Hi, and thanks for popping in to listen to this weeks' Episode, which promises to be an interesting one for anyone who owns a car (so that represents the vast majority of us!). If you are new here please do check out this page, which will tell you a little about why this project exists and what it's aiming to do for you. Episode 21 is here:
While some would argue that the cost of running a car hardly qualifies as a Financial Planning topic, I would beg to differ. Seeing as many of us possess one for the duration of our adult lives our choice of car represents a significant life long investment. What I am hoping to uncover is exactly how much they cost and what if any differences there are in buying a 'newish' car versus an older car!
Some of you at this point will hit the red 'x' in the top right hand corner, you like your cars, you don't care what they cost you, provided you can afford to have a 'nice' car you will continue to do so irrespective of the financial costs. I respect that, hit the red 'x', but might do you no harm to see what it is actually costing!
In the interest of being up front I will state that even before we look at the figures I have always had a strong bias towards owning older cars (6-10 years old) where the largest depreciation costs have been absorbed by a previous owner, however I am always open to correction, so lets see which option is the more informed from a financial perspective!
For the purpose of this exercise I based my findings on 2 family sized cars. The 'newish' car is a 2013 Volkswagen Passat 1.6 Diesel from a dealer, with 62k miles on the clock costing €20,450- listed on Carzone.ie at time of the research.
The 'old' car for the purposes of this exercise is a 2007 Ford Mondeo, 1.8 Diesel, 90k miles on the clock costing €4,700 from a dealer, again it's listed on Carzone.ie at time of research.
Our exercise will assume we hold the car for 3 years, before changing it again for another car. Mileage assumed at 13,000 miles per annum.
The Cost of Owning a 'Newish' Car for 3 years:
The cost of having this car for the 3 years is over €20,000. With good fuel economy and low tax it still amounts to a fairly sizeable amount of cash! If we break that down annually it is €6,683. Per month that is €557. If you are on the higher tax bracket you need to earn €1,100 Gross Salary in order to pay for your car..........................If you earn €50,000 Gross, that is 1 week's work per month to pay for your car! Seems hefty, but lets now compare it to the alternative, a cheaper, less flashy, less efficient and perhaps less reliable motor!
Cost of owning an 'old' car:
So there you go, the estimated cost of 3 years of motoring in such a car will cost you just south of €13,500, which works out at €4,492 per year and therefore €375 per month. Before tax you are looking at earning €750 Gross Salary to put this car under your back-side.
The single biggest cost differentiation between the two options is depreciation, yet this is the one factor which many many of us do not give due consideration to. We fail to include that in the cost of ownership, however it is a very real part of the cost, and in some circumstances is the single biggest aspect to the overall cost. Fact.
Many of us millennials see the shiny new shapes, we see what our peers are driving, we see the latest adverts, we see the 171's on the road and we start to feel that our 'old' car is giving a poor representation of ourselves and portrays a lack of success. I'm being somewhat melodramatic here obvously but there are elements of these emotions behind our decisions in buying 'newish' cars. I often look to the example set by Mr. Warren Buffet (3rd wealthiest man on the planet). He drives a regular joe-soap car, and seems pretty happy with it!!
As always I believe you are more than capable of drawing your own conclusions from the above. As with many of our financial decisions there is more often than not an emotive drive determining the outcome. One could choose to drive an older car, and to use the 'savings' to save for the future, enjoy an extra holiday or some other experience. Likewise one may prefer to be seen driving a 'newish' car, they may like the reliability and feeling they get from a more modern car, and are happy to sacrifice the 'savings' in favour of these aspects. Likewise they may not realise the costs of owning a car, until now!
Ultimately the choice is yours of course, but at least now you have a greater sense as to what your car is costing you, and indeed if you have 2 cars in your household what they are costing you.
If you are trying to budget and manage or indeed reduce your cash outflows the ownership of cars can be one of the single biggest factors in doing so.
I have included a sample calculator which I created for you to run your own numbers here, have fun!
Thanks for reading, sharing and spreading the love!
Paddy Delaney (QFA, RPA, Coach)
MPG Information for use in above calculator:
Hi again dear listener!
If you are new here, welcome! This is a great place to begin the journey if you are a new visitor.
