Late 30s Couple, 2 kids, Seeking Guidance to Optimise Family Finances

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BetterCallSteve

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Long time reader of the forum and would be very interested in people’s thoughts about our own situation.

In the last 3 years my wife and I got married, had a baby, bought our first home, and replaced one car, so our savings have taken a huge hit. We also have a second baby on the way early next year.

We want to take stock of where we are and hoping people could give a few pointers so that we’re heading in the right direction.


Personal details

Age: 37
Spouse’s/Partner's age: 38

Number and age of children: 1 (2 year old) and 1 on the way next year.

Income and expenditure
Annual gross income from employment or profession: €70K
Annual gross income of spouse: €62K

Monthly take-home pay: 7,200 (combined)

Type of employment: e.g. Me: Contractor working for a large US pharmaceutical company with a Ltd company setup. Currently pay myself a salary of €70K and pay €10K into pension directly from company account. My company makes approximately €90K gross per annum.


Spouse: Primary Teacher

In general are you:
(a) spending more than you earn, or (b) saving? Saving


Summary of Assets and Liabilities
Family home worth €475k with a €405k mortgage
Cash of €15k


Family home mortgage information
Lender: BOI (transferred from KBC)
Interest rate: 2.35%
If fixed, what is the term remaining of the fixed rate? 18 months


Other borrowings – car loans/personal loans etc
Do you pay off your full credit card balance each month? Yes
If not, what is the balance on your credit card? N/A


Buy to let properties
N/A


Other savings and investments:

Do you have a pension scheme? Me: PRSA (approx. current value €65K)

Spouse: Pension – Grouped (teacher since 2007) (Looking into AVCs)

Do you own any investment or other property? N/A

Other information which might be relevant

Second child on the way in 2025 and spouse will take approximately 6 months unpaid leave.
Creche fees: €1,000 pm (conscious that we will need to juggle creche, ECCE, before/after school minding for 2 from January 2025)

Income protection: Me (paid by my Ltd Co., deferral period of 13 weeks)
Spouse: Salary Protection – Group Scheme

We bought a new build A-rated home about 18 months ago. It is large enough for our needs, in a nice area with plenty of options for schools, close to work, and we can see ourselves staying here for the long-term so no plans to move home.



What specific question do you have or what issues are of concern to you?

I have income protection with a 13 week deferral period so I built up a small buffer in my company account to cover that deferral period. Have approximately €40k in the account now which would more than cover any period of unemployment or ill health before income protection kicks in. Should I make a lump sum payment to my PRSA? Or would it be better to take a lump sum as income, pay tax on it, and then pay down the mortgage?


With my Ltd. Company there is some scope for adjusting salary/pension amounts. Should I reduce my pension payments and increase my salary for a few years to overpay the mortgage? We’re currently on a good interest rate but that will end in 18 months. If we overpay by about €10K before we re-fix then we would move into a lower LTV bracket (<80%).


We would like to be in a position to help our kids through college when the time comes (and if that is what they want) but increasing pension payments and reducing the outstanding principle on our mortgage seems like it should be our goals for now.


Would really appreciate any feedback on how we’re doing.



Thanks
 
As you have a company, you can make, pretty much, unlimited contributions to your pension fund. You are not impacted by the "use it or lose it" limitation on PAYE workers.

So you should stop contributing to your pension and get your mortgage down to a more comfortable level.

As a teacher, your wife has a good pension already. So, again, I would hold off on AVCs, and focus on getting the mortgage down.

The advantages of a comfortable mortgage and low LTV are many:
1) You will have a lower mortgage rate
2) You will be less impacted by increases in mortgage rates
3) You will find it easier to switch lenders
4) You will have lower repayments leaving more money for kids' education etc.
5) You might get to a stage where one of you can take a career break as your outgoings will be lower
6) If you get into financial difficulty, you will find it easier to reschedule your mortgage

But don't overdo it. Contributing to a pension is the most tax effective vehicle for long-term savings.

It's hard to know what a comfortable mortgage is. It's easier to identify an uncomfortably large mortgage, and yours is uncomfortably large.
Review the pension situation in about two years.
 
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BetterCallSteve said:
We would like to be in a position to help our kids through college when the time comes (and if that is what they want) but increasing pension payments and reducing the outstanding principle on our mortgage seems like it should be our goals for now.
Click to expand...

