Moneymakeover Short term debt advice

[DBDPAUL]

Personal details

Your age: 43
Your spouse's age: NA
Partner's age if not married:

Number and age of children: NA


Income and expenditure
Annual gross income from employment or profession:
Annual gross income of spouse/partner:

Monthly take-home pay: €2065 per fortnight net income

Type of employment - e.g. Employee or self-employed. Public Sector
Employer type: e.g. public servant, private company.

In general are you:
(a) spending more than you earn, or
(b) saving?
Saving

Summary of Assets and Liabilities
Family home value: €330,000
Mortgage on family home: €204,000
Net equity: €126,000

Cash: €14,000 savings in Credit Union
Defined Contribution pension fund: €60,000 sitting in PRSA from previous employment in private sector
Company shares :
Buy to Let Property value:
Buy to let Mortgage:

Total net assets:


Family home mortgage information
Lender PTSB
Interest rate 3.8%
Type of interest rate: tracker, variable, fixed. Fixed rate until 2028
If fixed, what is the term remaining of the fixed rate? 3 years left on fixed rate.
If tracker, what is the margin e.g. ECB + 1%

Remaining term: (Original term is not relevant) 20 years left
Monthly repayment: €1227

Other borrowings – car loans/personal loans etc
1. Personal Loan of €15,000 (BOI) 8.4%. 3.5 years left
Repaid fortnightly at €192.00
2. Credit Card - €2500. APR 13%

Do you pay off your full credit card balance each month? No
If not, what is the balance on your credit card? €2500

Pension information

Value of pension fund: Defined Benefit Scheme Public Sector- New entrant to the Public Sector.

Buy to let properties - NA
Value:
Rental income per year:
Rough annual expenses other than mortgage interest :
Lender
Interest rate
If fixed, what is the term remaining of the fixed rate?

Other savings and investments:
NA

Other information which might be relevant

Life insurance: Mortgage Protection with Serious Illness
Medical expenses : €250 pm
€350 pm into CU Savings
Income Protection Policy- €127 pm


What specific question do you have or what issues are of concern to you?
I'll admit I'm terrible with money but have got better over the years.
For context: Approx. 5 years I had almost €48,000 in short term debt ( Car finance, personal loan(s), a credit card balance). Repaid these on top of my mortgage repayments so things have been tight for years.
They now stand at what's quoted above. Nervous to use all savings & have no emergency fund from past experiences.
Currently have €14,000 in savings in credit union, previously had a loan which is repaid now where I couldn't access these shares.
Glad to finally be seeing the wood from the trees so to speak.

1. How much of an emergency fund should one keep ? Or just use all savings to pay off the loan now?
Although the credit card APR is higher , psychologically I would like to pay off the big loan and that kill off that monthly debt commitment.

2. Pension: Have 60K in a PRSA from previous job, but no other pension benefits apart from that. Now in Public Sector DB scheme. Just wondering would you add the 60K PRSA to the DB pension pot, or leave it alone? Would an AVC be beneficial to try boost pension benefits or will current one suffice at retirement as its a DB scheme?

3. I was wondering about making accelerated mortgage payments next once short term debt is gone or would it be better to put that money in an AVC?

Thank you for taking the time to respond.

 

[Protocol]

2. Pension: Have 60K in a PRSA from previous job, but no other pension benefits apart from that. Now in Public Sector DB scheme. Just wondering would you add the 60K PRSA to the DB pension pot, or leave it alone?

Impossible, as there is no DB pension pot, as PS pensions in Ireland are unfunded.

 

[balders93]

How much of an emergency fund should one keep ?

Minimal if you're carrying high interest short term loans. You're paying more than a thousand euros a year on the personal loan and CC, that your savings are not making back.

Pay off the credit card first, it's costing you more money than the equivalent balance held on your personal loan.

If the boiler breaks your CC limit is your EF until you're in a position where debts are paid off and you have a good cash balance. If that happens it will feel like a step backwards, but clearing it and reaching for it only when necessary is the way to minimise your spending on interest.

 

[mathepac]

Pay off the credit card first

This immediately, no questions asked.

 

[TomEdison]

As others have said, pay off the CC debt first.

And, from now on, pay it off in full every month. No ifs, no buts. You say . . .

I'm terrible with money but have got better over the years.

As a rule of thumb, you haven't got much better if you're still paying credit card interest.

 

[Dr Strangelove]

2. Pension: Have 60K in a PRSA from previous job, but no other pension benefits apart from that. Now in Public Sector DB scheme. Just wondering would you add the 60K PRSA to the DB pension pot, or leave it alone? Would an AVC be beneficial to try boost pension benefits or will current one suffice at retirement as its a DB scheme?

You can’t transfer it in to the single public service scheme. I would leave it where it is ensuring it is in a high-risk fund with as low fees as possible. I’m a public servant with a fund from a fund from previous employment and am happy to have both as it gives more flexibility.

Down the line you can look at purchasing notional service or making AVCs. But I would prioritise paying down high-interest debt and then mortgage.

A secure €4.5k a month is plenty to live on for someone with no dependents. Try and get into good habits and stay the course.

 

[conor_mc]

1. Clear credit card immediately
2. Clear personal loan - use €350 pm that you’re currently putting into CU savings
3. Keep old DC pension pot of 60k separate from DB pension. Move to a low-charge PRSA if it’s currently priced uncompetitively.
4. Once 1 and 2 are done and cleared for 6+ months, get yourself a better mortgage rate, 3.8% isn’t extortionate but you can do better.
5. Can you explain why you have both “Mortgage protection with serious illness” and an income protection policy, whilst also having the security of a public sector job? Feels like you’re over-insured here but maybe explain the thinking and we can advise/comment.
4. AVC or accelerated mortgage repayments? What will be your DB position at retirement? Sounds like you’re new enough to the PS role if you built up a 60k pension elsewhere.

