Jill Kerby

MAKE A WILL:  HAVE A GOOD ‘HEIR’ DAY 

 

Over the next few weeks of this New Year, this column will take you through the basic steps of what constitutes good personal financial planning:  I can’t think of a more appropriate year to get your money and spending behaviour into order – if 2009 is anything like 2008, you won’t be disappointed by the effort. 

 

I never start a personal finance seminar without mentioning something that anyone with dependents or assets should consider:  making a Will and considering the impact of your ‘succession’ decisions.  Yet typically, no more than a third to half of any audience I address has bothered to write their last Willand Testament and that includes people with young children.  

 

The main reason to write a Will is so that you, rather than the state, gets to decide exactly to whom you would like to bequeath your money, property and possessions.  If you die ‘intestate’ or without a Will, the terms of the Succession Act 1965 take over, and your estate will be distributed first to your spouse, who gets it all if you have no children. If you have a spouse and children, they receive 2/3rds and 1/3rd in equal shares respectively. If you have no spouse or children, your parent(s) get your entire estate; if they are dead, your siblings take equal shares (or their children, equally, if their parents are dead), or your cousins and then nieces and nephews if there are no siblings, etc. 

 

The Succession Act is very fair, but it is also completely detached from the nuances of your own personal relationship with any of these people:  I love my brothers and sister dearly, but if I were a single person, I wouldn’t want them to exclusively inherit my house, pension fund, savings and all my personal effects. 

 

And as a married person with a child, by not having a Will, under the Succession Act, my son would inherit a third of my estate, which isn’t a big problem since he’s just 15 and my husband, as legal guardian, would have full control of its value until he turned 18.  By then, he would be entitled to what was left of his inheritance and if there was insufficient cash to give him, assets – perhaps even the family home – might have to be sold. 

(It isn’t unusual for adult children to gift back their inheritance under the Succession Act to a surviving parent if claiming it causes undue financial hardship, but there is no legal compulsion to do so.)

 

Given these sorts of unintended consequences – and the fact that it takes even longer to complete the probate process of an intestacy than it does a legal will, and that can typically take 3-6 months) – it is far better to write a Will and spare your family and friends the inconvenience of you dying without leaving clear instructions about what happens to your estate. You should also know that you can’t entirely disinherit a spouse, and that children left entirely out of a Will often successfully challenge that decision in the Courts.

 

Most solicitors charge modest fees, usually well under €200for writing up a simple will, which should also include the names of any guardians of any children under age 18.  If you want to set up a trust for your children, in the event, say, that both parents were to die or simply because you don’t want any of the children to inherit too much money too young,this will cost you more.  But a trust can be a very good idea on tax grounds as well, in order to postpone the payment of capital acquisition tax (CAT) if your estate is particularly large and their individual inheritance exceeds the parent-child tax-free threshold of €521,208 in 2008 (it is expected to rise by at least 3% inflation in 2009 to c€536,844 – the actual increase had not been published by the Revenue at time of writing).  (You can write your own Will via www.wills.ie).

 

So how much tax will your beneficiaries have to pay?

 

First, there is no transfer, inheritance or gift tax between spouses and the above mentioned amounts apply between parents and children or grandchildren, as well as adopted and step-children (and foster children under certain circumstances) if your son or daughter pre-deceases you.   The next group of beneficiaries – siblings, nieces and nephews and other linear ancestors/descendents - are entitled to a tax-free inheritance of €52,121 in 2008 (c€53,684 in 2009), while a stranger – someone who is not a blood relative – can receive €26,060 tax-free in 2008 (and c€26,842 in 2009).   

 

The Finance Bill increased the CAT tax rate in 2009 from 20% to 22%, so a child who inherited say, €600,000 worth of assets (ie a property, cash or life insurance benefit) would pay €13,894 in inheritance tax to the state compared to €15,775 in 2008.

 

 

There are some exemptions to CAT other than that enjoyed by spouses: the family home is exempt if the beneficiary(ies) have been living with the deceased for at least three years prior to the inheritance (or transfer in the case of a gift) and it is also their only, principal private residence. (The property must not be disposed of for the next six years or the tax relief is withdrawn.) 

 

Some relief from CAT for businesses being passed on and for agricultural land is also available; in the case of the latter, its value is assessed at just 10% of actual value. 

 

So as a New Year gift to you family, sort out your succession planning.  Write your will.  Have a good ‘heir’ day. 

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FF from Dublin writes: I have a personal pension fund in addition to my employer's. When I claim tax relief on my contributions to this fund can I include my PRSI contributions as well? 

