Starting from Scratch

Julesie

Hey guys,

First off apologies if a similar qs has being asked before but i looked through the forum and couldnt see any along the same lines

Secondly i understand that any advice given, is just that advice and is not to be taken as gospel or any prediction upon future returns. Well with that out of the way i may as well get to the purpose of the post.

Just about to graduate from college and I begin my first permanent job in under two weeks. Im 20 years old with no borrowings or significant outgoings and i am expecting to earn close to 40k gross in the next year. I figure i will have approx €1000 surplus each month (maybe more) and im not sure what i should do with it.

If you were starting from scratch what would be the order and plan of action you would have with regards to savings and investments?

- Should i first of all save a couple of months salary as an emergency fund?
- Would it be a good idea to have a strong savings record with a bank for when i require a mortgage in a few years or would proof of other investments suffice?
- Is it too early to start thinking about a pension?
- Is investing in funds such as those offered by rabo direct a good idea or are there better alternatives out there if you are looking at quite long term investment?
- Are there any other avenues i should be considering that will give me a good financial foundation?

Sorry for the 3rd degree but i want to get this right from the outset rather than seeing my savings almost costing me money sitting in my current a/c.
Thanks in advance.

Diarmuid

1. Definatly save some cash to keep you going in emergencies or if you lose your job.
2. Well I think once you don't have bad debts and if you have fulfilled 1 then you will be ok here.
3. I guess it's never too early to think about pensions but from what I've read it's better to get your mortgage down first
4. If you are going long term I would keep the annual charges to a minimum. So Quinn Life is the best option at the moment (IMHO). If you can invest large amounts each time you buy (say 5k) , then I would look at buying ETFs. If your broker is Keytrade you charges will be 0.3% on 5k (excluding bid/ask spreads) which should beat the 1% charges on Quinn. But I think someone else will probably correct me on something I said here :-)
5. Read some books , Random Walk Down Wall Street, Intelligent Investor, The Four Pillars ... would be good to start with.

Fair play to you for getting educated about this at a young age. I was 30 before I looked at this ...

whizzbang

first off, 40k for a graduate! fair play!

second off I thin kyou should look into a pension, you are in the uppper tax bracket already and could save paying 40% tax on up to 15% of your earnings. Thats about €2,400 for free each year!

Also if you start out paying a pension you won't miss the money

I should mention I'm a property bear so I don't think mortgages are a good idea right now.

stepbar

eh, Wats the job?

- Should i first of all save a couple of months salary as an emergency fund? Yes 3 months pay is adequate
- Would it be a good idea to have a strong savings record with a bank for when i require a mortgage in a few years or would proof of other investments suffice? Not really, banks will look at your ability to pay it back. On the other hand having a few quid to put towards a deposit is always nice
- Is it too early to start thinking about a pension? Never, the tax benefits are quite tasty. Get a few other things sorted first before you go getting a pension.
- Is investing in funds such as those offered by rabo direct a good idea or are there better alternatives out there if you are looking at quite long term investment? Really you would want to know more in depth info about the industry that the fund is being invested in, identify / do an industry SWOT (Strengths, Opportunities, Opportunities, Threats) analysis. By doing this you will be able to quantify the sort of risk / potential for gain.
- Are there any other avenues i should be considering that will give me a good financial foundation? Foreign Property - Germany?

easyontheeye

Julesie wrote:

Hey guys,

Just about to graduate from college and I begin my first permanent job in under two weeks. Im 20 years old with no borrowings or significant outgoings and i am expecting to earn close to 40k gross in the next year. I figure i will

yeah whats the job?

Julesie

Analyst with Accenture working in their Finance and Performance Management group. Its one of their business consulting specialist groups.

stepbar

You might not have much time to spend it so!!!

Julesie

Yeah tell me about it ...but im not afraid of long hours. Just means i have more of it to get working for me.

Julesie

whizzbang wrote:

second off I thin kyou should look into a pension, you are in the uppper tax bracket already and could save paying 40% tax on up to 15% of your earnings. Thats about €2,400 for free each year!

I should mention I'm a property bear so I don't think mortgages are a good idea right now.

Yes that was my thinking behind starting a pension now, no point losing 2.5k needlessly to tax. And getting in the habit from the start can only be a good thing.

I am also bearish about the property market and certainly wouldnt be looking to buy at current prices. When my aunts 3 bed semi in Firhouse sells for half a million I know the market has departed from its fundamentals. Having said that i would still like to be in a position to buy in a few years if the market has changed.

stepbar wrote:

Get a few other things sorted first before you go getting a pension.

