MoneyTimes - January 11, 2012

Posted by Jill Kerby on January 11 2012 @ 09:00



How much more money will you be paying for groceries, heat and light, petrol and other motoring or transport expenses in 2012? How much will your health costs rise by, especially if you want to keep your private health insurance or have expensive monthly drug requirements?

How much do you think the rise in VAT will cost you in total this year - another €200?  €500?  €1000?  And how can you get your debts under control, when all these extra expenses are making claims against your finite income or savings?

There are only two ways to make a budget balance – by earning more or spending less. And if this great recession lasts as long as many independent commentators suggest that it will – and it will only end when we reduce our great debt burden and by selling more goods and services to the rest of the world and to each other – then everyone should be dusting off their CV’s, improving and extending their skills, and doing their utmost to earn more income.

Where the latter isn’t likely – and official unemployment is now 14.3%, partly due to the fact that in so many sectors our pay is still too high relative to our near and global competitors – then the only other way to make your budget balance is to cut back on your spending.

Let’s start with the income and expenditure challenges of an ordinary working family with three children, one of whom is now 18, no longer in receipt of child benefit and will start college later this year. (The assumptions I make are based on those provided by a myriad of sources – utility companies, insurers, mortgage providers, the National Consumer Agency, pollsters and others.)

This family’s income is €41,500 for the father and €23,500 for the mother who works part-time (these figures produce maximum tax individualisation benefits) and this relatively modest, middle earning family will also receive an annual tax-free child benefit (CB) payment of €3,360 (instead of €5,136 in 2011) for their two children.

Their total gross income is €65,000 but PAYE (@20%), PRSI and the universal social charge will reduce it by nearly €19,500 to €45,500. Add child benefit and their basic, net disposable earnings will be €48,860. They will pay over 30% of their combined earnings to the state, about €1,500 more in 2011 than in 2,010 due mainly to USC. 

They already made up for the loss of the third child benefit by getting rid of their second car, but with just €4,070 a month to spend, 2012 is going to be a huge challenge.

First, their mortgage is €1,000 a month – plus another €29 (€350 a year) for home insurance and €25 a month (or €300 p/a) for joint life mortgage protection. The family now has just €3,015 left for food, clothing, insurance, utilities, motor costs, the education of the three children, holidays, etc.

Their monthly food budget is €866. The cost of heat and light for their typical, seven year old semi-detached house (outside Dublin) is approximately €1,800 a year for both gas and electricity or €150 per month. Their combined TV, phone and broadband package is another €850 a year or nearly €71 a month. The cost of their three mobile phone packages is €1,200 a year or €100 a month. Health insurance is a huge cost for this family of five. Their current family plan is c€250 a month or €3,000 per annum.

Their monthly disposable income is now reduced to €1578 and will fall by another €8.33 a month once they pay the €100 household charge on 31 March.

Next, motor costs. Their older, paid off car includes annual insurance (€400), the higher 2012 tax rate (€478), petrol (€2,600), maintenance (€250) and this year’s NCT (€50). When the extra 2% VAT is added, their minimum monthly motor costs will be €321. Disposable monthly income is now just under €1,250.

This family will spend at least €125 a month (€1,500) on the children’s school uniforms, footwear, books and school donation; annualised bus fares will cost another €75 per month (€900).

Clothing, doctor’s visits, holidays, Christmas, entertainment, birthdays and other anniversaries, and any emergencies must be met from their remaining €1,050 disposable income.  The 2% VAT increase alone will cost them another €500 a year, according to estimates by consulants Ernst & Young.

Their remaining monthly income is simply not enough to keep up with the bills which is why they now have €3,500 of credit card debt (which now requires a minimum monthly repayment of €175) and they are paying €125 to their credit union for a €5,000 loan they borrowed two years ago for two unexpected household and medical emergencies and to clear a previous credit card bill. (Another €50 is being paid into their share account, a prerequisite of the loan. This €1,200 is their only savings.)

This family isn’t in as much debt as some – the two older children are earning money from baby-sitting and other small part-time jobs. The parents are just about making all their debt repayments – but they are dangerously close to getting into arrears on their utilities some months. They need to make some serious spending cuts if they are to keep their heads above water.

Next week:  How our family got back into the black – a practical guide to making serious household savings.

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