How to avoid a financial midlife crisis

On Saturday 20 January, 2018, I was a guest on  The Business on RTÉ Radio 1  , to talk about avoiding a financial midlife crisis.

You might think a “financial midlife crisis” is the crisis brought on by middle-aged people suddenly buying a fancy sports car they can’t afford! However, there’s a bit more to it than that.

A midlife crisis can be described as “a psychological crisis brought about by events that highlight a person’s growing age, inevitable mortality, and possibly shortcomings of accomplishments in life. This may produce feelings of depression, remorse, and anxiety, or the desire to achieve youthfulness or make drastic changes to current lifestyle.”

Tight financial straits can also be the source of much “depression, remorse and anxiety” in middle age – all of it totally avoidable. As for “achieving youthfulness”, well, a good night’s sleep can work wonders to help you look younger – and you would definitely sleep more soundly if you knew you’ve done all you can to put your finances in order!

So, to take preventative action and avert any financial midlife crisis, or to work your way out of such a crisis, let’s get practical, and kiss depression and anxiety goodbye.

There are four main things that absorb most of our money: tax, your property, your children (if you have children of course) and securing your lifestyle after retirement . So these are the four areas we’ll focus on when we look at how to manage your finances in middle age.

One of the best things you can do with your money to avert any financial midlife crisis is to get a pension and make sure it is well-funded . Too many people simply assume that their state pension will find them on their retirement, but they don’t realise they can take action to make sure their pension is adequately funded.

It can be difficult to make this a priority when the mortgage has to be paid and the family has to be fed – after all, retirement is still decades away! But you can’t start too early, and it doesn’t need to cost you more than a couple hours of your time, and a little money every month.

To calculate how much you need to save in order to reach your target for a comfortable retirement, the Pensions Authority has a great pension calculator. Input your age, salary, intended retirement age and what percentage of your salary you would like to get in your pension, and the calculator will tell you what you need to save in a pension to get to that point . It can also take into account the details of your existing pension. The calculator will show you how much of a shortfall there is, and how much you need to save every month to make up for it, taking the tax relief into consideration.

The government has given us an exceptional incentive to put money into our pension in the form of our tax back. I am an economist, a Chartered Financial Analyst charterholder and an experienced stock market investor, but I do not have any way at all to turn €60 into €100 via a risk-free investment… and believe me I’ve looked. The only way I know of, is through a pension.

Whether I pay tax at the higher rate of 40%, or at the lower rate of 20%, the government is willing to give me all of the tax back on whatever amount I put into my pension. That is, at a 40% marginal rate tax, for every €60 I put into the pension, I get back the €40 I paid in tax. Similarly,  at a 20% marginal tax rate, for every €80 I put into the pension, I get back the €20 I paid in tax.

In addition, the barrier to entry is very low. You can start a pension with just €300 . Have a look at your savings account or use any amount left over after your expenses, and you can start a pension with that amount.

The Pensions Authority has put together a very helpful resource about Personal Retirement Savings Accounts , with all the answers to the most frequently asked questions, the charges, a detailed explanation of the jargon, which providers offer them and the detail of their respective offers.

Do you know how much government pension you will get? Do you contribute to your employer’s occupational pension or to a PRSA?

Women and pensions: most common issues and solutions.

Case study: thinking about your pension at different stages of your life.

Last year, as part of my own personal development plan, I studied for the Diploma in Taxation at Chartered Accountants Ireland. It was a fascinating journey through income tax, capital gains tax, VAT, corporation tax and a number of other tax heads besides.

It opened my eyes to all the implications of knowing about tax and making sure we adopt efficient strategies. And it made me all the more aware of all the amazing resources that are out there, that people don’t know about.

Did you know that you can give Revenue or Citizen’s information a call on their helpline, or request a meeting, and a member of staff will answer all your questions? They are not tax advisers, of course, but they will offer excellent information if you want to talk about your personal tax situation.

I understand that people might find it difficult to approach tax, but the Revenue website is actually very well written and very clear. Have a look at Revenue.ie. The Citizen’s Information website also has great, easy-to-read resources on tax.

To get started, here are a few areas to explore:

You can also sign up for the newsletters of accountancy and tax specialist companies. At our offices at DCU Invent , we are lucky to have Grant Thornton as our Resident Experts and you can sign up for their updates.

Do you have a number of income streams? That’s the case of many people today. In a household, there may be one person who works full time and another has a small self-employed business. They also generate a little from AirBnB and a small royalty from a piece of intellectual property they created years ago.

In that situation, setting up a company can be very useful. With a company, you can take out the income you need at the marginal rate of tax (20% or 40%), and leave the rest of your income in the company, to be taxed at 12.5%, until it’s needed. A company structure will also allow you to claim any expenses that you incurred in order to generate your income (for example, if you bought new furniture or bedlinen for your AirBnB).