What are the things you would do before getting a pension?

stepbar

Well Jules you are 20, enjoy yourself a bit. Save up for a holiday or something. Get a car. Stuff like that. Im not sure when the special tax incentives for new pension a/c run out, but dont be in a rush to stick all your money in a pension, because you are not goin to see it for a very long time. I also assume that you will have a pension of some sort at work? After a few years you can look to increase your contributions. As for property at home, I wouldnt go there unless you have some land and you can build on the cheap. But I would look at property abroad, as I have said Germany maybe an option that you could look at, berlin seems to be the flavour at the moment.

Julesie

God i must sound a bit dry alright I wasnt considering putting everything i earn into a pension or anything like that, just making the most out of any incentives on offer. But thanks for the advice re: german property, I must do a bit of research into it.

Hitchhiker's Guide to...

would advise reading a few books on investment. The classics are:

... "A Random Walk Down Wall Street" Burton G. Malkiel

... something on Warren Buffett e.g. "Buffettology" ;

the Hodges Figgis selection of investment books are excellent

www.bullbearings.co.uk

have a bit of practise too...

kluivert

15% of yoru net relevant earnings at 20yrs can be put into a pension.

40k by 15% is 6k a yr , tax saving at 42% = 2500k saving.

ircoha

kluivert wrote:

15% of yoru net relevant earnings at 20yrs can be put into a pension.

40k by 15% is 6k a yr , tax saving at 42% = 2500k saving.

I prefer to use the word defer, rather than save.


Ignoring PRSI etc, in order to "save" the 2,500 : 6,000 has to be put aside which means you are forgoing the 3480.

The way I prefer to describe the tax relief on pensions is that for every 58c you are prepared to put into a pension scheme, the taxman puts in 42c to give you a gross euro.

This gross euro can then be used to build a capital sum which will in T+40 years or so will be used to generate an income stream which will be then taxed, hence the notion of deferring as opposed to saving.

ircoha

Julesie wrote:

Hey guys,

First off apologies if a similar qs has being asked before but i looked through the forum and couldnt see any along the same lines

Secondly i understand that any advice given, is just that advice and is not to be taken as gospel or any prediction upon future returns. Well with that out of the way i may as well get to the purpose of the post.

Just about to graduate from college and I begin my first permanent job in under two weeks. Im 20 years old with no borrowings or significant outgoings and i am expecting to earn close to 40k gross in the next year. I figure i will have approx €1000 surplus each month (maybe more) and im not sure what i should do with it.

If you were starting from scratch what would be the order and plan of action you would have with regards to savings and investments?

- Should i first of all save a couple of months salary as an emergency fund?
- Would it be a good idea to have a strong savings record with a bank for when i require a mortgage in a few years or would proof of other investments suffice?
- Is it too early to start thinking about a pension?
- Is investing in funds such as those offered by rabo direct a good idea or are there better alternatives out there if you are looking at quite long term investment?
- Are there any other avenues i should be considering that will give me a good financial foundation?

Sorry for the 3rd degree but i want to get this right from the outset rather than seeing my savings almost costing me money sitting in my current a/c.
Thanks in advance.

Julesie,
First let me congratulate you on your job with Accenture. Best of luck.

A question: why Hey Guys, as opposed to Guys and dolls?

Julesie

Sorry i just call everyone "guys" irrespective of gender. I'm of the female variety myself so no deeper meaning attached to it.

RainyDay

I wouldn't go for a pension at this stage. Yes, you will get tax relief on your contribution, but you are effectively tieing up your contributions for life. If you are stuck for funds for house purchase or wedding in a few years time, you won't be able to get your hands on the pension.

I would agree with the previous advice about building up an emergency fund. Avoid all debt - overdue credit cards, car loans etc. Pay up-front and save the interest payments.

In relation to the rest of your investments, it all depends on how long you prepared to tie up your money for, and your personal attitude to investment risk.

ircoha

Julesie wrote:

Sorry i just call everyone "guys" irrespective of gender. I'm of the female variety myself so no deeper meaning attached to it.

Thanks:) I was teasing a little, ( Bye the way in recent days I am dealing with an american co who frowned on my use of the word guys at the top of an email to a number of them.)
On a serious note re the pension I agree about the tying up money bit etc etc but depending on the details of the scheme, u can access the funds and pay 25% tax on the amount withdrawn- the devil is in the detail but Accenture must have all that on the intranet.