 

[Brendan Burgess]

Cash: €14,000 savings in Credit Union

1. Personal Loan of €15,000 (BOI) 8.4%. 3.5 years left
Repaid fortnightly at €192.00
2. Credit Card - €2500. APR 13%

So you are paying €1260 + €325 or about €1,500 interest a year.
Your net loans are €3,500

So you are paying a true interest rate of about 43%

You have an emergency - it's a loan costing you 13% - use your emergency fund to clear it.
Clear the personal loan as well and your net borrowing will be down to €3,500

You do not need an emergency fund
You have a good record with the Credit Union
You have access to a Credit Card

Clear your loans.

 

[Brendan Burgess]

Income Protection Policy- €127 pm

5. Can you explain why you have both “Mortgage protection with serious illness” and an income protection policy, whilst also having the security of a public sector job? Feels like you’re over-insured here but maybe explain the thinking and we can advise/comment.

That struck me as well. It doesn't make sense to be paying €1,500 a year for income protection when you are a civil servant.

Medical expenses : €250 pm

Is this for actual expenses or health insurance?

Health insurance strikes me as a far higher priority than Income Protection.

 

[mathepac]

Income Protection Policy- €127 pm

I just noticed that too. Was it tied into your:

• a) now paid-off CU loan,
• b) your credit-card debt, or
• c) your mortgage?

If it's a) or b) I'd seriously consider canceling it.

 

[DBDPAUL]

Thanks to everybody who took the time to respond to my query. Just to update on some questions people asked me :

1. I took out the 'guaranteed mortgage protection and serious illness' protection policy at same time as my mortgage with the financial broker. This is what he proposed and i need to admit ignorance and say I assumed this is what everybody normally had with their mortgage.

2. The income protection policy is in force many many years since my last job. I didn't get sick pay benefits above the now statutory. This is indexed for inflation so the cost goes up each year. Perhaps I can review this and its not needed anymore. The policy pays out on week 12 if i was out of work due to long term illness.

3. The 250 pm at the moment is for medical expenses for a pre-existing medical condition, not for health insurance. I do have the very basic health insurance cover with VHI.

4. AVC or accelerated mortgage repayments? What will be your DB position at retirement? Sounds like you’re new enough to the PS role if you built up a 60k pension elsewhere. Correct, I am a new entrant to the civil service so I don't have any years built up yet. starting fresh.

 

[ClubMan]

Although the credit card APR is higher , psychologically I would like to pay off the big loan and that kill off that monthly debt commitment.

This is very flawed thinking - you should tackle the most expensive debts first - i.e. the CC.
You should pay heed to what @Brendan Burgess posted here:

Moneymakeover - Short term debt advice

Personal details Your age: 43 Your spouse's age: NA Partner's age if not married: Number and age of children: NA Income and expenditure Annual gross income from employment or profession: Annual gross income of spouse/partner: Monthly take-home pay: €2065 per fortnight net income Type of...

www.askaboutmoney.com

3. The 250 pm at the moment is for medical expenses for a pre-existing medical condition, not for health insurance. I do have the very basic health insurance cover with VHI.

Does the Drugs Payment Scheme not help here?

Drugs Payment Scheme

Under the Drugs Payment Scheme individuals or families only pay a maximum monthly amount for the prescribed drugs, medicines or appliances they use.

www.citizensinformation.ie

Under the Drugs Payment Scheme, you and your family only have to pay a maximum of €80 each month for approved prescribed drugs and medicines, and certain appliances.

Are you claiming tax relief on any qualifying unreimbursed medical expenses?

Health expenses

This page overviews how you can claim relief on the cost of health expenses

www.revenue.ie

 

[conor_mc]

I took out the 'guaranteed mortgage protection and serious illness' protection policy at same time as my mortgage with the financial broker. This is what he proposed and i need to admit ignorance and say I assumed this is what everybody normally had with their mortgage.

It’s quite possible that this was good advice for your circumstances at the time, but now with a Public Sector job perhaps the serious illness cover is no longer necessary. Possibly worth discussing with your union rep to clarify what would happen your income if you had a serious illness. If it’s not going to be significantly disrupted then why do you need lump sum cover?

Edit to clarify, mortgage protection is still required by your lender, it’s just the serious illness aspect that might potentially be unnecessary.

 

[conor_mc]

The income protection policy is in force many many years since my last job. I didn't get sick pay benefits above the now statutory. This is indexed for inflation so the cost goes up each year. Perhaps I can review this and it’s not needed anymore. The policy pays out on week 12 if i was out of work due to long term illness.

I strongly suspect this is now superfluous but check the long-term sick pay details of your current role first.

 

[Dr Strangelove]

mortgage protection is still required by your lender

It’s required at the initiation of a mortgage. If I had no dependents and a mortgage I wouldn’t bother keeping it up. It does make life a bit easier for your executor however.

 

[Fortune]

€350 pm into CU Savings

This needs to stop for now

psychologically I would like to pay off the big loan and that kill off that monthly debt commitment.

You can kill of the smaller, more expensive credit card debt more easily/quickly. Surely getting rid of a whole debt would give a psychological boost instead of waiting (and paying more) to pay off the bigger, cheaper debt?

Just wondering would you add the 60K PRSA to the DB pension pot, or leave it alone?

Leave it alone

€14,000 in savings in credit union,

How much of an emergency fund should one keep

Some people say high interest debt is an emergency. In your case, I'd say using the savings to pay off the credit card and most of the loan would be a good course of action. When all that debt is cleared, you can build your emergency fund back up. In the mean time, the credit card could be used to cover emergency liquidity.