In addition, you can charge expenses to a company including travel and subsistence, educational investments and if you’re VATable, you can claim the VAT back. Please note you can only operate a company if you have multiple income sources – you can’t use it as a vehicle for sheltering sole employment income, or to store passively generated income.

Setting up a company comes with certain obligations, like director responsibilities: you will  need to create a set of accounts annually (which you would be doing anyway as a business) and comply with tax returns … which makes point No.2 above all the more relevant.

Do you have debt, apart from your mortgage? Then in that case, one of the best ways to avoid a financial midlife crisis is to aggressively pay down that debt.

My own rule of thumb is that, for borrowing to make sense, the life of the asset has to be longer than the life of the loan. If that’s not the case, don’t take out a loan (or don’t charge the expense on the credit card). For example, if I borrow for 25 years to buy a house I will live in forever, then that’s likely to be a good decision. If I splurge on a luxury holiday that will last two weeks, but then it takes me a whole year to repay that expense, then it’s unlikely to be a good decision, all else being equal.

Sometimes people think that paying off a loan early is a minus in their account. Certainly at the time, while you’re scrimping and saving to channel the money into repaying your debt, it can feel like that. However, if you clear off a loan a little early, then you get to keep the interest that you don’t have to pay anymore. If I have a loan at 6% interest, it means I have to pay 6% on top of the sum I borrowed – that’s the price of the loan. This also means that, as soon as I have paid off the loan, I get to “keep” that 6%, since it’s not leaving my account anymore. For example, if I borrow €10,000 and I repay it over 4 years at 6%, I will end up paying €1272.81 in interest over that timeframe. I worked this out in seconds using the Consumer Help loan calculator.

Using the loan calculator on CCPC.ie

The earlier I pay that back, the less interest I have to pay and hence, this is a “plus” in my account.

Finally, it’s important to repay the most expensive debt first: the most expensive debt might not be the biggest amount, but the one with the highest interest . For example, if you have a 12% credit card and a 2% mortgage, then of course, it makes sense to pay off the credit card first as it costs more.

Make a list of any debt that you have: mortgage, car loan, credit card, student loans, etc., on a spreadsheet or even a simple piece of paper. Beside it, write the amount you still have to repay and the rate of interest. Using this list, decide where is best to put any extra money. Think about the interest that you won’t have to pay back once your debt is cleared.

One of the best things that you can do, in midlife or at any other time, is to give your children a solid grounding in personal finance. Teach your children good financial decision making, how to be resourceful and how to generate income themselves.

Even if you’re not really sure you’re the perfect role model when it comes to personal finance, that doesn’t matter. Your children will pay a lot more attention if they see you making earnest efforts to improve your situation and find solutions, than if you try to appear like you have it all figured out already. This can even be a common learning project on which you embark together.

It’s also good to involve children in the financial decision-making of the household. You will need to bring the language to their level, but even very young children can soak up key lessons in ways that will surprise you. That’s why it can be a very good idea to involve them in an open way. For example, explain that you’re going to have a certain type of holiday this year so that you can have a bigger and more luxurious one in the future. Talk to them about your shopping choices: this brand offers better value than another, and how to find out about that value. Show them price comparison websites and highlight that saving €100 on the car insurance is the equivalent of the amount they asked for their school tour and spending money, for example.

If you ask children and teenagers what they want from their finances, many of them will say “I want to be rich!” Being rich is very often in their eyes (and the eyes of many adults) a shortcut to being financially secure. However, there’s a lot more to financial security than just “being rich”. That’s why it’s important to learn how to set effective financial goals.

When your children become teenagers, the prospect of their working life will start to loom large. I’ve worked with hundreds of teenagers through #SavvyTeenAcademy and they tend to be very anxious about doing well in their exams, about going to a good university, about choosing the right career, about finding a job, and they are worried about unemployment. You can allay their fears by showing them that there are many, many things they can do to take control of their future: they can be proactive and resourceful, and they won’t be the victim of circumstances .

Encourage your college student to look up paid internships for their summers in college. Explore funded international learning exchanges through Leargas and Erasmus. Through all of these ideas, teach them the ethos of financial resourcefulness. This won’t just save you money on funding their lifestyle, but it will give them skills for life that will reward them richly over and over again.

Over at the #SavvyTeenAcademy blog, my partner Monica Murphy and I have written extensively about:

(The #SavvyTeenAcademy is a 4-day camp for teenagers, covering Careers, Communication and Confidence. One of the workshops is specifically about Finance and Budgeting )

Over the past week, I attended the Asian Financial Forum in Hong Kong. As these events often are, the focus was very much on the future and on preparing for it. There were many conversations about FinTech , but there was also quite a bit of anxiety about whether we were all going to lose our jobs to robots. Several panelists suggested that “jobs will be transformed, not lost”. That’s true, but it also requires that we adapt with these evolving jobs.