One point that may be of interest, the 15% limit is at the emplyee side, there is, AFAIK, either no or a much higher limit for payments made by employers directly into your pension plan so your bonus can go straight in.
It must NOT go through your payroll

Julesie

I suppose the pension is a bit of a compromise and in the end I will have to weigh up the pro's (government incentives) vs. the cons (inaccessibility). If my contribution is coming from income taxable at 42% then I believe it is worthwhile.

Cute Hoor

My understanding is that not alone do you get the tax back (42%) but also your PRSI (whatever percentage that is), so effectively you and the Government would be going roughly 50/50 on your pension contributions - a no-brainer in my opinion. It is never too early to start on your pension.
Good luck in Accenture, and don't forget to leave some time (and money) for fun.

RainyDay

ircoha wrote:

On a serious note re the pension I agree about the tying up money bit etc etc but depending on the details of the scheme, u can access the funds and pay 25% tax on the amount withdrawn- the devil is in the detail

Ability to access the funds only happens in rare circumstances where you leave employement before you reach the 'vesting period' in the pension scheme (which is no more than 2 years). It would be a huge gamble to count on qualifying for withdrawals in this way. For example, a 1-month delay in getting your new job could mean that you no longer qualify (if it pushed you over the vesting period).

Cute Hoor wrote:

It is never too early to start on your pension.

Not true. Don't believe everything you hear in the bank adverts. If you're struggling to buy a house, your pension is no use to you.

Reyman

The Government's not really giving you tax relief on your pension contribution.

It's another defer game -- they tax you on the cash when you get paid the pension. Though maybe at a lower rate, because you'll be poorer at that stage.

whizzbang

Reyman wrote:

The Government's not really giving you tax relief on your pension contribution.

It's another defer game -- they tax you on the cash when you get paid the pension. Though maybe at a lower rate, because you'll be poorer at that stage.

Are you saying they tax you when you draw down the pension when you are 65? I thought you got that tax free? but only if you take it after you are 65?

Reyman

Say your pension is €30k at 65.

They tax you as if it's ordinary income. There are some allowances for older people but the principle remains the same - all income is taxed.

So if you put money into your pension that's already taxed then they tax you twice on it !

N.B. A percentage of the pension capital sum (approx. 30% ) can be withdrawn tax free at 65. So you can extract some of your cash without the Government's kind attention

whizzbang

Reyman wrote:

Say your pension is €30k at 65.

They tax you as if it's ordinary income. There are some allowances for older people but the principle remains the same - all income is taxed.

So if you put money into your pension that's already taxed then they tax you twice on it !

N.B. A percentage of the pension capital sum (approx. 30% ) can be withdrawn tax free at 65. So you can extract some of your cash without the Government's kind attention

ouch! thanks for clearning that up! The pension sales person didn't seem to mention that

Reyman

Caveat Emptor!

My own view is that you should not contribute to a pension scheme if you're on the low tax rate - 20%. The entry and ongoing charges are too high and the tax advantage is cancelled out with the tax hit at pension age.
Direct investment in equities has no ongoing charges and may offer a better longterm investment route.

Having said that pension fund returns are exempt from tax as they accumulate and this is an advantage over the years.

RainyDay

Reyman wrote:

The Government's not really giving you tax relief on your pension contribution.

It's another defer game -- they tax you on the cash when you get paid the pension. Though maybe at a lower rate, because you'll be poorer at that stage.

True - but it's worth mentioning that you get tax-free growth on your pension investment as well, which is generally not available through other forms of investment.

ircoha

RainyDay wrote:

Ability to access the funds only happens in rare circumstances where you leave employement before you reach the 'vesting period' in the pension scheme (which is no more than 2 years). It would be a huge gamble to count on qualifying for withdrawals in this way. For example, a 1-month delay in getting your new job could mean that you no longer qualify (if it pushed you over the vesting period).


Not true. Don't believe everything you hear in the bank adverts. If you're struggling to buy a house, your pension is no use to you.

In normal circumstances you are right, however I did say "but depending on the details of the scheme". There are, as always exceptions

ircoha

RainyDay wrote:

True - but it's worth mentioning that you get tax-free growth on your pension investment as well, which is generally not available through other forms of investment.

This is an important point that Rainy has made, let me try explain why.