This is the 2nd in our 'financial foundations' series, and will further explain one of the many protection options available to us all in today's market. For the first in this series we looked at the ins and outs of specified illness cover. Click here to listen.
Income Protection, also known in some quarters as Income Continuance, Income Insurance, Income Cover & Permanent Heath Insurance. Confused yet!!? I'm gonna stick with the label of Income Protection on this one, purely because that is what it is designed to do, protect your income if yours stops!
Before we get into the basics of this potential financial foundation lets picture the following. (Disclaimer: this might seem like an old insurance sales technique but bear with me!!).
Imagine for a second that you had a printer in the corner of your bedroom, every morning as you wake up you hear this printer printing out the equivalent of a day's wages for you. Because there is no such thing as work in this dream-land you survive on your printer's ability to print this money for you every morning. Having said that, like all printers on this planet yours is prone to breaking down occasionally, indeed it is also susceptible to breaking down permanently. If it does your income will stop, cease, finish. Bearing in mind it is your sole form of income would you insure this printer against such an incident, bearing in mind it is your sole form of income? If you woke up one morning and it was all flashing red lights would you feel it prudent to have a back-up plan to help pay the bills?
On the face of it it probably seems like pure gambling to not do so, yet the fact is that a huge percentage of us do not have such a plan in place. If we go back to the analogy of building a home on solid foundations, it would seem that doing so without a core foundation would be a risky approach. So why don't people have this protection in place? Personally I believe there are a few core reasons for that; cost, awareness and understanding of what it actually is! So here goes.............
What is it?
As already mentioned above, it is a type of protection which should pay you an income if you are medically unable to work for a minimum period of time due to an accident, illness or injury. As with the majority of income sources it is taxable. (You will note that this is quite different to Specified Illness Cover which pays you a lump sum (one-off) upon diagnosis of a certain type of illness, and not related to your ability to continue to work or not).
So its Sick Pay, right?
No! Typically 'sick pay' from an employer is paid for a set period of time, for example 2, 6, 12 months, after which time the benefit stops and you are on your own. Income Protection however is designed to continue to provide the income benefit until either a) you are deemed medically able to return to work or b) your protection plan reaches the end of its term, you can select usually between 55 and 65 years of age, at which point the benefit stops.
What about the State Disability Benefit?
Importantly receiving Income Protection, while it is a taxable income, does not immediately impact on your ability to receive your entitlement to State Benefits. The State 'Illness Benefit' is paid for a maximum of:
a) 2 years if you have at least 260 (5years) weeks reckonable social insurance contributions paid since you first started work
b) 1 year if you have between 104 and 259 weeks reckonable social insurance contributions* paid since you first started work
How much Income do I get from an Income Protection Plan?
Depends on how much your printer prints each morning! You can protect up to a max of 75% of your Gross Income with one of these plans. When/If you do claim as a result of being unable to work you make your claim, have it supported by medical evidence of you being unable to work, and the insurance company essentially become your employer, they deduct the tax payable and you get the Net Income paid into your bank account.
Example: You are 34 years of age, an Accountant, non-smoker. Your income is €50k. You put in place an Income Protection plan which will cover 75% of your income (€38k per annum benefit). You are married and 1 child. Your spouse is working also. If you were to become ill/injured/sick for a minimum of 1 week you could apply for State Disability Benefit, if successful it would provide in the region of €940 per month. (11k per annum).
How Much Does it Cost?
The above plan would cost in the region of €130 per month to put in place. Do note however that the Revenue recognise the importance of having this in place and have generous tax relief available on the cost of putting it in place, so if our Accountant above was on the 40% tax rate his actual cost would be around the €70 per month mark...........not bad for a potential monthly benefit of €3,167 if in a claim, and a claim which could last from now until he/she gets to 60 years of age!
Worth noting that the more physically perilous or manual your occupation the more expensive the cover would be for you.
Who Can Have It?
A lot of folks might want it but not everyone can get it! Typically anyone in an occupation which involved mostly driving or very heavy manual labour can have difficulty in getting an application through what is often very rigorous underwriting/assessment. But once you have it you have it! If you are not sure if your occupation would qualify you can easily check this by 'googling' income protection quotes, and they all ask you your occupation, before either quoting you or saying 'thanks but no thanks'!