Absolutely. The best way to fund kids through college is to be living in a mortgage-free home.

Brendan
 
BetterCallSteve said:
Have approximately €40k in the account now which would more than cover any period of unemployment or ill health before income protection kicks in
Click to expand...

If you are expecting a period of unemployment, keeping money in the company can be a good idea. For example, if you earn €70k in 2023 and 0 in 2024, then leaving back €35k subject to Corporation Tax and paying it the following year is tax-effective.

However, I would not leave €40k sitting in the company just in case something bad happens. That is very tax inefficient.
Take it out and either keep it as an emergency fund in your own name, or better still, pay down your mortgage with the net amount.

Brendan
 
Overall you have a pretty good set of finances for your age and I don't think you need to be doing too much differently.

You are right to worry about expenses over the next few years as two kids below school age will cost a lot.

BetterCallSteve said:
Spouse: Pension – Grouped (teacher since 2007) (Looking into AVCs)
Click to expand...
I don't think AVCs are a priority. She's on track to have accumulated a full pension by 63.


Brendan Burgess said:
It's hard to know what a comfortable mortgage is. It's easier to identify an uncomfortably large mortgage, and yours is uncomfortably large.
Click to expand...

I disagree. Mortgage is 3x gross income which is fine at your age. Monthly payment is about a quarter of net income for a house which is perfect for needs. This is fine.

If you have spare cash I would prioritise your own pension over mortgage.
 
Yeah, it doesn't make sense to leave money in the company imo. It will be subject to corporation tax, professional surcharge tax and then you will be taxed if you take it as wages eventually
 
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Brendan Burgess said:
Absolutely. The best way to fund kids through college is to be living in a mortgage-free home.

Brendan
Click to expand...
I don't disagree with the advice on reducing the mortgage to a more comfortable level but, given that the children won't be finishing secondary school for c. 18 years, isn't there a strong argument to be made for putting an appropriate lump sum or regular amounts into an equity based investment (ideally directly in shares rather than a unit linked fund given the lower costs and tax involved with the former) to cover/defray possible future further education costs?
 
Hi ClubMan

No, there is no basis to that argument although many people make it.

It's discussed in detail here:

Key Post - What is the best way to save for children's education?

My first child is soon to be born and I am thinking about ways to save for his (and 1 sibling's, hopefully) 3rd level educations. We will be saving on a monthly basis, with an aim to have accrued a fund of c. €50K (in 2014 €) by the time they are 18. My wife is deeply risk averse and insists...
www.askaboutmoney.com

It's a common error because people take a silo approach to money. "That is my mortgage. That is my kids' investment plan. That is my pension." They should be all integrated.

The best, guaranteed , tax-free, charges-free return on your money is to overpay your mortgage.

The fact that it is 18 years away makes this even approach even more right.

If they had a large mortgage with education costs just two or three years away, it might make sense to build up an education fund instead.

Brendan
 
Brendan Burgess said:
Hi ClubMan

No, there is no basis to that argument although many people make it.

It's discussed in detail here:

Key Post - What is the best way to save for children's education?

My first child is soon to be born and I am thinking about ways to save for his (and 1 sibling's, hopefully) 3rd level educations. We will be saving on a monthly basis, with an aim to have accrued a fund of c. €50K (in 2014 €) by the time they are 18. My wife is deeply risk averse and insists...
www.askaboutmoney.com

It's a common error because people take a silo approach to money. "That is my mortgage. That is my kids' investment plan. That is my pension." They should be all integrated.

The best, guaranteed , tax-free, charges-free return on your money is to overpay your mortgage.

The fact that it is 18 years away makes this even approach even more right.

If they had a large mortgage with education costs just two or three years away, it might make sense to build up an education fund instead.

Brendan
Click to expand...

Would that hold true if savings rates > mortgage rate in your view? The Op has a 2.35% mortgage rate, the ECB rate is higher than that and if that flows through into savings deposits then the 'risk free' rate of return on savings will be higher than mortgage rate.

The other point to consider is that you actually need to have the cash available to pay education costs when due. At some point the Op will have to start saving the cash needed for Education in this example. As it is 18 years away, they have plenty of time to do that, but it is a factor.

I'd imagine they will have larger cost outgoings sooner than 3rd level education in 18 years!
 