Generally when u come to retirement the capital you have accumulated in your pension fund is used to provide an annual income stream, aka an annuity.
Mostly it is insurance companies who do this and they look at your age and decide from the actaurial tables that u should live for x years so they will price the annuity accordingly.
Lets take a simple example. Suppose u have 100,000 in the pension fund and they expect you to live for 20 years then, in simple terms they will agree to pay u 5,000 per annum. If u dont live the 20 years they keep the balance, if you live longer they lose:) as the annuity is for your life.

Therefore the size of the capital sum is critical so tax free growth is important.

If the fund was being built up from taxed income it would, in simple terms only be half, or 50,000 and the income would be taxed again.

A second point here is that because interest rates are so low now, there is little or no increase in the amount of funds in the pension due to income growth, it is mostly capital growth so this means making higher contributions earlier is a better idea.

If interest rates are 10% the value of the fund will double in 7 years, just due to income growth. However with rates down at the 2.5% it will take 28 years to double, so u need the capital contributions to be going in early.

ircoha

Reyman wrote:

Say your pension is €30k at 65.

They tax you as if it's ordinary income. There are some allowances for older people but the principle remains the same - all income is taxed.

So if you put money into your pension that's already taxed then they tax you twice on it !

N.B. A percentage of the pension capital sum (approx. 30% ) can be withdrawn tax free at 65. So you can extract some of your cash without the Government's kind attention

<So if you put money into your pension that's already taxed then they tax you twice on it >

money put into a registered pension scheme is NOT taxed, this is the whole point of the deferred tax argument so it is incorrect to say it is taxed twice

Reyman

ircoha wrote:

<So if you put money into your pension that's already taxed then they tax you twice on it >

money put into a registered pension scheme is NOT taxed, this is the whole point of the deferred tax argument so it is incorrect to say it is taxed twice

Really what I'm saying is that if you put €20,000 into equities and over 10 years it gains 25% = €5,000. You are taxed only on the €5,000 when you withdraw the money @ 20% (CGT) = €1,000 tax. Property capital appreciation works the same - you are taxed on the growth.

If you put €20,000 of your after tax income into a pension (ignoring the limited tax relief on a percentage of your income) and it gains €5,000. You are taxed on the whole €25,000 when you try to withdraw it in the form of a pension.
In this sense they are taxing you twice on the original €20,000. Quite a strange inequitable system really!

ircoha

Reyman wrote:

Really what I'm saying is that if you put €20,000 into equities and over 10 years it gains 25% = €5,000. You are taxed only on the €5,000 when you withdraw the money @ 20% (CGT) = €1,000 tax. Property capital appreciation works the same - you are taxed on the growth.

If you put €20,000 of your after tax income into a pension (ignoring the limited tax relief on a percentage of your income) and it gains €5,000. You are taxed on the whole €25,000 when you try to withdraw it in the form of a pension.
In this sense they are taxing you twice on the original €20,000. Quite a strange inequitable system really!

Very fair comment indeed.
Of course the dividend or rental income respectively would also be taxed on an annual basis but I dont mean to detract from your interesting observation

Blackjack

If you are taxed on the income from your pension, is it not subject to the same tax rates as current?.

For example, if when you retire, your pension gives you an annual income of 17k, you are below within the individual Tax Free allowance, so won't be taxed on this?.

If the above is the case, then pumping a bit of cash in now which only costs you 58 cents to the Euro, and gaining an income from it that potentially is taxed at a lower rate (and this is likely as your pension is less likely to pay you anything close to your current earnings) is not a bad idea.

If you are currently paying the higher rate and eventually have annual pension returns taxed at the lower rate, then you are still saving. Particularly when you are currently only contributing 58%. If you are taxed at 42% later, then that's a bummer.

Reyman

Blackjack wrote:

If you are taxed on the income from your pension, is it not subject to the same tax rates as current?.

For example, if when you retire, your pension gives you an annual income of 17k, you are below within the individual Tax Free allowance, so won't be taxed on this?.

If the above is the case, then pumping a bit of cash in now which only costs you 58 cents to the Euro, and gaining an income from it that potentially is taxed at a lower rate (and this is likely as your pension is less likely to pay you anything close to your current earnings) is not a bad idea.

If you are currently paying the higher rate and eventually have annual pension returns taxed at the lower rate, then you are still saving. Particularly when you are currently only contributing 58%. If you are taxed at 42% later, then that's a bummer.

Quite correct - if you're on the high tax rate a pension contribution is a very good idea at present.

I've a feeling the Government is going to change this advantage enjoyed by higher rate taxpayers very soon.

So act while you can!