What am I doing wrong?

Benedict8

Hi everyone,

I am interested in hearing people’s perspectives on my financial situation.

I’m in my early 30s, I work in financial services and live in Dublin. I earn just over €4,000 a month net, and on top of that I receive an annual bonus of up to €8,000 (net). I contribute 10% of my gross salary to pension (together with my employer) and I have in the region of €45k in my plan.

I am fortunate to own the place where I live outright, thanks to the generosity of my parents. I have no dependents or loans, and cash savings of between €80k and €90k. Pre-Covid my monthly savings were in the region of €2,700 per month, but at the moment they tend to exceed €3,000. Back when travelling was an option, I would take a couple of trips a year, and make smaller contributions to my savings the months I went away.

Even though I am financially literate, I have not invested my savings or pension, as I feel that a correction is overdue.

In a few years, I would like to buy a larger house, probably with a mortgage, and to rent out the place where I currently live. Although the tax treatment is unfavourable, the gross return is decent, and I plan to move abroad at some stage, meaning that my tax rate on rental income should drop to 20%.

My question is: what could I be doing better? Is there anything I’m overlooking?

Cheers

athlone573

I don't think you need much advice from us here!

For me the big question mark would be around keeping your current place if you buy somewhere bigger, you'll pay a lot of tax if you rent it out.

It sounds like you could afford to take a year out to do a course in whatever might interest you, yoga, basket weaving or an MBA.

Jim2007

Benedict8 wrote: »

In a few years, I would like to buy a larger house, probably with a mortgage, and to rent out the place where I currently live. Although the tax treatment is unfavourable, the gross return is decent, and I plan to move abroad at some stage, meaning that my tax rate on rental income should drop to 20%.

Well if this is where your at then you need to put some serious time in to learning about investing and understanding the nature of financial risk and maybe a bit more about taxation.


For instance property as an investment falls into a high risk asset class and as such should represent not more than a single percentage allocation in your portfolio, you already own a property and adding a second one will just put you of the charts in terms of financial risk.


Furthermore, this second property would break every rule of thumb when it comes to investing:
- A high risk asset class
- Failure to diversify the risk
- Borrowing to invest
- Accepting a poor rate of return on a high risk investment
These rules have evolved over time based on previous experience as a way to try and protect people from getting badly burned. As we say in the last recession, many people who ignored them got badly burned.



As for taxation, the amount you pay will ultimately depend on where you decide to locate and the double tax agreement between that country on Ireland.



My advice would be to do nothing now, but study, study, study.

Benedict8

Jim2007 wrote: »

Well if this is where your at then you need to put some serious time in to learning about investing and understanding the nature of financial risk and maybe a bit more about taxation.


For instance property as an investment falls into a high risk asset class and as such should represent not more than a single percentage allocation in your portfolio, you already own a property and adding a second one will just put you of the charts in terms of financial risk.


Furthermore, this second property would break every rule of thumb when it comes to investing:
- A high risk asset class
- Failure to diversify the risk
- Borrowing to invest
- Accepting a poor rate of return on a high risk investment
These rules have evolved over time based on previous experience as a way to try and protect people from getting badly burned. As we say in the last recession, many people who ignored them got badly burned.



As for taxation, the amount you pay will ultimately depend on where you decide to locate and the double tax agreement between that country on Ireland.



My advice would be to do nothing now, but study, study, study.

Thanks for taking the time to reply.

I don’t think you ever stop learning, and I am always aware that there may be a certain aspect of an issue that I have not considered, which is why I came here looking for advice. Having said that, I make investment decisions for a living and have a solid background in the field, so I am afraid that for better or for worse, this is not a case of me not having the tools to make informed decisions.

I will however admit that I do not find this field particularly interesting, and that as a result I tend not to use too much of this knowledge in my personal life - basically I want to make sure I am on a solid path overall, but I have no real desire to spend time looking at the stock market, for instance.

Buying a bigger house is something that will hopefully happen in time, and is really lifestyle driven - ie. would not be happening for investment reasons. I would tend not to consider my primary home as a financial asset, in the sense that I cannot really live in a bond or stock portfolio. However, I do take the point that it is a substantial portion of my wealth.

The main question would be whether to sell the property I am currently living in, and roll the proceeds into the new property, or to keep the current property and buy with a mortgage.

Although I dislike the idea of being in debt, I also think that having a mortgage on your primary home is not unusual and probably an acceptable level of risk, given that my employment is relatively secure and with good prospects.

I could probably buy without a mortgage by selling my current house, but within a short period of time I would probably be faced with the issue of what to do with my savings.

Assuming things don’t change between now and then - ie. rates and risk premia remain at all-time lows, equity multiples remain at all-time highs, growth remains sluggish etc. - then perhaps not selling my current property would not be a bad idea? The net yield on it would probably be in the region of 3% of its current market value, after taxes, and assuming that my employment remains secure etc, I don’t think I would need access to this capital for years to come and therefore, I would have discretion to sell it at a time that suits me (for what it’s worth, the property is deep in the money, although my point of reference should probably be its market value at the time when I make a decision).

The only potential issues with the reasoning above that I can think of are the following:
- You could perhaps argue that 3% net is not an adequate return for the risk I am taking
- You could perhaps argue that my exposures are correlated, but I wonder if it really matters as long as I am not in a liquidity crunch and don’t have to sell? Working in the financial sector, my income and career prospects are also not insulated from the market, and I wonder if an equity portfolio instead of a rental property would really make me better off?

The J Stands for Jay

10% going to the pension seems a little low.

Benedict8

McGaggs wrote: »

10% going to the pension seems a little low.

Would agree with you - I think I will put most of my next pay rise into it.

Sheep Shagger

Benedict8 wrote: »

Would agree with you - I think I will put most of my next pay rise into it.

If you are earning 4k net a month and have no mortgage or childcare you should be maxxing out your pension contributions (not just your latest payrise). It's tax efficient and you can always pull back if you buy a bigger house or have a family later.

Don't ask a message board for advice, go to a qualified financial planner as they can tailor it for you.

Joe4321

Think pension, pension, pension, the power of compounding, as someone who is in the financial world you should know all about this, as was said you can always reduce your contrabutions later if needs be

Q&A

Tend to agree with others it's pension where you should focus. However if it's a second property you're after what kind of prices are the houses you'd be interested in? Being mortgage free is great but not being able to use the equity in the current house will limit your budget.

I'm guessing you're earning about 70-75k gross based on your net figures. On a good day a bank will give you 4-4.5 times your income (the fact you have a non-mortgaged property should make you a more attractive proposition). Based on that plus your current savings you've a budget of €410k? Does this buy the type of house you want?

Shedite27

Benedict8 wrote: »

My question is: what could I be doing better? Is there anything I’m overlooking?

Figure out your goal, is it to retire early? Buy a bigger house? Only then can you figure out what you need.

Worrying about market correction is a waste of time, nobody can time that.

Darc19

There's a specialist Irish financial forum called aakaboutmoney.com

They love this type of question and you will get some great advice from experts with a variety of options

I think it's under their money makeover thread.