Monday, March 23, 2009

Has the Recession changed the 'General Principles' of Financial Planning?

We are living in very different times at present. The whole Financial Services Industry is in turmoil. Many investment companies are hemorrhaging money, as investors call on their savings to meet current financial commitments. Early Exit Penalties, Market Value Adjustments and Loss of Capital don't seem to matter to consumers. They want their money back, and they need it now. Some of those that have direct debits for savings, income protection, pension, and in some cases life insurance, are cancelling what they deem 'unnecessary' in the current climate.

I think that some of the 'Rules of Thumb' that apply to Financial Planning may have to be tweaked, so that our personal finances can be more 'sustainable' in the future.



It is inevitable that we will have to borrow to finance some assets, such as our homes or investment properties. The problem arises when we borrow too much money (relative to value) over mega terms for properties that are too big for our basic requirements. 100% mortgages over 35 years that gobble up 35%+ of our income are a step too far.

The bar needs to be reset at 75/80% of Loan to Value over 20/25 years. The size of the house is a personal matter, but stretching yourself to buy a 'bigger' house also carries with it higher maintenance costs, which will be ongoing. Common sense should prevail.


If you need to buy a car and have to borrow to finance it, you should probably only do so once you have 20% of the purchase price saved. The longest term for a car loan should be 5 years and the repayments should cost you no more than 7/8% of your income.

Do bear in mind that the monthly cost of running the car could add about 75% to the cost of your actual loan. Be cautious with what you deem to be affordable, buy second hand and keep the car for 7+ years. Using the words 'car' and 'investment' in the same sentence can be a bit of a contradiction.

Credit Cards

Simple. If you can't afford to pay the full amount off every month, you probably shouldn't have a credit card.


Keep your affairs up to date with Revenue and claim for all reliefs/allowances to which you are entitled. There is no point in putting tax issues on the back burner in the hope that they will go away. The last thing you need is getting a demand for taxes owing, with possible penalties and fines, when you can least afford to pay it back.

Financial Advice

Never, ever, take financial advice from a Bank on an investment or pension product where the Investment Company is an integral part of the Bank.


You should probably target to have enough money in a high yield deposit account to cover your living expenses + mortgage/debt payments for a period of 9 months. Some say that you should save 10% of your income in non-pension savings products. I say, that it depends on your individual circumstances as every ones commitments are different. The 'savings' deposit account should be your first priority. Once you have achieved that milestone, it is then a good idea to start looking at 'investing' in low-cost index tracking unit linked funds.

Family Protection

We have an uncanny habit of going into denial when it comes to taking out life insurance or other protection products that would give security to our dependents. Simply brushing the requirement aside by saying that 'I have a policy' or 'I am covered though work' is not good enough. It is the level of cover, relative to your needs and affordability, that is important. Most 'death-in-service' work related life cover policies insure the employee for 2 or 3 times salary. For someone with dependents, this can be a paltry amount of money. Think 8 to 10 times; and buy convertible term assurance. You will be surprised at how inexpensive it is. Always insure the stay at home spouse, not just the bread-winner.

When it comes to Specified Illness Cover, you should always keep this separate from any life cover you may have for mortgage related debt. It is expensive, so be realistic about what level of cover you might need so that it is affordable.


If your employer has a facility whereby they will pay into a pension scheme subject to you making a personal contribution, always take this option. If you want to make additional contributions to the pension you should start early. You are not signing a commitment to retirement age so you can reduce or stop payments at a later date.

The general consensus in the market would imply that you will need a fund of 20 times your annual income when you retire. That's fine, if your only retirement asset will be your pension policy but do bear in mind that you will have equity in your home (if you need to downsize) and you will still have an earning potential at 65. If you are a business owner, you should be able to realize a value from the transfer or sale of your business. If you can afford to buy diversified property (commercial/foreign), you should add this to your pension assets.


It is my opinion that the 'general principals' of financial planning remain intact. The only caveat that I would add is that we will have to be a tad more cautious about taking on too much risk. Asset building should be done slowly and we have to diversify our pot of savings/investments as much as possible.

If you are of the opinion that, on a scale of 1 - 10 (where 1 is 'no' risk and 10 is very high risk), you can stomach a '7' you should probably deem yourself a '5' on the scale. I have yet to come across a case where an investor takes a case against an advisor or product provider for not recommending a higher risk investment.


Pat Quirke said...

Good post. We must go back to looking at investments as just that. Over the last few years, investments had to (and sometimes did) pay back over 5-7 years. Realistically this is "gambling", not investing and was not sustainable.
An investment is a 20+ year plan imho.

Gerard said...

Our expectations on returns on single assets classes were completely out of sync with reality, hence the need for as much diversification as possible.

The 'sins' of risk management by our banking fraternity trickled down to the regular investor and alot of people bought into it.