Herrand Associates Wealth Management Singapore, Tokyo Japan’s five financial tips to get your year off to the right start

New Year’s resolutions don’t all have to be about giving up chocolate and alcohol

It’s only the second day of the New Year and you’re probably fed up with reading about resolutions. However, they don’t all have to be about giving up chocolate or alcohol, or rising before the sun to exercise.

These tips for 2018 don’t have to be done with any great urgency; rather, think about the following advice as something you can check in on over the year as your appetite for financial management ebbs and flows.

1: Decide on your goals

An obvious one, but how many of us have ever taken out life insurance, or embarked on a renovation without thinking of the wider impact of such a move?

Writing down your financial goals may not mean you’ll actually achieve them (sorry fans of The Secret) but it will probably increase your chances of doing so.

2: Get your mortgage into shape

If you already have a mortgage, there are three things you should be thinking about this year. The first is checking you’re on the right rate; after all, one thing we’ve learned from the tracker scandal is we can’t rely on the banks to get it right for us.

The second is to consider a switch to another product or competitor. With house prices continuing to rise, your loan-to-value (LTV) ratio will have fallen which should make you liable for a cheaper mortgage.

Thirdly, pay more than the minimum. While you could be doing something else with your money, for most of us, the peace of mind that comes with inching away at your mortgage is hard to beat. A little effort can, over time, produce substantial returns.

By overpaying each month you’ll reduce what you owe the bank and cut the term of your mortgage. It also means you’ll cut your interest bill. As you’ll be enhancing your LTV ratio, the bank may offer you a keener interest rate which will have another cost-reducing impact.

Consider someone on a €250,000 mortgage with 17 years left to go paying interest at a rate of 3.7 per cent. They are currently making repayments of €1,653 a month. If they increased their repayments by €100 each month it would knock 16 months off the mortgage term, saving them €7,302 (based on interest rates staying where they are).

If they bumped up payments to €200 a month, they would cut the term by 30 months and save themselves €13,454 in interest.

Bank of Ireland has a calculator which can help you work out your savings.

3: Review your pension

You may not do it this week or next week, but at some point this year take the time to read your annual pension benefit statement and figure out how your retirement is shaping up. You owe it to yourself.

And if you don’t have a pension, is it time to think about getting one?

If you have spare cash you can simply bump up your contributions. But if your pension is going nowhere, why reward your non-performing fund manager even more?

So how do you go about that?

You’ll need to figure out a couple of things. How much will you need in retirement? Will you have a mortgage? Will you get a full state pension of €12,300 or so a year? What if you don’t?

Armed with this information, you can see where you’re headed by examining the “statement of reasonable projections” in the pension documents that should be sent to you annually. This will show what income your current pot, plus future contributions, will generate.

If you’re falling short of your goal outlined in the first step, you may have time to rectify this. Typically, to get a pension worth half your salary, you’ll need to be saving at least 15 per cent (ideally 20 per cent) of your salary. Any employer contributions will count towards this, and making additional voluntary contributions (AVCs) will boost it.

Don’t ignore your pension fund’s performance. Is your manager returning as much as you’d expect given market conditions? If not, think about switching. If you’re in a group scheme and can’t, bring your concerns to the funds’ trustees.

Fees and charges are also a factor. Are they too high? If you’re losing too big a chunk on fees, it may be time to switch or renegotiate. After all, as figures from the Pensions Authority show, an annual management charge of 1 per cent depletes a fund worth €136,700 by 10 per cent, or €14,500, over 20 years.

4: Bump up your savings

Deposit rates may be on the floor (the best 1-year fixed rate is currently just 0.75 per cent from KBC Bank), but so too is inflation. This means it may make as much sense to save today as it did when these indicators were much higher.

You won’t regret upping the amount that goes into your savings each month, even if it’s a small bit such as the amount you’ll save this year thanks to Budget 2018 changes.

You could also consider investing in a stock market fund. Doing so on a monthly basis lowers the risks and could offer better returns; saving €200 in an account paying 2 per cent will give you €4,893 in a regular savings account, while a stock market fund returning 8 per cent a year will give you €5,186 after two years (assuming markets continue to rise).

Of course while headline inflation is stagnant, rental and house price inflation is rampant. This undoubtedly makes it more challenging to try and save. But, if you’re seriously considering trying to buy your first home, look at other factors which might help you seal the deal. Help to buy (5 per cent tax rebate on purchase price up to €20,000) can help you get your deposit on a new home purchase.

The rent a room scheme, which allows you earn €14,000 a year tax free by renting out rooms in your home, may convince a lender to take a chance on you. It could make you a more attractive candidate for a mortgage and will also make repaying it much cheaper.

Consider a three-bed home with a mortgage of €350,000. Monthly repayments at 3 per cent will be €1,500, or €18,000 a year. If you earn the maximum €14,000 allowable under the scheme, you will be left with a shortfall of just €333 (plus bills) each month. Certainly cheaper than renting in the current market.

5: Take control of your debt

As a nation, our outstanding consumer debt may be falling but figures from the Central Bank show we are the fourth most indebted in Europe. Average debt per household is €83,941.

While mortgages may account for most of this, expensive, short-term debt is also a factor. In August 2017, for example, more than one-third (36 per cent) of credit cards had balances of between 75 and 100 per cent of their limits.

If you have too much debt weighing on your credit card, try and make some inroads this year.

For example, if you have €2,000 sitting on your credit card at a rate of 20 per cent and you are repaying just 2 per cent a month (€40), it will take you nine years to clear your debt. And it will cost you an extra €2,336 in interest!

If you repay an extra €5 a month, you’ll cut the time to 6.6 years and your interest bill to €1,635. If you bring the monthly repayment up to €60, your cost of funds will drop to less than €1,000 and you’ll repay it in about four years.