Views on our financial position please

Discussion in 'Money makeover' started by Barbara Bunter, Oct 15, 2016.

  1. Barbara Bunter

    Barbara Bunter Registered User

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    Last edited: Oct 15, 2016
    Hi

    I would be grateful for your advice regarding our financial position:

    Ages 37 (me) and 36 (husband).

    2 children (4 and 3).

    Salaries €60,000 (me) and €120,000 (husband).

    I'm public sector and my pension will be 50% of my final salary with 150% lump sum (retire at 60).

    He is private sector. He contributes €23,000 to his pension each year. His employer contributes 8% of his salary. His fund is worth around €100,000.
    He receives a bonus of around €25,000 each year. He also has net income of around €7,000 from other sources. He also receives share options and has around €50,000 worth (realisable next year).

    We owe €700,000 on our home which is worth €1,250,000. The interest rate is 3.1% and there are 30 years left. The repayments are around €3,000 a month.

    We owe €200,000 on a second property worth €250,000. The rent is €1,250 a month and the mortgage rate is 0.5%.

    We have a holiday home worth €175,000 and owe €118,000 on it. The repayments are around €480 a month. It also generates €6,000 of rental income a year which we use to cover some of the costs. The mortgage is a 0.5% tracker but the rate is less than 0.5%. There are around 23 years left on it.

    His employer provides health insurance and protection. Our debts are all insured.

    We have very little cash but are saving around €500 a month but plan to stop once we have €50,000 in cash (from savings and the share options money). Then we will focus on paying down the home mortgage. My husband says we should not repay the tracker mortgages.

    Childcare is manageable at €500 a month. We have no other debts and run two cars (which we own).

    Are we making any obvious mistakes or missing anything? thank you.
     
    Last edited: Oct 15, 2016
  2. bmount

    bmount Registered User

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    potentially a little bit sad we are all on here on a saturday night with first world problems but really looks like you are more than knowledgeable and articulate to figure this out i dont see a problem but consider surely paying off some of the 3.1% 750k and you ll be retired by 45. (what then ?)
     
  3. Delboy

    Delboy Frequent Poster

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    Saving €500 a month off those salaries + rental income seems very low.
    Would need to see a table of net income + rent less mortgages, penions, health. See what you have then before paying the day to day bills such as the childcare you mentioned
     
  4. Barbara Bunter

    Barbara Bunter Registered User

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    I'm inclined to agree. My husband thinks that once we have €50,000 in cash for a rainy day that should be the end of it. We saved a lot more in the past to buy the house.

    Thank you for taking the time to reply Delboy.

    The regular take home plus the rent is around €10,000 a month. The mortgages total around €5,000. Childcare is about €500 a month and we save €500. That leaves €4,000 which we spend on living expenses. Of the €20,000 extra in bonus/other income my husband's view is "invest 1/3, pay down debt with 1/3, and fritter away 1/3" (his Dad told him this is sensible and what he did over the years!). I think his idea now that things have stabilised is to put 1/3 of this extra money into an investment account.
     
  5. Brendan Burgess

    Brendan Burgess Founder

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    First of all, you are saving a lot more than €500 a month.
    You are putting a lot of money into pension schemes.
    You are paying down the capital off three mortgages which is a huge amount of savings. As two of them are tracker mortgages, most of the repayments are capital and not interest.

    You have a lot of property and a lot of debt. While you can handle any increase in interest rates comfortably, I wonder if the return on this property is worth the hassle and small risk involved?

    upload_2016-10-16_8-45-24.png
    If you sell it, you will have €50,000 to pay off your mortgage. So you will save €1,500 a year.

    So you are getting a net return of €4,500 a year.

    If it runs itself without any hassle from tenants, then let it run on a bit. But in the next few years, as you pay down the capital on the mortgage, the pendulum swings towards selling it and using the increased equity to pay down your mortgage.


    This is really important and you will probably ignore the advice. But your husband should sell the shares as soon as they are realisable. It is wrong to have so much of your earnings and wealth tied up with the fortunes of one company. You can't diversify your earnings. But you can diversify your wealth.

    If the company does well, your husband's earnings will continue. If the company falters, he may lose his job and his shares become worthless. It's probably hard for you to imagine that now. But many bankers saw their earnings hit as their shares in their employer became worthless.

    Brendan
     
  6. Barbara Bunter

    Barbara Bunter Registered User

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    Thank you Brendan. Selling the shares as soon as we can is 100% the plan. That is an interesting way to look at the trackers. My husband says that the tracker mortgages mean that we're using someone else's money for free to make money on the property. The other tracker mortgage takes account of minus rates so it is now at around 0.25%!
     
  7. elacsaplau

    elacsaplau Frequent Poster

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    If we accept your figures, this net return is only true if you ignore house price movements. I believe that this is not a valid assumption in the long-term.
     
  8. Brendan Burgess

    Brendan Burgess Founder

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    Good point. House prices can rise as well as fall.

    Brendan
     
  9. elacsaplau

    elacsaplau Frequent Poster

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    Exactly - never said they would appreciate. I just think it is genuinely silly to get into detail about one aspect of the return and to ignore the other.
     
