Smart financial habits worth starting today

Old habits might die hard, but good financial habits can set you up for a lifetime of financial success.

It can take time to get in the swing of savvy financial practices but building good money habits is worth the short-term pain.

Check out these expert tips and see how to budget, reduce debt, and achieve your financial goals.

How to build good financial habits

Whether you dream of a place of your own, a new car, or you want to set aside funds for a rainy day, now’s the time to create good financial habits. Let’s get started!

Evaluate your financial situation

The first step to becoming financially savvy is to get in the habit of evaluating your personal situation, especially if there are any major changes in your income or expenses. Check in from time to time and consider these questions:

• Do you have enough savings to cover an unexpected expense or emergency?
• Are you spending within your means?
• Is your total debt going down?
• Have you started a pension?
• Do you have financial protection?

If your answer to any of these questions is yes, that’s great, but don’t be disheartened if the answer is no. The goal of this exercise is to spot areas that may need improvement and help you determine what adjustments to make.

Review your spending

Start by reviewing the money coming in and going out of your account each month. Track how you’re spending and see if you can make some changes. Consider what your needs are including accommodation, food, and electricity.

If your needs are covered and you have some wiggle room at the end of the month, you could look at using this money to pay outstanding debts.

Pay off debt

No one likes to think about debt but keeping on top of money you owe is an essential financial habit. Make a list of all your debts, placing them in order of what should be paid off first.

Deal with urgent debts such as high-interest loans and credit card bills as a priority. This will save you money in the long run as the longer interest accrues on a balance, the more you'll pay.

Make the minimum payment on your loans so that you don’t fall behind but put as much money as possible towards, say, the hefty credit card bill with the highest interest rate.

Assess your financial protection

Financial protection can offer peace of mind in the event of illness, death, or loss of job. These are things we don’t like to imagine happening, but it’s important to be prepared. Depending on where you’re at in life, you could consider investing in financial protection. This could mean taking out a life insurance policy, mortgage protection, income protection, or critical illness protection.

If you already have a life insurance plan, let’s say, it’s a good habit to reassess its adequacy and ensure it still works for you based on your personal circumstances at various stages in life.

Make a budget

A budget makes it easier to see how you’re spending all your hard-earned cash so you can make sure your financial goals are on the right track.

Get in the habit of following a monthly budget by adopting the 50/30/20 rule. This is an easy-to-follow budgeting guide which recommends spending 50% of your income after tax on your needs, 30% on your wants and putting the remaining 20% into savings.

If you have children or adult dependents, your budget should account for them too. You can make the 50/30/20 rule work for you and your family by allocating a portion of the 20% into a special savings account for your children. A child has different needs at different stages so early planning and knowing how to budget is a great financial habit to help you cope with expenses such as childcare and third-level education.

Let’s say your goal is to save a total of €500 a month, try depositing €125 into this account and the remaining €375 into your personal account or vice versa depending on your financial situation. In time, these small monthly deposits can add up to sizable savings.

Start a pension

You may have started saving for your child’s future but what about your own? Many of us put off setting up a pension, but the longer you spend contributing to your pension the more money you will have saved by the time you retire.

Did you know having a pension is also one of the cheapest ways to save? In Ireland, the Government provides significant income tax relief on pension plans, making it a worthwhile investment. 

Grow your money by investing

Another way to increase your wealth for the future is by investing and the best part is, you can invest online with Smart Invest, provided by Irish Life Financial Services and Irish Life Assurance and available to residents in Ireland aged 18 to 59. Much like your pension contributions, think about investments as a monthly expense. Review your financial situation (head back to point no.1) to make sure you’re in a good position to start investing.

Pay off any debt you may have first and ensure you’ve got enough money saved in your rainy-day fund to cover between three and six months of normal living costs. If you still have some extra money at the end of the month, you could consider investing it.

How much tax do you pay on investments?

These days, it’s easy for anyone to invest at the touch of a button but before deciding where to spend your hard-earned money, it’s important to be aware of the various taxes on investments in Ireland such as tax on life insurance policies.

Tax on life insurance

We mentioned earlier that life insurance is a great form of financial protection but it’s also an investment in your loved one’s financial security.

While you may have a lot of questions about life insurance, when it comes to tax, it’s important to be aware that anyone who inherits life insurance money after death may have to pay inheritance tax (also known as Capital Acquisition Tax), depending on your relationship with them.

Life insurance payments are also subject to a 1% levy and any gains made from a life insurance saving or investment plan are subject to exit tax at 41%.

In addition to tax on life insurance policies, there are other taxes that you might need t consider. These are:

• Capital Acquisition Tax (CAT)
• Capital Gains Tax (CGT)
• Deposit Interest Retention Tax (DIRT)

While we cannot advise you on tax, we recommend that you seek independent tax advice in respect of your own specific circumstances.

Capital Acquisitions Tax

Capital Acquisitions Tax is a tax on gifts and inheritance. It’s charged at 33% above what’s known as the “tax-free threshold”. This threshold is determined by your relationship to the person gifting you and can be categorised into three groups. These are:

• Group A: If you receive a gift from your parent or child, the tax-free threshold is €335,000.
• Group B: If you receive a gift from your brother, sister, niece, or nephew, for example, the tax-free threshold is €32,500.
• Group C: If you receive a gift from a stranger, the tax-free threshold is €16,250.

The balance above these thresholds is taxed at 33%. But what if your gift’s taxable value is below the tax-free threshold? In this case, you don’t have to pay any CAT at all! Gifts between married couples and civil partners are also exempt from CAT.

Capital Gains Tax

In Ireland, if you make a profit on your investment, you are required to pay Capital Gains Tax on the chargeable gain (that’s the difference between the price you paid for the asset and the price you sold it for).

The standard rate of Capital Gains Tax is 33% for most gains you make, but the good news is that your first €1,270 of chargeable gains is tax-free. This means you’re exempt from paying CGT if your total chargeable gain i.e. your profit is less than €1,270 in a tax year. If your gain is more than €1,270, you only pay tax on the balance above this initial amount. Win!

Deposit Interest Retention Tax

If you earn interest from your savings account, you are required to pay a tax known as Deposit Interest Retention Tax. DIRT is charged at 33% by financial service providers such as your bank or credit union. It’s known as a “final liability tax” which means your bank, for example, automatically deducts this tax before you receive the interest earned.

This is our understanding of the current tax treatment of the investment and is provided as a guide only.

Armed with the right knowledge and clever planning, investing can help your savings grow over time but be sure to talk to a financial advisor about what taxes apply before you invest.

Now that you know where to start with creating good financial habits, it’s time to put them into practice and reap the benefits. Get a free financial review online now to take the first steps towards taking control of your finances.

Or check out the form below and book in with one of our expert financial advisors. You can chat about your current financial position and get the guidance you need to help reach your financial goals.