The offer is not conditional on you taking out a fixed or variable rate offering either, the product you choose has no bearing on the 2% incentive.
Is it worth taking them up on this offer then? Well their variable rate for example is one of the highest in the market if the loan to value exceeds 80% at 4.5%. And when you compare this rate to other providers who are charging a lower rate of 3.9% the difference in monthly repayments assuming a mortgage of €250,000 over a 25 year period is c. €84 per month.
If rates stayed the same then the breakeven point when the €5,000 is used up to make up the difference in monthly repayments is at month 59 (€5,000/84)
So, whilst the lure of immediate cash is attractive particularly to first time buyers who might need the funds to furnish the property or replace savings used to gather the deposit, the long term benefit might not be assuming rates stayed the same over the mortgage term, for example, when you compare one lender offering cash back incentives with higher rates and another offering no incentives but lower rates, you find the following assuming a loan amount €250,000 over a term of 30 years:
Cash Back Incentive but Higher Rates
Institution: Bank of Ireland
Interest Rate: 4.5%
Total Interest Repayments: €216,016
Less Cash incentive of €5,000
Total collected by Bank of Ireland: €201,016
No Cash Back but Lower Rates
Interest Rate: 3.9%
Total Interest Repayments: €174,501
Less Cash Incentive €0
Total collected by AIB: €174,501
So, the question I guess here is can you do more with the €5,000 right now than you could with repaying €884 more each year than you need to for the next 30 years?
Let me explain further.
One of my favourite personal finance authors, David Bach, suggests that if you save 1 hour of your income every day and spend the rest on everything else, you will accumulate a significant amount of money and the math actually backs his claim up.
The average weekly wage in Ireland is c. €700 which translates into an hourly salary of €22 and I know for many it may be over this amount but for the purpose of this exercise, let me work off this figure.
So, let’s assume that you and your partner commit to saving 1 hour of what you earn every day:
In Bach’s bestselling book, Start Late Finish Rich, he claims you don’t have to start saving very early to end up with a large amount in your savings account when you are older, but obviously saving at a younger age will help you get there easier and faster but it is not beyond anyone’s reach, regardless of their age to build up a significant of money – all you have to do is commit to saving 1 hour of your income every day, can you that?
So how about the amount you earn between 9am and 10am every day is yours to keep and is going into a savings or pension account and the amount you earn for the rest of the day can go towards taxes, loan repayments, utilities and so on.
And I appreciate this is easier said than done given the cost of servicing debt and the costs associated with raising children and so on but if you did find it difficult to save 1 hour of your income every day, could you and your partner save 20 minutes? Because if you did, in 25 years you would have c. €362,272.15 sitting in your account so it doesn’t have to rounded to saving an hour of your income either, don’t discount smaller amounts and think the amount you will accumulate won’t be worth the effort, this clearly isn’t the case.
When it comes to saving and how much we should be setting aside each month, I believe we need to start changing our behaviour and our mind set from saving a certain rounded amount each month to saving based on the amount of time we spend working each day and paying our self a portion of the income we receive for that day.
When I ask people about the amount they save each month and why it is a particular amount, I would say that nearly 100% of them have no rationale behind the number – it’s an amount they feel they can afford to set aside each month or it’s even a number they continued on with from the good ole days of the SSIA accounts of the 90’s.
And some of the amounts are quite big but when I equate them to the amount they earn each day, they are small, so do people not value their time and effort and the amount they earn as much as they should? One person I was working with recently was saving €250 each month, an excellent figure, but this amount compared to the number of hours he was working each month was actually very small because he was saving just 3.7 hours out of a typical month which saw him work 180 hours.
And please do not get me wrong, I am not suggesting that we should all work as hard and as long as we can now and save every cent we earn, so that we can live comfortably when we retire. Doing this would be insane because you would be denying yourself the things that keep you healthy, happy and sane today but we do need to start valuing our time a bit more because if we do, our savings levels will soar and I’m betting our productivity levels at work will increase as well.
We work on average 1,529 hours per year, and let me refer back to the example about a couple saving 20 minutes of their income every day because if they did, they would accumulate c. €362,272 in 20 years – do you know how many hours that is over one year – it’s just 174 hours’ between them out of an average of 3,058 working hours for two people – it doesn’t seem that much when you look at it this way does it?
