January is the month when the credit card statement strikes terror into the hearts of many people. A month of excess and overindulgence has not only added inches to the waistline, but has also sent personal budgets spinning out of control. So, along with the usual health and sobriety resolutions, lots of us could do with paying a little bit more attention to our financial fitness.
PwC director of pensions and investments Bernard Walsh advises people to start the year with an honest assessment of their current state of affairs.
“The first step is to get on the financial weighing scales,” he says. “That can be a bit of a shock to the system and people often think they need new scales or to adjust the one they’ve got. You’ve got to look at both sides of your personal balance sheet – what you have and what you owe. And then look at what’s coming in and what’s going out. A lot of bank apps will help you with that.
“Honesty is absolutely key. Then you need to think about what you would like the numbers to look like if you did it again in 12 months’ time.”
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Marta Pelc, pensions advisor with Cantor Fitzgerald Ireland, agrees on the need for honesty. “I often see clients underestimate their lifestyle expenses and a clear picture of your finances is the first step towards making an informed decision,” she says. “Once you have a solid overview of your finances, it’s time to consider your financial aspirations.
“The foundation of your wealth management plan lies in understanding what truly matters to you and your family, as this will drive your planning. Whether your goals include paying off your mortgage, funding your children’s education or retiring comfortably, having specific objectives will keep you motivated.”
Bank of Ireland head of financial wellbeing Dawn Bailey describes the process as being like “getting from the couch to doing a 5k”. “The hardest part is getting off the couch,” she says. “The first thing to do is get all your documents in one place. Even if you do procrastinate and put off the next steps, you at least know where everything is. It’s like decluttering your financial wardrobe.”
She advises people not to beat themselves up about their Christmas overspend. “You need to look at your spending habits and divide it into essentials and non-essentials. After that, look at what you can cut out or reduce without causing hardship. December is probably a bit of a write-off, so don’t worry about that too much.
“The Bank of Ireland app allows you to track your spending for the past six months across 14 categories. That helps you to understand your spending and look for quick savings in things like TV subscriptions that you might never or rarely use. You can also look at little things like bringing lunch to work a few times a week or having ‘no-spend’ days. Once you start, it gets easier.”
It is also important to look at debt and how much it is costing. “The immediate one is the credit card bill,” says Walsh. “It’s very expensive debt and the most efficient use of your money is to pay it off. It’s the equivalent of a financial dry January. You might need a month or two or three to bring the credit card debt down but it’s worth it. If the debt is larger than that, it may be worth having a conversation with a financial institution. It might be better to take out a term loan for a year to pay it off.”
Having dealt with the outgoings, it’s then a question of what to do with anything left over. “The first thing is the emergency fund, the just-in-case money,” says Bailey. “When you start that, the peace of mind it gives you is amazing. If the washing machine breaks down or the car needs new tyres, you’re not caught on the hop. You should aim to have between three and six months’ spending in the emergency fund. Even if you think it might take years to get there, the important thing is to start. Automate it and have a direct debit going into it every month.”
People should also pay more attention to their savings and investments, Pelc advises. “Are you confident that your savings and investments are on track to match your goals or would you need to adjust your strategy?” she asks. “Are the charges applied to your investments justified by your returns to date? Review your investments in terms of strategy, taxation, asset allocation and charges. Educate yourself about different investment options and choose those that align with your risk tolerance and financial goals. Look at your overall assets and diversify accordingly.”
Protection is also important. “People are willing to take out gym memberships but don’t look at illness or income protection insurance which might only cost the same amount but provide cover if you are unable to work or are diagnosed with a serious illness,” says Clear Financial certified financial planner Ashling O’Neill.
“People should also start or review their pension,” she adds. “Even if it’s a small contribution, the important thing is to start. The more time you give your money to grow the better. Start with an amount that’s easy for you and increase it every six or 12 months. If people start even with a small contribution to a well invested portfolio, they can build up a massive pension fund over time without feeling any real financial pressure.”
Regular reviews are vital, Pelc agrees. “Life changes, such as a new job or unexpected expenses, may require you to reassess your goals and strategies,” she says. “Be prepared to adjust your plan. An experienced financial planner can help you analyse your current situation and identify opportunities for improvement, bringing you closer to your financial goals. A well-thought-out plan will also integrate tax and cost efficiencies, enabling you to enjoy the wealth you have accumulated.”