You may be entitled to claim relief from the total PRSI and health levies of 6% of your net relevant earnings on your contributions which would result in total contribution relief of 47% if you pay tax at the higher, marginal rate and 26% if you pay tax at the standard rate. Pension contribution/PRSI tax relief is restricted however, and is based both on an age-related percentage of net relevant earnings/remuneration and on a total earnings/remuneration figure of €275,236 in 2008 and €150,000 in 2009.  This generous tax and PRSI relief may not last forever, so you should ensure that you’ve claimed it all up to this current tax year.

 

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TL writes from Dublin: I recently lost my job in the media. I have been thinking about writing a book for some time and this might be just the opportunity (I’m trying to stay positive). Just wondering how I could apply for the artist’s tax exemption status and when it applies - only from when you get a book published, or sooner? If sooner, can I get the exemption status while I am researching and writing my novel?

Under Section 195, Taxes Consolidation Act, 1997, income earned by writers, composers, visual artists and sculptors from the sale of their works is exempt from income tax in Ireland, but only under certain circumstances, according to the Revenue Commissioners. (Certain literary non-fiction works are also considered exempt.) The key features that you need to fulfill to the Revenue is that your work “is original and creative and whether it has, or is generally recognised as having, cultural or artistic merit” and that you, the artist, “must be resident, or ordinarily resident and domiciled in the State and not resident elsewhere.”   You are also exempt from paying any income tax from any bursaries or grants you might receive from the Art Council, or even an advance payment from a publisher, for example, to help support you as an artist, but only in the year in which you make the claim and only after you achieve your tax exemption status from the Revenue.  Any income earned from your work before you are given your artist exemption status will be liable to income tax.  The Revenue have full details of this scheme on their web-site, www.revenue.ie . Finally, while this may not affect you immediately, since January 2007, artistic income is regarded as a "specified relief" and may be affected by something called High Income Individual Restriction which takes into account various tax reliefs that higher income earners use to reduce their income tax liability. The restriction will only apply to those individuals whose "adjusted income" is over €250,000 per annum. 

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MB from Dublin writes: I received my annual Christmas bonus this year which was in the region of €60,000. I plan to spend €10,000 on home improvements would like to put the rest away for about six months. Could you tell me where I would receive the best return over a six to 12 month period? I don't mind if it is locked away and inaccessible for that period. 

Interest rates are coming down as the ECB lowers its base rate and savers will find their annual yields will come under even more pressure in 2009 due to the extra 2% Dirt (now 22% instead of 20%). While you naturally want to maximise your return, a quick glance at the ‘best buy’ interest rate charts in this newspaper and on the interest rate website, www.irishdeposits.ie shows that Anglo Irish Bank, Irish Nationwide, and the EBS are offering some of the highest six and 12 month fixed rates.  At time of writing their long term futures were still being determined by the government.  I suggest that before you go for the highest return on your money, that you are equally satisfied not just about the return of your money at the end of the fixed term but that the institution you leave it with is still around then too. 

 

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PB writes from Limerick: I have €19,000 on deposit with National Irish Bank and I'm wondering what to do after January 1, when the rate of interest drops to just 1% from the 5% I’ve been receiving since reinvesting my original SSIA fund in the NIB tracker deposit account. Can you advise me of how I might earn a better return? I might consider risking a portion of it, in the hope that any losses I might incur would be covered by the return earned by the portion I leave on deposit. I like the idea of forestry, but it seems to me that you have to wait ages to make a return. I'm very sceptical about stocks and shares though I’ve read that the best time to invest is when values are low. I invested in a tracker bond in the past but made very little money - and that was when times were good. I'm also wondering which is the best deposit account at the moment. Your Best Buys tables lists Anglo Irish Bank as one of the best but, after the scandals that have emerged recently, would my money be safe?

You’ve already given quite a lot of thought to this process and have come to some sensible conclusions: the security of the bank you choose for the funds you want to leave on deposit is just as important as the return you are offered on your money and also that when a global market collapse happens, bargains will be available among those strong, well capitalised companies with little or no debt, that pay dividends despite falling share prices.  There are also sectors and funds that should produce good returns over the longer term – like energy and other natural resources (including timber and water), consumer durables, food and infrastructure companies that will be able to take advantage of the massive building projects governments intend to pursue as part of their national stimulus plans. You should start doing your own research and compare the cost of different funds (check out the RaboDirect.ie and Quinn-Life.ie investment funds) and low cost ETFs (exchange traded funds) that represent these sectors. The Irish Stock Exchange has just dropped its charges on its new selection of ETFs (see www.ise.ie) and is also a good place to start. 

