How to set financial priorities

If you have cash left in your account at the end of the month, what is the best use for it?

If you have some cash left in your account at the end of the month, what is the best use for it? Everyone’s financial situation is different, however, there are some things that experts agree we should all have covered.

Here are 4 financial fundamentals for you to think about.

1. Building up a ‘rainy day’ fund

When it comes to your personal finances, it’s a good idea to expect the unexpected. Emergency demands on your money – the car that suddenly has to be replaced, an unexpected break in your employment, the boiler that breaks down – can hit hard.

Aim to build up a ‘rainy day’ fund equivalent to the cost of 3 to 6 months’ essential living expenses. For example, if your expenses amount to €3,000 a month, then you are looking to save €9,000.

You might need to allow 12, 24 or 36 months to build up this amount. Saving €9,000 over 36 months means, for example, putting €250 a month into your rainy day fund. The best way to do this is to make it automatic.

Set up a direct debit or standing order to pay the money into a deposit account or a regular savings account as soon as you get paid.

2. Repaying debts

If you have outstanding loans or credit card balances, you may want to make it a priority to pay them off. But if you have more than one debt, which one should you repay first?

Some experts suggest that you should pay off the smallest debts first as it is satisfying to get results quickly and it might give you the momentum you need to clear other debts.

Others suggest that you should pay off the debts with the highest interest rate first. However, if these are your largest debts then it may take some time and there’s a danger that you might lose motivation somewhere along the way. Perhaps a mix of both approaches might work best for you?

3. Overpay your mortgage and save interest

For most people, their mortgage is their biggest loan and repaying it is their biggest monthly expense.

Overpaying your mortgage each month or with a one-off lump sum will reduce the remaining balance so that you pay less interest over the mortgage term.

Alternatively, you can overpay to reduce the term and pay your mortgage off sooner. Please note if you repay a fixed loan early, you may have to pay charges.

4. Saving for retirement

When you retire, you may be hoping to enjoy the same standard of living you enjoy today. However, unless you put a pension plan in place, your income could drop significantly.

For most adults in their 50s and in full-time employment, the contributory State pension is €12,636 a year (or €243 a week), but the average full-time worker’s salary in 2017 was much larger at €46,402 according to the Central Statistics Office*. That’s a potential drop in income of €33,766 a year, from the day you retire, if you are on the average full-time salary.

You need to start saving for your retirement while you still have time on your side to help reduce this drop in income, and the impact it may have on your lifestyle.

Putting the right plan in place for you depends on:

  • Your age
  • Your expected retirement date
  • The lifestyle you want when you retire
  • And what you can realistically afford to save.
* Source: CSO, Average annual earnings for full-time employees in 2017, Earning and Labour Costs 2017.
The information contained in this article has been prepared by Bank of Ireland (“BOI”) for information purposes only. BOI believes any information contained in the article to be accurate and correct at the time of publishing.