And again it is very important to consider saving this way otherwise, your chances of achieving a considerable sum of money or becoming that millionaire from saving alone are greatly reduced. If you just randomly select a rounded number, with no great particular though process, then this is what is going to happen:
If you save €100 per month, it will take you 58 years 6 months before you reach the magic €1M. It means if you are 25 you will be 83 years old before you can call yourself a millionaire.
If you double the amount to €200 per month, then it will take you 48 years, if you save €400 you will be a millionaire in 39 years’ time - €750 per month will take you 31 years and €1,000 in 27.
For me, when it comes to saving each month, it always helps if you have a reason why you are saving in the first place.
And it is a question I ask of my clients all of the time – why do you save as much or as little as you do and what are, you trying to achieve? And most people tell me it’s for security, or for freedom and then we speak a little more the real reasons come out:
“I want my children to have more opportunities than I did”
“I don’t want to worry about money like my parents did”
It might be a useful exercise for you after you have read this article to give a little bit more thought to why you are saving in the first place. And to help you uncover your reasons you should look at:
And the reason why I save everything I earn everyday between the hours of 8.30am and 9.15am are because I consider my family to be my highest priority and I work as hard as I do, because I want the financial freedom to be able to spend as much time with Roseann and our three children and give them a foundation for a life full of opportunity – that’s my WHY.
Whether you think you know everything or very little, if you can’t give me the numbers to the following 5 areas, then you had better get working on finding out what the answers are.
And the first number is one that you would think everyone would know but you really would be surprised how many people don’t:
1. Your Monthly Income
I asked a client of mine last week, what her annual salary was? And she looked back at me with a blank expression on her face. She admitted to me that she hasn’t opened a payslip in 2 years. She could tell me by looking up her bank statements what was lodged into her account each month but had no idea how that figure came about.
She had no idea about how much tax she pays each month and by not looking at her payslip she couldn’t tell me how much was going into her pension – and when we looked at her payslip, nothing in fact was going into her pension, ZERO.
She had assumed that something was going in and she was with her present employer for the past 4 years and by not taking notice of her payslip and what she was being paid or what was going into her pension (nothing in her case) she missed out on FREE MONEY from her employer who would have put c. €37,444 into her pension had she instructed them to and had she joined the company scheme.
Just take a little bit more notice of what your gross and net income is. Familiarise yourself with your payslip – are you receiving the correct tax credits, what is your monthly cut off point are all questions you need to get the answers to and if you don’t know, ask your employer or better still ask them to get a presentation carried out for you and everyone else who mightn’t know either and I can tell you that will be probably 99% of the workforce.
Income tax, prsi, usc probably account for the biggest % that is taken from your monthly pay cheque so get familiar with it and make sure you are not paying any more than you need to.
2. Net Worth
So, what are you worth right now? If you subtracted everything you have that has any monetary value from the total amount you owe, what number would that be? Would it be a positive number of a negative one?
Knowing what your net worth is, isn’t just for wealthy people, everybody should know what their number is. This exercise provides a great snapshot at a point in your life as to what your financial balance sheet looks like.
If it’s positive then great but how positive should it be? You know what my formulae for working out what it should be, is:
Your age x gross annual salary / 10
If you are below this number or you are starting from a negative position then fine, no issues, now you have a number that you can aspire to. Diagnose or get someone to do it for you where you are going wrong and then create a plan that will get you into a positive number.
And having that formulae is a great tool to benchmark your progress against each year, you can create a timeline that in 5 years’ time your net worth should be X and if I do the following i.e. investment more, pay down debt, get a second source of income, increase your main source of income etc. that you will achieve that number.
3. Monthly Outgoings
This is one that very few people know and their guess is that whatever they earn is the amount they spend!
You have got to get a grip on your monthly expenses. And if you don’t know what it is, then please write down what you spend your money on for 1 month in a diary, an excel spreadsheet or better still on My|Money’s spending planner. This is a great exercise it really is, a pain I know but at the end of the month it will give you great clarity as to where your money is going each month. And what this exercise is all about is awareness, because only when you know what you are up against can you put a plan in place to improve your monthly cash flow.
It really is like losing weight – what is the first thing you do when you want to lose weight? You weight yourself – that is your starting point, your anchor number that you can measure your progress against. The same thing applies with your monthly cash flow, step on the scales by knowing how much you spend each month and what you are spending it on.
4. Your debt to income ratio
While your net worth looks at how much more or less you have when you look at your assets and liabilities, your debt to income ratio is the one that will tell you how much of your monthly income is going towards servicing monthly debt.
