Advice/Direction on Savings Please?

A

apple1

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Hi,

Age: 32
Spouse’s/Partner's age: 32

Annual gross income from employment or profession: 55,000
Annual gross income spouse: 0. Stay at home mum & intends staying in the home. Just a preference to raise baby(ies) herself rather than put in creche.

Type of employment: e.g. Private Sector
Expenditure pattern: In general are you spending more than you earn or are you saving? Currently spending 95% of earnings to service mortgage, car loan, day-to-day living expenses. Very little room for indulgences.

Rough estimate of value of home: 400,000 on PPR

Mortgage on home :150,000. Currently in Year 1 of 30
Mortgage provider: NIB

Type of mortgage: Tracker,
Interest rate :4.6 LTV

Other borrowings – 5K car loan, 1 yr remaining.

Do you pay off your full credit card balance each month. YES
If not, what is the balance on your credit card?

Savings and investments: €100K on deposit & €20K in shares

Do you have a pension scheme? Yes but employer only contributes 20% of employee contributions. Have a €35,000 balance from previous employer's DC scheme.

Do you own any investment or other property? No
Ages of children: 1 en-route. Due to arrive before year-end!!

Life insurance: Just to cover mortgage.

I'd love to hear how we can make our savings work as hard as possible both to ease current burden yet provide for junior(s) somewhere down the road. Should we consider using some/most/all of it to pay off the mortgage? This increases cash-flow in the short-to-medium term but leaves little/no reserve. Or should I funnel some of it into a medium/long term fund to provide for education costs down the road with the balance on deposit to ease current day to day pressures. I was thinking of putting 20K perhaps into a Quinn-type fund (lock away for 18yrs to help fund college), put another 20K in a similar fund to help with arrival #2's education (assuming we're lucky enough to be blessed with 2), keep 30K in a high interest deposit a/c (e.g. Rabo) and leave the remaining 30K available for living while trying to divert some of this into pension occasionally? Would love some feedback from other more seasoned posters. For the purpose of this exercise, I'm assuming that the shares don't exist (never had them, never missed them scenario - maybe some day, they'll be a wee nest egg for a once-in-a-lifetime family hol.)
Thanks in advance, apple1
 
With an income of €55k and a wife and one or two kids to support, you can't really afford to take much risk. I don't think you should be borrowing at 4.6% to invest in an equity fund, even if it's for the long term. Over the long term, I would expect that an equity fund exceed a return of 4.6%, but if it doesn't, you would find it difficult to handle the loss.

For that reason, I would use the savings to pay down the mortgage.

Many people compartmentalise their money i.e. that is the child's education fund. But this is not a good idea unless it motivates you to save.

Contributing to a pension fund would be far more tax efficient than putting the money into Quinn Life. You won't be able to get at it until you are 65, but if you have a big pension fund and a mortgage-free house, you will be able to pay for your kid's education out of a combination of current income at that stage, and a remortgage to be paid off from your pension lump-sum.

So in summary...
Max the pension
Pay off the mortgage

I assume that there is some penalty for early repayment of the car loan. If not, pay off the car loan. Again car loans are often a result of compartmentalisation - people are happy to borrow at a high rate against a car while having money on deposit.

Brendan
 
Thanks Brendan.

If I understand your advice correctly, I should use our savings to reduce the term of the mortgage rather than necessarily ease the monthly repayments over 30 years - correct?
 
Hi apple

A lot of people make that distinction, but I don't think it's relevant.

You owe 150k - let's say you pay off 100k, then you will owe 50k.

It's a separate and side issue as to how much your monthly repayments should be.



Brendan
 
Brendan

Thanks for the responses. Two quick questions though & apologies if I'm struggling to grasp what you're advising.

1. Do you advocate allocating 100% of our savings against the mortgage to either shorten the term or make repayments more manageable?
2. Is it wise to hold back a certain amount in the event of unforeseen circumstances? If yes, what is a rational amount to hold in reserve in your opinion?

Thanks, apple1
 
I am suggesting that you maximise your pension contribution. So put in as much as possible before the end of October. Put in some more for this year. Put in the balance on 1st January next. Whatever is left over pay it against your mortgage.

Let us say that you contribute 50k to your pension scheme and that leaves you to pay 100k off your mortgage. You will be left with a balance of €50k on your mortgage. If you are meeting your current repayments easily, then why not leave these repayments as is. You will then pay off your mortgage much sooner than 30 years. I don't see much point in reducing the repayments if you don't need to as you will be faced with a decision "we are saving €500 per month. Where should we invest it?"

I don't think that you should hold back much in reserve. If you do need more money but you have a tiny mortgage, then you will be able to increase your mortgage or reduce the amount of your repayments. If you wish, you might want to keep €5,000 in a deposit account.

Brendan
 
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Brendan said:
I don't think that you should hold back much in reserve. If you do need more money but you have a tiny mortgage, then you will be able to increase your mortgage or reduce the amount of your repayments. If you wish, you might want to keep €5,000 in a deposit account.
Click to expand...

I think this is an important point. Many people feel that if they use their savings to pay off or reduce their mortgage then the money is "gone". The reality is that it is not gone, it is simply being held in the form of equity in your home rather than as cash in a bank.
This has a number of advantages.
Firstly it is not subject to DIRT tax.
Secondly rather than earning a low rate of interest in the bank it is being used so that you are not paying a higher rate of interest on borrowings, in other words rather than earning 2.5% while you pay 5.5% on a loan of the same amount you are just not paying the loan.
Thirdly having a smaller load to value ratio may enable you to get a lower interest tracker mortgage on the balance of what you owe.
There are other advantages but these are the main ones I see.

The usual disadvantage that people suggest is the “It’s good to have cash for a rainy day”. I don’t accept this as it usually takes no more than a few hours to get an overdraft facility and a phone call to have it extended if you have one. This can be used as a stop gap ‘till a loan or mortgage top-up can be organised.
Apologies if there is another thread with a more comprehensive post on this topic elsewhere on the site.
 
I think it is a remnant of the "mattress" mentality. Having your own cash available is comforting as it is readily accessible and usable - asking for debt may be easier now than it ever has been but it is not as easy as having your own fund.
 
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