 

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Letting your personal finances get out of control is just as easy as losing sight of your waistline – especially when your banker was so keen to encourage that spending binge. So why not set up a ‘MoneyWatchers’ club to trim up your bank balance and slim down your credit card balance, asks Jill Kerby.

 

Here’s a novel New Year’s Resolution to mull on…join a money club in 2009.

 

I came across the notion after reading a New York Times article about five mainly thirty-something professional women in Vancouver, Canada who were desperate to lose their disastrous spending habits and monstrous credit card balances.  

 

Described by the NY Times as a “one part Debtors Anonymous and one part Weight Watchers, a bit like the investment clubs that were popular in the 1990s but with every part of our financial lives under the microscope”, ‘The Smart Cookies’, (see www.smartcookies.com) as they are known, have now written the inevitable book, ‘The Smart Cookies Guide to Making More Dough’.  Clever and cute in a Martha-Stewart-on-Manolos sort of way, perhaps the book was even part of the plan right from the start to get themselves out of debt and onto the money pages of the NY Times and other media.  But as my mother could never resist saying when a cynical daughter rejected a perfectly good idea (because she hadn’t come up with it herself): there’s more than one way to skin a cat. 

 

Getting your personal finances in order by sharing your money misadventures with others  - and other women of a similar age and experience in particular – has a certain appeal.  In my experience, both personal and observed, money is a difficult subject to discuss at the best of times, but especially with most men of one’s acquaintance.  

 

For example, once you move out of home, admitting to your father that you’ve made a complete haims of your finances is pretty humiliating and regressive, especially if he’s positively pleased that you came home to him for the bail-out.  Daddies suffer from empty nest syndrome too, especially when it comes to their little girls. (This only works once, by the way. The next time he’ll be properly pissed off, especially if your mother is carping on about how irresponsible you’ve been.)

 

Next, husbands.  My experience of the vast majority of married couples is that they have never had a formal money discussion – the kind in which all financial cards are put on the table and sorted into orderly piles like assets, debt, tax, savings, investments, retirement provision, succession planning. Since most working women still earn less than their husbands, going to your husband to admit to a debt problem can seem worse than going back to your father (but is a better idea, ultimately).  It is for this reason that money issues should always be discussed before, as well as during a marriage.

 

Boyfriends don’t really count, unless they are very old and very rich or long term co-habitees, and maybe not even then. The ones you are simply dating will sympathise with your credit crisis, but are unlikely to hand over any cash (nor should they).  They may be in worse fiscal shape than you are, and would you want to bail them out? You also take the risk that they will interpret your profligacy as a problem…that isn’t theirs…yet…but could be.

 

Bank managers? They have problems of their own these days, what with the value of their personal bank shares having fallen by more than three quarters over the past year. All the umbrellas are locked up in the vault again now that it’s pouring, and as one bank manager of my acquaintance put it so pithily recently: “If you need a friend, get a dog.”

 

Which is why the women-only money club idea has a certain appeal, though I can see how it might be rife with difficulty.  Who should join?  Sisters and cousins who already know your spending habits intimately?  Work colleagues who may not know exactly how much you earn but have a pretty good idea how much you spend?  Neighbours?  The women you work out with at the gym? 

 

As with investment clubs, it may be a good idea to set up some rules and appoint officers for the money club, suggests The Smart Cookies.  They particularly stress the need for a confidentiality clause that (hopefully) ensures that what is spoken about in the club is kept within the club.  In their case, a condition of joining was that members shared their financial records – bank statements, credit card records, pension fund details, etc., so that the nitty-gritty of everyone’s overspending and poor budgeting could be ruminated upon by the group and individual and collective solutions devised.   

 

‘How North American’, I hear you say.  Since money is the last taboo in Ireland, if you don’t think your fellow spendthrifts can keep their lips sealed once they leave a weekly/bi-monthly/monthly meeting, you might want to keep the agenda somewhat more informal and generic.

 

With recent research by Hibernian Insurance showing that about three quarters of Irish adults admit that they need help with their personal finances and don’t really understand how much of it works, just getting together with like-minded friends or family members and discussing pressing money issues has to have some positive effect. 

 

For example, you could set assignments each for each meetings – say, researching how credit card interest works, how long it would take to pay off a typical €5,000 balance if you only pay the minimum payment (a long, long time), what are the best value cards on the market and what you need to do to qualify for one. 