Likewise, if you have previous medical history or medical/physical illnesses or conditions it may impact on you getting the cover at 'standard rates', which simply means at the price you were quoted for, and covering you for all eventualities.
Are There Any Down-Sides?
Like everything, it is important to know what you are covered for and what you are not covered for with these types of things. For example, you would likely not be covered if you were out of work due to an illness/injury suffered as a result of something you did while under the influence of alcohol, so no climbing trees or lamp-posts after a trip to the 'local'!
Another thing to watch out for, is if you intend traveling for a period of time, as in moving to another country. Most plans will only pay you for a short period of time if you are living abroad at the time of claim, so it's one to be aware of if this might apply to you. As always, read the details, be informed of all the facts.
You need to be medically certified as unable to work, if this is not the case then a company would likely refuse your application. The company covering you are charging you a price which will ensure they make a profit, pay the advisor/agent, and also ensures that other people who have the cover will get paid if they have a valid claim, so it is in everyone's interest to be upfront and honest about what is and what is not covered, and when it would or would not be paid.
As always I will leave it to you to form your own conclusions on this. If your income stopping would have a massive impact on your financial, physical or mental well-being then it could be a worthwhile foundation for you. If you feel the State Benefit would not be sufficient, and you have few other crutches to support you should you be out of work for a considerable period of time, then it could be worth considering, big-time!
Please use this information in the manner it is intended, inform yourself and supporting you in creating a better financial future for yourself. Thanks so much for reading, sharing and spreading the word.
Paddy Delaney (QFA, RPA & Now Qualified Coach too- yay!!)
Welcome to Informed Decisions Podcast #19! Thanks for continuing to listen and learn about critical aspect of Personal Finance & Financial Planning.
Specified Illness has been getting the 'Joe Duffy Treatment' for years, lets see if it is deserves it!
If you are new here, welcome! This is a great place to begin the journey if you are a new visitor.
Any (decent) builder would tell you that in order to build the house of your dreams, you need to put in place solid and durable foundations. While these foundations can be expensive, are no addition to the overall look of the house, and often more expensive than initially envisaged, I'm sure we all agree that they are a must have.
The same can be said of our financial lives; solid foundations will help support you if there is an earthquake, landslide, or even some mild tectonic shift! We addressed the basics back in earlier blogs and podcasts, but lets dig deeper on one of the core aspects of financial foundations, protection. Many of us in our 30's have some sort of cover in place, have been offered it or seen adverts online. What to do!? Over the next few weeks we will explore of each of the main types of protection on offer to us today, and whether they are something to consider or not!
Specified Illness Cover, Serious Illness Cover, Critical Illness Cover, Disability Cover, Income Cover, Permanent Health Insurance, Income Cover, Income Protection, Bill Cover, Inability to Work Cover......these are just a few of the names thrown around for various types of 'living benefits' (you don't have to die to claim them!) which may or may not help you financially if you are unable to work due to accident, ill-health, injury, mental or physical illness. In this blog we will dig deeper on Specified Illness Cover, aka Critical Illness Cover as it stands in Ireland today.
What is Specified Illness Cover?
As it's name suggests when you are medically diagnosed with a specific illness, injury, ailment or condition you would receive a tax free lump sum payment. It is for that reason that i always refer to this as Specified Illness Cover, because it's claim is dependent on whether is was one of the specified illnesses.
When you apply for this cover you will/should be given a clear list of the illnesses, the definitions of each, and the severity of which you must be diagnosed in order to be considered valid for a claim under any particular illness. If you suffer from something which is not on this list, or is not of 'sufficient severity', or does not meet the 'definition' you do not get your claim. If it does you do.
What sort of illnesses are covered by Specified Illness Cover?
Every serious life company in Ireland offers Specified Illness Cover under one title or another, each one will largely cover the same illnesses, however some have different definitions and severities under different illnesses. This is where it can get a bit murky and subjective in terms of which route is best. It's important to research this yourself, as well as taking the input from the providers, in order to make an informed decision on which is most appealing to you.
Irrespective of that, all providers will cover the 'Big 2'; so if you are diagnosed with having had a Heart Attack (of specific severity!) or Cancer (of specific severity!) you will be covered.
