This is the second part of the article, we posted yesterday, and 5 more solutions to wiping out this couples monthly cash flow deficit.

Reduce Debt Repayments

This couple were making payments of €462 per month which was accounting for 9% of their net monthly income. The amount that was coming from their gross annual income to service a car and a credit card was €9,240.

Debt is the enemy to any sort of wealth creation because the amount you repay in this category is money that isn’t available for savings, paying down mortgage debt etc. and whilst you might think it is only a little debt, the impact it has on other areas of your finances can be significant and it is as bad as living beyond your means.

There is a concept known in the financial world as the debt spiral and it works like this:

1. The more you earn the more you spend

2. You borrow to fill the gap

3. More of your income goes on debt repayments

4. You keep borrowing to maintain a lifestyle

5. The end result – a big portion of your income goes towards repaying debt leaving you at the end of the month WITH NOTHING LEFT.

And obviously there are times when you have to borrow money, of course you do, and that is fine once it isn’t having any real impact on achieving your other goals, but when it does, you run the risk of putting yourself under serious financial pressure.

If this couple didn’t have that debt, they wouldn’t need to think of having to earn more money, change jobs, or look at cutting back on their existing outgoings, they would have that money going into a savings account rather than into a bank’s balance sheet.

The solution to getting rid of this debt was to use their existing savings and if they did, they would have c. €7,000 left over – but that was not where I wanted them to be at, because it was below the emergency levels I wanted them to have in reserve.

Use Existing Savings

They have c. €20,000 and last year this was €25,000 but they have been dipping in and out of the account it was in to fund the monthly deficit. And if they continued doing this, in 4.7 years they would have ZERO in savings.

An option to solve their problem but not a good option you will agree.

Stop Saving

They could stop saving each month and now the deficit is only c. €73 per month.

But you know what’s going to happen? They will stop saving and in 3 months’ time they will be back overdrawn by €353 again and they won’t be able to identify how this happened. The double whammy is no more saving and still overdrawn – the problem has gotten worse, not better.

And consider this, if they continued saving at a rate of €280 per month and didn’t stop and didn’t have to use their existing savings, this is the difference if they did (using an annual return of 2% for comparison purposes).

You can see the massive impact of taking the easy, short term option, of stopping saving can have on finances. And the real impact is having a conversation with their children that they won’t be able to help them financially if they wanted to go to college. And rather choosing a course they would like to attend in a city like Dublin or Cork, they may have to go to college closer to home, complete a different type of course because they and their parents can’t afford the rent repayments.

I don’t want to seem over alarmist but this decision could alter the direction their young children take when they are older. And all because their parents stopped saving to fund a cash flow problem that in all likelihood could have been solved by other means.

Stop Pension Payments

OK, so they don’t stop saving because they want that money for their kids and are not prepared to stop saving for them. So, in return they are considering stopping their pension payments to solve their problems instead.

What do you think the impact would have on their income in retirement?

Do you think it will be big or small? When I asked this couple, they had absolutely no idea so I told them.

But before I did, I was able to identify the income they need when they retire at 65 is €31,000 per year.

So, if they stopped pension contributions their pension income would amount to €15,523 per year.

They need €34,000 so the income gap they can look forward to from giving up pension contributions is going to be €18,477.

If they continued with their €400 monthly contribution, they would have an annual income in retirement of €28,977 which is only €5,023 short of what they need.

Giving up monthly pension contributions of €400 to solve a €353 cash flow problem right now, creates a monthly deficit of €1,121 when they reach retirement age.

Not a good solution I think you will agree.

Use Annual Bonus

A lot of people I meet rely on (A) getting an annual bonus and (B) hope it will be enough to clear off the deficit they accumulate over 12 months’. They come to depend on it which creates all sorts of other stress.

But I think an annual bonus should be used to bring your family on holiday, take a lump sum off your mortgage, put into your pension as an AVC lodgement, lodge into a savings account, give some to charity etc. and not be used to pay off debt/clear your overdraft. You have nothing left to show for your hard work and then come January the cycle starts all over again, and what happens when in December the bonus is ZERO or a lot less than the amount you owe.

Summary

There are a number of options you can choose to bridge any deficit you have each month, and some are easier than others, and some have a much bigger impact on your finances in the short and long term.

Knowing what these impacts are, will I think help you make a better decision. It certainly did with this couple. What started off with an amount they couldn’t readily identify, the solution to their problem wasn’t to cut out their savings, it wasn’t to stop pension contributions, it wasn’t to use their existing savings either – all solutions but all with massive impacts on their future security.

In this journey of discovery, they came to appreciate their jobs a bit more, especially him. They understood how debt can have such an impact on their finances, and it wasn’t for the better either.

They came to understand, that taking more notice of their finances each month was important, and this was the solution to their deficit. They came to understand that they need to set aside some time each month reviewing their outgoings each month. They came to understand that they both need to be involved in the running of their finances, and not just one of them. They came to understand that small amounts add up to large amounts over a short period of time. They came to understand that they shouldn’t be complacent about monthly premiums like home, life, health and utility costs, and not to assume they can’t get better value.

And this exercise, I think, brought them closer together as a couple, which was great.

They were in this together and they were going to make it work, and they were excited about the future and not fearful of it as they were not too long ago.