In addition, we’re living longer and we need to remember that our careers are likely to be much longer , too… As a result, we will be competing against, but also collaborating with people who have recently graduated, and who will be at ease with the latest technology and fresh thinking. Of course, the older we get, the more experienced we become. This sharpens our edge, if we work on it. For all these reasons, it’s essential to continue to invest in our education and not to rest on our laurels.

I was commissioned by CPA Ireland (Certified Public Accountants) to create a suite of six freely available webinars on career skills. You can start there to focus your efforts.

You could spend a couple hours a month upskilling yourself: if you’re not already, start using YouTube to refresh your skills and learn new ones. You would be surprised at the sheer number of very good quality educational or how-to videos on the platform. You can take a subscription to Lynda.com for more structured courses in a number of topics. And to keep up-to-date on a wider range of issues, you can listen to some excellent podcasts, on your daily commute for example. (You can try my own podcast: I interview high achievers about their strategies )

To take things up a notch, you could decide to take a professional exam in your specialty. A few years ago I decided to take the arduous CFA exam (Chartered Financial Analyst): this was a very technical, very demanding professional exam, that I tackled on top of a full-time job as a business owner. Here is how I did it:

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If you have a work appointment in your diary, I’m sure that you organise yourself to get there on time and give your concentration (or most of it anyway) to the people that you’re meeting. Do the same for your finances, and treat that meeting with the same serious care you would have for a work appointment.

Schedule an hour with your finances every month. You can choose a monthly theme: reviewing your direct debits, shopping around for a better deal on something, stress testing if you could step up the mortgage repayment by €50 per month, reading about the stock market, etc. Please note, this meeting is not just about having a look through your bank and credit card statements to make sure nothing is amiss – I’m sure you do that from time to time anyway using online banking?

This monthly meeting with your finances can also be devoted on occasion to scheduling time with somebody you need to talk to. Maybe you haven’t discussed making a will with your partner, or you want to talk to your child about the opportunities mentioned earlier, or you need to talk to your bank manager about adapting your credit line or the general state of your finances, accounts, loans, etc.

This time with your bank manager won’t cost anything at all, but it can make such a difference. If you take the time to establish rapport with your bank manager, you’ll receive better, more personalised advice from somebody who is already familiar with your situation. This will be immensely helpful if anything goes wrong, when there is an emergency, but also when things go right, when there is an opportunity to be seized and when things change.

Do you understand the difference between investing and speculating? Do you know what investing can, and can’t, do for you? Now would be a great time to educate yourself about it: if investing is right for you, it’s a great thing to do to improve your finances.

Broadly speaking, there are two ways to invest your money: in risk-free or in risky investments. Risk-free investments, as the name implies, are safer, but offer a smaller return. Riskier investments should offer a return commensurate with the risks, so do your research to find out whether they fit your profile.

If you’re looking for the risk-free options in Ireland today, look at statesavings.ie (a tax-free way to save with the government). The Consumer Help website is, again, a great place to find savings calculators.

If you would like more risk, then educate yourself on Exchange Traded Funds. They’re a low-cost, diverse way to have a diversified portfolio of stocks. For example (and this is only an example and not investment advice), the World Stock Market ETF tracks the largest 100 stocks in the world.

This fund enables you to gain exposure to all of these companies, without having to pick your own stocks. This diversifies across geography, currency, sector and generates a dividend.

The key point here is that, as with investing in your education, educating yourself regarding investment can empower you to make better decisions and have better conversations with people who advise you about your finances.

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One other thing you can do to put your financial house in order and mitigate a crisis is – get life insurance. The idea here, as always, is to “ hope for the best, plan for the worst ”.

Nobody likes to think about their own mortality, but take a few moments to take out life insurance that fits your needs. In case anything happens to you, your family’s needs will be covered, at least in the short term to medium term. Of course money is likely to be the last thing on a grieving person’s mind – but that doesn’t mean their financial situation will automatically be grand. This is the one thing we can do once we are not on this earth anymore – we can help our family weather the hard times when we’re gone.

So if you haven’t already, schedule an hour this month to sort this out and then let it run on auto-pilot for life. The younger you start, the cheaper it is and competition in the industry is such that it can be very cost effective. Your loved ones will thank you for it.

Susan HayesCulleton is the founder and MD of international company HayesCulleton Group , and the co-founder of #SavvyTeenAcademy. Her books are The Savvy Guide To Making More Money and The Savvy Woman’s Guide To Financial Freedom, both published by Penguin ( available here ).

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