you can keep the broker on her toes !

Many people on askaboutmoney give questionable advice. But it's usually quickly challenged. Alternatives are offered. Conventional ideas are challenged.

Many professional advisors give questionable advice and there is no scope for challenging them

Completely understand the merits of this approach. That said, I am not 100% sure I want to 'declare' my financial status on the web, but I will see how I can summarise it and what the broker says to get others people's view on it. Lots of people are 'cautious' in this area, and I would fall into that category to a degree.

 

[Brendan Burgess]

In my particular case, it is highly likely that my children will be attending a fee based secondary school, which means access to the funds would be needed in 8 years time.
There is not much benefit in having a lower mortgage, if the funds are not available when needed.

Hi gnf

In general, I think that saving in poor performing product for 8 years is too long. If your kids were due to start school next year, or maybe in 3 years, I might go along with that. Pay down your mortgage. Put your excess savings for the next 5 years against your mortgage. With three years to go, accumulate your savings into a separate account. When your kids are in secondary school, your mortgage repayments will be much lower so you will have more free cash to pay the fees for the private school.

That is the general advice. But you have referred previously to the KBC redraw mortgage. So can you not overpay your mortgage and then withdraw the money when you need it?
http://www.askaboutmoney.com/threads/how-much-is-kbcs-overpayment-offset-worth.195929/
Brendan

 

[Gordon Gekko]

My thought process is as follows:

- I have an overarching aim to be debt-free and to have a meaningful cash reserve at age 50 (15 years from now).

- My resolutions for 2017 have one eye on those longer term goals. 2017 is all about deleveraging and building up cash.

 

[gnf_ireland]

That is the general advice. But you have referred previously to the KBC redraw mortgage. So can you not overpay your mortgage and then withdraw the money when you need it?

Yes, but that facility has been withdrawn. I have agreement from KBC that a reasonable level of the funds paid to date are available for redraw, but future over payments are not. This means any extra funds I pay into it would not be available.

My case is a little trickier, so I will start a separate thread on that.

In general, I think that saving in poor performing product for 8 years is too long. If your kids were due to start school next year, or maybe in 3 years, I might go along with that.

I am not suggesting saving the education fund in a deposit account making minimal interest. Currently this is invested in equity funds with Rabodirect, which to be fair has made a reasonable return over the last 4 years since they were commenced. That is before the taxman gets his hands on them of course

 

[gnf_ireland]

I have an overarching aim to be debt-free and to have a meaningful cash reserve at age 50 (15 years from now).

My resolutions for 2017 have one eye on those longer term goals. 2017 is all about deleveraging and building up cash.

This is similar to what I have proposed above, which is balancing the reduction of the mortgage with parallel investments, albeit for a specific purpose. Are you talking about building up 3-6 months reserves, before deleveraging or something totally different?

 

[Brendan Burgess]

Currently this is invested in equity funds with Rabodirect, which to be fair has made a reasonable return over the last 4 years since they were commenced. That is before the taxman gets his hands on them of course

It will be difficult to get a return of 3% after tax over the next 8 years. And to get anywhere close to it, you will be taking a significant risk.

Let me put it another way, would you take out a mortgage at 3% interest to invest in a heavily taxed and heavily charged fund?

I suspect not, but that is what you are doing.

Brendan

 

[Brendan Burgess]

I have agreement from KBC that a reasonable level of the funds paid to date are available for redraw, but future over payments are not. This means any extra funds I pay into it would not be available.

OK. Let's say you have overpaid by €50k. Can you leave that overpaid and overpay more, but withdraw that €50k in 8 years?
If so, it's clear that you should pay down your mortgage.

Brendan

 

[Brendan Burgess]

- My resolutions for 2017 have one eye on those longer term goals. 2017 is all about deleveraging and building up cash.

Well your name is appropriate. As your eyes are in different directions. Building up cash and deleveraging are opposing ideas. Use the cash to deleverage, subject to an emergency fund, if your income or expenditure is volatile and unpredictable.