  10. username123

    username123 Frequent Poster

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    IMO that is a crazy amount for monthly "living expenses". You should break that down into exactly what is consuming the 4K e.g. groceries, alcohol, eating out, clothes/fashion, petrol etc. I would be looking to reduce that to E2K outgoing and save the other 2K, or better yet, pay off more of 3.1% mortgage with it.

    Investing outside a pension wrapper in Ireland is fraught with complications and tax headaches. 1/3 invested may not be a good idea. Another 1/3 i.e. E6600 - that's alot of "frittering away". I'm sure that E6600 could be put to better use? Personally I'd use the entire E20K to pay of debt ASAP (again the 3.1% mortgage).
     
  11. Brendan Burgess

    Brendan Burgess Founder

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    With a gross income of €180k, it is not crazy to spend €4,000 a month.
     
  12. username123

    username123 Frequent Poster

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    With E10K nett pay and 3 outstanding mortgages, I respectfully disagree. However, I hold this view as I hate debt so perhaps others will not share this view.
     
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  13. Sarenco

    Sarenco Frequent Poster

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    Hi Barbara

    It seems to me that you are carrying an uncomfortably high level of debt relative to your incomes - your DTI ratio is around 5:1.

    You are obviously in good shape in terms of providing for your retirement so I would be inclined to focus on de-risking your overall financial position (ie paying down debt).

    Is it sensible to have a holiday home while you still have a €700k mortgage on your PDH?

    I would definitely apply any bonuses, etc. to pay down the PDH mortgage ahead of schedule as soon as you have built up a reasonable reserve fund - €50k looks a bit on the high side in this regard.

    Hope that helps.
     
  14. Barbara Bunter

    Barbara Bunter Registered User

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    Thank you for your feedback.

    The thinking behind the €50,000 (my husband thinks €60,000 actually) is to have six months worth of a reserve. If worst case scenario he lost his job, he would receive a meaningful payoff.

    On the €4,000 a month living expenses, we don't scrimp but equally we don't go crazy either. Things just add up.

    The de-risking you talk about Sarenco makes sense, but we're also conscious that we could try and repay the main mortgage early and die in the meantime!

    My father in law thinks that if all you do with bonuses and spare money is pay down debt or invest that it's bad for the psyche and that 'frittering away' a portion of your spare money is good for the mind and soul. Invest/save 1/3, pay down debt with 1/3, and consume the other 1/3 (holidays, cars, etc).
     
  15. Brendan Burgess

    Brendan Burgess Founder

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    Yes, yes, yes, it's very sensible.

    We have to be careful about not applying the advice appropriate to someone in financial difficulties to someone who is doing very well.

    The interest cost of this is €600 a year! They are covering that ten times in rental income.

    If you enjoy your holiday home, keep it.

    Brendan
     
  16. Barbara Bunter

    Barbara Bunter Registered User

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    Thank you Brendan. I think our broad plan may be in line with everyone's suggestions the more that I think about it. Once we have €50,000/€60,000 set aside for a rainy day, we will be paying an extra €500 a month off our home mortgage and an extra €6,600 a year with 1/3 of the bonus. That's around a €1,000 a month over-payment on a €3,000 a month mortgage which is surely sensible enough.
     
  17. noproblem

    noproblem Frequent Poster

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    I think the public sector pension won't kick in at 60 for people your age, just have a feeling I read somewhere. Another thing not specifically mentioned is the future of your children, both financially and in an educational sense. You guys are so far very lucky in life but god forbid anything should happen my 2 points will come into focus. Just a thought.
     
  18. Sarenco

    Sarenco Frequent Poster

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    That certainly looks like sensible approach.

    It's really a question of balancing your lifestyle spending today with investing for the future and prudently protecting yourself from unforeseen changes in your circumstances.

    It seems to me that the level of debt that you are carrying relative to your income is your main source of risk so that's where I would focus your attention.

    Maybe set a target of getting your DTI ratio down to, say, 4:1 over the next 4 years. I certainly wouldn't invest in any more risky assets until you reduce your debts to a more comfortable level.
     
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  19. Barbara Bunter

    Barbara Bunter Registered User

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    No, for people who entered the public service when I did, it's 60.

    I'm not sure what you mean about our children? Whatever happens, they'll be comfortable. We have income protection, all our debts insured, and a payout of €480,000 if my husband dies.

    We chatted about paying down the mortgage today and my husband made an interesting point. What good is paying down the mortgage to "de-risk" when if there's a crisis we now know the banks shut down? The difference between owing €700,000 or €400,000 wouldn't be a whole lot. Wouldn't it be safer to have €300,000 in cash and still owe €700,000 in the event of a crisis? We think yes, owing €200,000 at 3.1% and having €300,000 in cash would be crazy. But we don't think that owing €700,000 and having €300,000 in cash is crazy. Logic being that if the world goes to hell in a handbag, it makes no odds. Yes, you pay 3.1% extra per year but is it worth it to have the flexibility?

    thanks
     
  20. noproblem

    noproblem Frequent Poster

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    That's all good. What I meant about the children was their future education needs and related expenses, that was all. Others on here have given better advice than anything I can offer and your husband's father seems to have a good outlook on life.