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Financial expert Three steps to helping you fight the rising cost of living

Mark Coan of Money Sherpa has some handy advice for anyone hoping to get a handle on their finances.

ACCORDING TO A 2018 study conducted by Laya Healthcare before the cost of living crisis hit, money worries are the biggest source of anxiety for Irish families.

Not crime, not health, not housing. Money worries.

One in 10 families has serious struggles with money day to day, three in 10 have no savings and over half have no retirement savings.

This year, we’ve seen a huge increase in the cost of living that is impossible to avoid. Fuel, groceries and energy have been hardest hit, with the knock-on effects of that affecting all sectors.

Many people who were lucky enough to save ‘significant’ amounts during the Covid lockdowns may find those nest eggs depleted by now. The rest of the workforce is feeling the proverbial pinch as the cost of a weekly shop or a fill at the petrol pump fluctuates.

We know this inflationary period is being driven by unprecedentedly high energy costs in a period of war on Europe’s doorstep and the government measures announced in Budget 2023 softened some of the blow for most households, but in no way did it make up for all of the increases.

These cost of living price hikes are beyond our control, but what is within our control is what we do with our own money. How we manage it. Clearly, the economy has a huge bearing, but your personal financial understanding can also make a big difference to your financial outcomes.

Financial literacy studies around the world have shown that having a good grasp of the fundamentals of managing money can be the difference between surviving or thriving in tough economic conditions. Yet there is very little information available in Ireland on how to improve your financial situation.

In the hope of addressing this, we have been working with Irish NGOs over the last year to develop a programme of practical tips and tools to help households fight back against the rising tide of inflation. It’s a comprehensive programme that I can’t cover wholly here, but some of the key ideas might help readers trying to improve their financial health coming into the new year.

The three money smart steps

Money management information on offer often involves a lot of paperwork or is overly theoretical and short on practicality.

We’ve tried to keep our approach simple and practical, so it can be adopted by as many people as possible, boiling it down into just three steps:

  • Get money fit
  • Pay down debt
  • Save for a rainy day

The first step is the most important as it unlocks the following steps. Without more cash available you obviously can’t pay down your debts or build up your savings.

Step 1 – Get money fit

The way we talk about getting money fit in the programme is to think of it as the opposite of dieting. In dieting, the aim is to take in fewer and use up more calories.

With our finances, we want to take in more and use up less money.

Take in more money

There are usually three big areas where you can get more money in:

  • Boost your income
  • Reduce your tax bill
  • Claim all the allowances that you’re entitled to

So how do you boost your income? We undertook some research recently and found that over 33% of people had increased their income in the last six months by working longer hours, changing jobs or requesting higher pay.

Almost 21% of people we surveyed said they had worked longer hours in the last six months. Granted, not all jobs pay more if you work more and working longer might not be sustainable long term, but in one of the tightest labour markets in the state’s history, you may also be in a stronger position than you think to move jobs or get a rise.

Do your research on what other employers are paying for your skills in your area or even apply for other roles, then ask your current employer for a pay rise based on that research, if you don’t get the rise you deserve you can always change jobs.

The average annual tax refund weighs in at over €1,000 according to Taxback.com the biggest of the many firms who will do your tax return for you online, with tax credits for home care and tax relief for medical plus flat rate work expenses still being left unclaimed by many.

Don’t forget, whether you are working or not, there is always an opportunity to claim all the benefits you are entitled to. Contrary to what many believe, a huge number of people entitled to benefits don’t avail of them, needlessly putting themselves under more financial pressure than they have to.

Often this is because they don’t know about the allowances in the first place or the benefits system is too complex for them to navigate. You should check out what you are entitled to through citizens’ information and then make sure you claim for it.

Spend less money

When it comes to using less money, this is where we usually find the biggest opportunities. No household is actually average, but our research has shown that the average Irish household can save over €11,277 a year by being smarter about how they spend.

Buying less, by ditching credit cards, takeaways, cigarettes, drink and conserving energy saves the average household €6,643 a year.

Buying for less, by switching mortgage, TV and groceries saves the average household €4,634 a year.

Over 30% of us have found ways to buy less in the last six months and almost 20% of us are buying for less by switching providers.

With an average saving of €2,650 a year the biggest single thing households can do to save is switch their mortgage, but there are a huge number of areas to potentially save on household expenses.

Some of your money saving options can even double up as lifestyle changes with other benefits. Turning down the thermostat by 1 degree can save €260 per year according to research conducted by Utilita the UK energy provider and also reduce your carbon footprint. Swearing off the drink will save €2,000 per year on average, while also helping feel healthier and might even make you more popular as the designated driver at work events.

Step 2 – Pay down debt

Once you are in better financial shape you can hopefully start to work on the next two critical aspects of your financial health – paying down high-interest debt and building up savings.

Debt, buying now and paying later, can be very seductive, but it can come with a hefty price tag. A low interest fixed rate loan like a mortgage can help build wealth by helping you escape the rental market, but high interest debt which can easily spiral out of control, should be treated with care and if possible avoided entirely.

Irish households owe €8,000 in overdrafts, loans and credit cards on average, with an average interest rate of 10.3% the 4th highest in Europe. At that rate, an €8,000 loan can balloon to over €10,000 in less than three years.

This is why we emphasise the importance of paying down your high-interest debts as soon as you possibly can. So don’t take any savings you make in step 1 and blow the proceeds, use any money you have left over to pay down any outstanding credit card, loan or other short term debt each month till it’s all clear if possible.

If you pay off your debt, you will double the impact of any savings you make as you will shed all that extra interest you are currently paying. If you find your debts getting on top of you, however, make sure you get in touch with Mabs.ie to help you before things spiral out of control, when it comes to debt the worst thing to do is bury your head in the sand.

Step 3 – Save for a rainy day

Once you have made a dent in your debt you should turn your focus to savings. There is no amount too small. The important thing is to start.

Revolut and other apps allow you to automatically tuck something away each week in a separate savings pot. Start with a small weekly amount and then increase it in line with what you can afford. Having two months of your average outgoings tucked away in an emergency fund is critical if you are to avoid slipping back into debt if the unexpected happens.

It’s easy to think of savings as some kind of luxury or something that can be put off, especially in a cost of living crisis. Savings though are a form of self care. They are there as a backup for that rainy day – a way of supporting your future self. So, try and think of your emergency fund as a way of protecting yourself, reducing your money worries and setting yourself up for a brighter future.

Those families who have come along to our programme sessions have found a better understanding of how to best manage their money can make a real difference to how much cash they have at the end of the week.

More than that though, they often come to realise that getting their finances in shape is a crucial step in improving their overall mental health and happiness. That’s why, although it may be quite boring when compared to buying crypto, it’s one of the best investments you can make.

Mark Coan is a financial expert and founder of online money guide moneysherpa.ie. Email: mark@moneysherpa.ie. For information on the money smarts programme, click here.

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