Brendan

 

[gnf_ireland]

It will be difficult to get a return of 3% after tax over the next 8 years. And to get anywhere close to it, you will be taking a significant risk.

Let me put it another way, would you take out a mortgage at 3% interest to invest in a heavily taxed and heavily charged fund?

I suspect not, but that is what you are doing.

@Brendan Burgess Agree with you on the above, but things are never as black and white as that.

So in general I have followed this advice and liquidated a reasonable level of my investments to over-pay the mortgage. Most of these are available for redraw, as per the discussion above.

However, unlike a lot of people my short term goal is not to become mortgage free. I want to reduce the mortgage to a 'manageable' level - say 40k and then default back to regular payments. We are currently aggressively overpaying our mortgage at the moment by just over 100%. We project that we will reach the 40k mark in around 4 years time, and then have a further 12 years odd on regular repayments (around 425 euro a month).

The objective is to start rebuilding cash reserves/investments at this stage again, and only clear the mortgage once we decide the redraw is a facility we no longer require, or would not be worth it from the bank point of view. At that stage we would simply clear down the mortgage from the cash reserves - somewhere between 2025-2028.

Taking a 5 year view, the goal is to be at that manageable mortgage level and be back on the road to rebuilding cash reserves. Diverting the education fund money into the mortgage would move this 'trigger point' by just over a year. However, this would be offset by losing the 'averaging' nature of paying into an investment fund over a longer period of time reducing the impact of price fluctuations.

So instead of paying in a smaller amount between 2013 and 2021 and increasing it from 2021-x, I would pay nothing from 2013-2020, and paying an increased amount from 2020-x. (Maybe incorrectly), I thought it would be better to invest smaller amounts over a longer period for this reason.

Does this make what I am doing any clearer ? While I 'nominally' call this an education fund, it really is just the start of rebuilding of the cash reserves post mortgage a few years early.

 

[gnf_ireland]

Agree with you on the above, but things are never as black and white as that.

Hence one of the reasons we are making a resolution to engage a fee based financial planner/adviser this year

 

[Gordon Gekko]

Well your name is appropriate. As your eyes are in different directions. Building up cash and deleveraging are opposing ideas. Use the cash to deleverage, subject to an emergency fund, if your income or expenditure is volatile and unpredictable.

Brendan

Hi Brendan,

I'm taking surplus cash and splitting it as follows:

- Some towards the mortgage as part of my plan to half the term of my mortgage.
- Some towards building an emergency liquidity fund of €60k.
- Some towards a second cash fund which will be used for opportunistic investments which could include additional repayments off the mortgage.

I do believe in deleveraging but I also remember wealthy clients being unable to access funding during the credit crisis. Having €100k and owing €300k can be better than having no cash and owing €200k.

All the best.

G

 

[gnf_ireland]

Having €100k and owing €300k can be better than having no cash and owing €200k.

Interesting viewpoint and definitely one which most on here would disagree with !

Is having access to the funds worth an opportunity cost of say 3500 a year (100k @ 3.5% on the mortgage for example)

 

[Brendan Burgess]

- Some towards building an emergency liquidity fund of €60k.

That is some emergency.

If you have a non-tracker mortgage, you are getting a definite tax free, risk free, return of 3%.

That is so much better than paying €1,800 a year insurance in case of some emergency, which is unlikely to happen.

If you are building up such a fund, you presumably have a good income. You can meet most emergencies.

The only reason you would need such a large fund would be if there was a significant risk to your income.

Brendan

 

[Bronte]

Completely understand the merits of this approach. That said, I am not 100% sure I want to 'declare' my financial status on the web, but I will see how I can summarise it and what the broker says to get others people's view on it. Lots of people are 'cautious' in this area, and I would fall into that category to a degree.

If I were to disclose on here I'd use a different username. Just for that specific purpose. Then I wouldn't feel like it was 'me' posting, keeps the personal out if it.