DublinHead54 said:
Would that hold true if savings rates > mortgage rate in your view? The Op has a 2.35% mortgage rate, the ECB rate is higher than that and if that flows through into savings deposits then the 'risk free' rate of return on savings will be higher than mortgage rate.
Click to expand...
It's very unlikely that an after-DIRT savings rate will pay more in interest than your mortgage will cost you.
 
DublinHead54 said:
Would that hold true if savings rates > mortgage rate in your view?
Click to expand...

For the vast majority of people and most of the time, it is right to pay down the mortgage.

In this case, the OP might get a marginal benefit from saving for the remaining term of his fixed rate in some foreign bank.

But I doubt it would be significant.

He certainly should not invest the savings in an equity fund as ClubMan suggested.

Brendan
 
Just re kids and college etc. what we do is we save the children’s allowance for college. Then we each put in €5 a week to an account for them. We see this as their gap year fund or if the want to buy a car perhaps.
 
niceoneted said:
we save the children’s allowance for college.
Click to expand...

A great example of the fallacy of silo thinking.

There is no connection between the two other than some psychological connection.

If you have a mortgage, then it's a very poor management of your long term finances.

Brendan
 
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Brendan we have no mortgage have maxed out pension and avcs and have a very good pot in the bank (not literally) on modest wages. Both 50.
 
That is fine. While putting money in different silos makes no sense, in your case it's not doing any harm.

Brendan
 
Overall your finances are in good shape and I don't think you need to change much. I would slightly prioritize mortgage overpayments out of your current salary but I don't think you need to change pension contributions to do so.

BetterCallSteve said:
I have income protection with a 13 week deferral period so I built up a small buffer in my company account to cover that deferral period. Have approximately €40k in the account now
Click to expand...
Why €40k? You pay yourself €70k so 13 weeks is €17.5k. Your income protection policy probably covers salary of 60-80% so really you should only need €11-15k. I would reduce this number and like others, I think it makes more sense to have it in net cash as €5-10k. Especially when your spouse effectively has a guaranteed income.

BetterCallSteve said:
spouse will take approximately 6 months unpaid leave.
Click to expand...
The extra money you have built up can be used fund the unpaid leave. Make sure you are jointly assessed for this period as your spouse probably won't enter the higher tax bracket next year.

BetterCallSteve said:
In the last 3 years my wife and I got married, had a baby, bought our first home, and replaced one car, so our savings have taken a huge hit
Click to expand...
This is probably the most cash intensive period in most people's lives so don't worry too much, it will settle down again when the big items are paid for.

BetterCallSteve said:
Creche fees: €1,000 pm
Click to expand...
Are you claiming the NCS? This should reduce your Creche fees significantly

BetterCallSteve said:
We would like to be in a position to help our kids through college when the time comes (and if that is what they want) but increasing pension payments and reducing the outstanding principle on our mortgage seems like it should be our goals for now.
Click to expand...
Brendan has already touched on this and how people compartmentalize their spending but I can never understand how people do it. Particularly the fear/obsession around 3rd level costs

When you have 2 kids in childcare , you will be paying about €1500/m (after NCS). Did you start saving for this 15 years ago? So why would start saving now for university when it will be a similar cost?

The best way to fund university is to be in a healthy overall financial situation. You are currently doing pretty much everything right so continue as you are. 2-3 years before your eldest goes to university, if required, you can cut back on pension contributions and mortgage overpayments to free up the cash flow you need and build a cash buffer
 
Hi all,

Many thanks for all the advice offered. Really interesting to hear other peoples thoughts on our situation. Few things to consider but we will definitely start overpaying our mortgage from now and will see how much we can chip away over the next few years.

Thanks again.
 
Brendan Burgess said:
A great example of the fallacy of silo thinking.

There is no connection between the two other than some psychological connection.

If you have a mortgage, then it's a very poor management of your long term finances.

Brendan
Click to expand...
I think Brendan is spot on this with the "silo" thinking. Its based on psychology but is poor financial management and it crops up time again on AAM.

Imo personal financial management should about prioritising the use of available resources to obtain goals. Its well documented that this prioritisation equates to a hierarchial deployment of reaources along lines of pay down mortgage, max pension etc etc. Ringfencing resources for some possible far off use is not the best use of resources.
 
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