There are also another approx 50 less common, more bizarre illnesses covered by the various providers. For example surgical removal of an eye is a regular on the list, indeed diagnosis of flesh-eating bugs is another more recent addition by one provider! Hmmmm.
What definition must be met to claim my Specified Illness Cover?
Here's an example of the definition involved for claiming on a cancer diagnosis under specified illness by one provider, as of Jan 16. Worth noting that not many of the providers make the definitions available online. Doesn't inspire trust does it! Here's the high-level definition for Cancer:
Any malignant tumour positively diagnosed with histological confirmation and characterised by the uncontrolled growth and spread of malignant cells and invasion of tissue. The term malignant tumour includes leukaemia, sarcoma and lymphoma except cutaneous lymphoma (lymphoma confined to the skin).
So there you have it, if you had Specified Illness Cover and were diagnosed with a form of cancer, that is the definition your condition needs to meet in order for you to have a valid claim. If it doesn't currently meet that definition then you don't get your cash. If it does then you submit your claim, backed up by medical evidence from a medical professional and you can await your cash payment.
While no official figures can be found to show how many Specified Illness Claims there are every year from all the insurers I gather there are in the region of 2,000 claims each year in Ireland. That is just under 8 individuals in Ireland each and every working day either being diagnosed with a specified illness, sending in their claim, or receiving their claim cheques. That again is scary. The average amount each individual claims is estimated at €60,000.
What would you do with the money? What's the point in laying this foundation?
As a result of us being 5 to 6 times more likely to suffer from one of these illnesses than we are to die before 60, it is therefore in the region of 5 times more expensive than life cover. As a key element of our financial foundation it ain't cheap, and it is because it is statistically so likely to happen, unfortunately.
Consider if you were in the situation of being diagnosed with a cancer which displays levels of 'uncontrolled growth and spread'. It's scary, it's hard to picture, however many of us will have had first or second-hand experience of this.
What sort of an impact will it have on you and your circumstances? Will it impact on your ability to work, to earn your current income? Will your partner need to take time out of work to support you or replace you in some way? How will you pay for medical treatments? Will you be under financial pressure to return to work as soon as possible as opposed to taking time out? What impact will it have on your financial goals? Will you have to rely on loved one's to support you? Will you have financial concerns?
If you answer 'yes' to any of these then having some level of Specified Illness Cover may be appropriate to you. The level of cover you should have will depend on many factors, among them; what emergency fund you have in place, what impact a diagnosis will potentially have on you, what your income is, what your affordability allows and ultimately it will boil down to how big a problem you feel it would be if it did happen.
Irrespective of how much there is no doubting that for many of us it is prudent to have an element of it in our financial foundations, no question. In conjunction with some of the other foundation protection types we will discuss over the coming weeks it can help keep your house intact while you overcome the earthquake.
Whatever you do or do not do with this information at least make sure that you make an informed decision with regards your financial foundations.
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The last few Blogs have been focused on informing you on how you can access money from your Pensions, both Personal Pensions and Employer Company Pension Schemes, when that time comes.
If you are a new visitor you can check these out here and here!
For many of us I am conscious that the single biggest financial mountain to climb is one's mortgage. This can often lead, and I'm sure has done for some of you, to the question;
"Should I invest and save for the future, or focus on getting rid of my mortgage."
You can access the full show notes below, or jump in here:
I had the very same question put to me by a friend recently, he had a large lump sum of money which he had been managing for several years, rolling it over in various accounts, the interest rates constantly falling. He was considering throwing it at the mortgage, bring down the term left. What should he do...................................................What would you do?
Listeners to the Informed Decisions Podcast will recall Episode 8 (listen here) where we saw the massive impact a relatively small change in mortgage repayment can have on the term of one's mortgage. This Episode was hugely popular and the Pro's below outline why.
For completeness sake lets look at some Pro's and Con's of 'Clearing my Mortgage' instead of 'Investing my Money For the Future'
So there are lots of really great 'Pros', but before we write the cheque lets look at the full picture, this side is somewhat technical, so brace yourself!