Any idea what your number is?
Your starting point is to figure out how much you are paying each month on your mortgage, car loan, visa, personal loan and so on. Divide the sum total of theses repayments against your net monthly income and that is your debt to income ratio number.
And you don’t want it to be any more than 30%, you really don’t.
I carried out this exercise with someone recently and their debt to income ratio number was 40.27% - it shocked her that for every €100 she earned, €40 was going to repay debt and €22 of that was only going towards servicing interest payments. So, we did something about it and with a bit of rescheduling of debt repayments/getting lower interest rates and using some of her existing savings to pay down debt, her number is now 26.25%.
5. Your investment returns
You might know the amount you have on deposit, but knowing what interest rate you are earning is another thing.
I want you to actually know two numbers here and they are (a) the interest rate and (b) the amount of interest you will earn in 12 months.
Are you making the most and best use of your money? Could it be earning more elsewhere?
Again, I met someone recently and when I asked them how much they have on deposit, the answer was €40,000. Good start, next question, what interest rate is this amount earning?
Mmmm not quite sure, 2% I think (the rate was in fact…….wait for it……….0.05%)
So, how much interest did you earn last year? Again not quite sure, about €200 I think.
The amount of interest he earned was ZERO, in fact it was costing him money to have it on deposit when you factor in DIRT and inflation. Whilst that was bad enough, it was the opportunity he was losing on by not investing in better yielding accounts. Again it was all about awareness, he found out his number investment return number each year was -€38 and he made it become +€708.
It’s easy to get overwhelmed when it comes to money, I get that. People also lack the time, energy and interest in getting to know numbers, terms and conditions of accounts etc. But if you do take the time out and get to know just a few important numbers and how they can impact your financial life, you will realise that people who are in control of their financial life are those who are in the know.
The Bad was:
But it was actually a great way for us to start our conversation and a little bit easier for her to talk, think and reflect on each area of her finances and compartmentalise them into good, bad and ugly sections.
Because, sometimes, it is hard to know where to begin when it comes to you and your money, where do you start? Is there any point looking at the good things you have done? Does it matter what the value of your property is? Does it matter how much you owe in credit card debt? Does it matter how much you earn? And the answer is that they all matter because they are all linked and each area has a direct impact on the other so they are all important, but you need to take the step of putting down everything on paper, warts and all.
And whilst I am a big advocate of people completing a statement of what their net worth is so they benchmark themselves against what their peers have, along with using it as a method of recording how their finances are progressing against goals they set themselves i.e. save €X amount or reduce mortgage by €X amount over 12 months, it is only a measure of what they are financially worth, and that is a problem.
When this lady began talking about The Ugly part of her finances, she couldn’t record how she was feeling about her husband on a statement of net worth. So, it was good to talk about what she thought was one ugly part of her finances because up until she mentioned it, she didn’t consciously realise it existed.
The exercise we did together was very emotional for her because on the one hand she was very pleased she had a small mortgage and was aware that she was in a much better position than most and if anything ever did happen well she would always be able to earn enough to repay her mortgage so she was never going to be homeless and rather than taking that for granted, she became more grateful and was proud of herself for that.
When she spoke about her wedding and honeymoon and the amount they spent on it, she thought it shouldn’t be in The Bad section but more like The MAD section but then there is no movie I think called The Good, The Mad and The Ugly. Anyway, what was done was done, it couldn’t be taken back and no point beating, yourself, up about and when I asked her if she had her time all over again would she have done the same thing, she answered without hesitation – YES. They had incredible memories of it with friends and family and life can be short and often cruel so they will always remember that experience.
Talking about their wedding made her think of her husband and she joked that they got married for better and for worse and you know he had been trying incredibly hard to get a job, she realised that and if she was feeling under pressure god only knows how he must be feeling, so she resolved to move resentment off her ugly list simply by talking to him about how she is feeling.
And of course, doing this exercise wasn’t and isn’t all about the emotional aspects of her finances, they are absolutely important because they give her the why to make those changes so the ugly becomes the bad that eventually becomes the good. And she is going to have to do the things she doesn’t like doing like budgeting, planning her shopping trips, not going on holidays this year etc.
And I would encourage you to think about what’s good, bad and ugly about your finances (I think I sound like Father Trendy here) because only when you do, can you begin to see what’s really important and then resolve to do something positive about them.