As you have deduced by now, the 'Pros' to clearing your mortgage are fairly obvious and appetising to most of us, however the 'Cons' are somewhat more murky and financially complex, reliant on long term inflation effects and discounted present and future values!
If you sought advice on the matter many Financial Advisers may will quickly highlight to you the long-term historical returns for a given investment product of 6-8% per annum. When this is compared to mortgage rates of 3-4% it seems there is no debate. Common sense would also suggest the following:
Investment returns via such a vehicle are highly variable, they can have periods of double digit growth which far outstrip mortgage rates, and indeed periods of double digit downside (losses) where even paltry mortgage interest rates represent a far superior return on your investment.
As we all know the future is not the past and returns will vary, but mortgage interest saved is a bird in the hand. It is important to acknowledge however that suitably chosen investment funds have more often than not outperformed mortgage interest rates over the term of an average mortgage (20-30 years).
While the mathematics may well point to the fact that investing for the future should provide the investor a greater return in the long term than clearing the mortgage it really is a personal decision. This decision will usually be driven by one's motivations and by how they want to feel, and that to me is proper, provided it is an informed decision.
Thanks for tuning in, please do share, tell your friends, and support Informed Decisions in becoming the leading personal finance podcast in Ireland.
Paddy Delaney. QFA, RPA
Happy New Year! It's Officially 2017, and I genuinely wish you every success in whatever you are aiming for in the coming year.
How can I take my Pension? The first part of the answer to this question was launched last week (click here), and this week we tackle the second part to this, getting our money from pensions we have 'through work', most often known as company schemes or occupational pension schemes. So, how do I get my money from my company pension you might ask, we here we go, and yes we are going to 'cakify' it again!
When you are drawing from a Personal Pension as we saw in Blog# 15 you are tied to the Revenue 'rules' when accessing it at retirement. However in the case of Company Schemes you are most often tied to the 'rules' as set out by the Individuals who generally oversee and manage that particular pension scheme. These Individuals are known as 'Trustees' and more often than not they are experienced in this space, have to compete 'Trustee Training', and are bound to act in accordance with the pension scheme 'mandate' which sets out how it should be managed. So the 'trustees' are acting in the interests of the people who have 'cake in the oven'!
What is a Defined Benefit Pension Scheme & How Do They Work?
If you work with a company that is promising to pay you x % of your 'final salary' when you finish, and the x is based on the number of years you have worked with the company at that point then you may well have a Defined Benefit Pension, yeeehaaaa! They are generally a great thing to have as the size of the cake at the end is largely dependent on how long you serve in the scheme instead of how much ingredient you yourself add to it!
If you have a DB here is how you can most often access your cake.
Typically these schemes pay you 1/60th of your final year's salary for every year you have served. So if you were 20 years in the scheme you may expect to get 1/3 of your final salary as your gross income for the rest of your days, separate to any State Pension entitlement. Not too shabby I'm sure you'll agree! These are a dying breed, the cake requires a huge amount of ingredients and the burden can often be too much for employers to bear, they then stop cooking this particular cake and direct employees into the next and often less favourable type of pension cake!
What is a Defined Contribution Pension & How Does It Work?
You will know you are in a 'DC' cake if you are told that you need to put ingredients in, your employer may or may not put ingredients in, and that the size of the cake at the end will be subject to how well the cake gets on in the oven, there's no promises made from the employer.
In short the only thing defined with a DC scheme is the contribution you are making, hence the name! Unlike the DB above you are not told 'do x years here and you will get x every year when you retire'. In many ways a DC scheme is very similar to a Personal Pension as we heard about in Podcast 16.
How Do I Access My Money From a Defined Contribution Company Pension Scheme?
Almost everyone in a Defined Contribution Company Pension will have the choice of the following methods to access their funds.
Drip-Feed Cake Method:
Your Own Cake Tin Method:
So there you have it, pheewww! There is a lot to how we claim our pension funds. This and the previous blog have been an introduction to it, to informing you as to what the finishing line looks like currently.
As always when the time comes for you to put plans in place to give yourself the retirement you want you can refer to these and they should help you on the road to making informed decisions.
Thanks for engaging and sharing.
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Firestarter Sessions- Danielle LaPorte (Great Read/Listen!)
Actual Book! (Could not find it online on any of the Irish Books Sites)