 

You could apply the same research and report principal to mortgages, personal loans, tax relief, pensions, investments, will-making, etc.  How ‘expert’ your report will be depends on the amount of research and fact-checking that is done, but there is plenty of objective information available – the Financial Regulator’s internet site www.itsyourmoney.ie is as good a place to start as any – to get you started.  A small investment in some good financial guides and money books wouldn’t go amiss either. 

 

Moral support is cited as an important feature of any money club; talking about a problem, like how weak-willed you are every time you see the word ‘Sale’ or even how you can’t bear to tackle the pile of overdue bills that are overflowing on the hall table, can be a first, constructive step. Like with a diet or AA buddy, members can even offer to be there for each other - at the end of a phone line or by e-mail – to talk you out of a compulsive spending moment that you will know you will live to regret. 

 

That isn’t to say that if you’re losing sleep about the size of your debt and are about to lose your home that you shouldn’t throw yourself at the mercy of your bank manager, and if that fails, at the local MABS* counsellor.  

 

Professional assistance in re-scheduling impossible mortgage payments or other bills that are in arrears should be sought as soon as possible to avoid court action or a visit from the sheriff. But for every hard case of desperation, there are probably a dozen others of women who lost the run of themselves buying a slightly more expensive car than they should have; or have been using a couple of credit and store cards on the run when they really should have had only one tucked in their wallet.  These are personal spending attitudes and habits that need changing, and a group of like-minded friends to thrash out all the issues and to try and come up with workable solutions may be all you need. 

 

A money club is only going to be as effective as its members are committed to its core goals – to help each other sort out their pressing financial difficulties and to move onto a healthier attitude towards the use of credit and debt.  Once that’s tackled, saving and investing becomes much easier and less contentious, even in today’s tumultuous financial times.

 

Maybe because we are facing such tough economic times that money clubs might catch on.  Before it was expropriated by the professional counselling industry, self-help groups, though they weren’t necessarily described that way, were the backbone of every community where people were having problems.   

 

Women seem to be particularly good at coming up with ways to provide practical solutions, all the while interweaving them with other old fashioned notions of friendship and sisterhood.  The foundation bones are already there – whether it’s the Irish Countrywomen’s Association or Network. 

 

Smart Cookies indeed. 

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Exactly one year ago, I was warning in this column about the dual dangers of inflation and taxation. The inflation risk was on two fronts – the inflated supply of money, which was running at about 11% for most of the year in the Eurozone, despite productive growth of only about 2%-3% -  and its consequence, price inflation, which was already taking off and much of it pumping up the price of oil. 

 

The taxation risk came in the form of indirect increases in government-controlled driven services like healthcare, education, transportation, energy; then in October, when the Budget was launched early, in the form of income levies, higher DIRT, capital gains and capital acquisition taxes, the  VAT increase and a raft of other cutbacks. 

 

But inflation was the big story in the first half of 2008. By late summer, as the price of a barrel of crude rose above $140, caused by the surge in the money supply and loss of confidence in the US dollar and the impact of diverting fields of corn from food to ethanol, our TV screens were full of people in countries from Italy to Indonesia protesting about the trebling and quadrupling of the price of bread, rice, pasta and meat. 

 

And then it was August.  And inflation began to recede.

 

Lehman Brothers, and its other over-indebted, investment siblings on Wall Street began to topple like a line of dominoes as the impact of 17 interest rate hikes since 2005 finally resulted in massive US sub-prime foreclosures.  

 

Soon all the other lines of interlinked dominoes – the global banks, hedge funds, private equity companies and pension funds that had bought into the seemingly risk free and endlessly profitable collateralised, sub-prime debt instruments began deleveraging their positions to pay margin calls and they too began to fail. Stock markets plummetted; credit disappeared.  People stopped borrowing and spending. 

 

If you thought 2008 was memorable for its jaw dropping financial events, 2009 could be the year that we get ring-side seats to a government-sponsored, spectacular, scary, pyrotechnic, anti-deflation show. 

 

INFLATE AWAY DEBT

The new US president will lead the way, say the US press.

 

In an effort to get credit back into the world’s biggest borrowing and spending economy, Mr Obama has already said that his government will spend at least $775 billion, in addition to the c$8-$10 trillion already created to recapitalise, underpin and save the banks, insurance and motor industries, on major infrastructure, education and health projects. About $310 billion of that new fund will go on tax cuts for businesses and individuals. If none of that works, the dollar printing presses will be turned up even higher. 

 

Given how determined politicians are to avoid the pain of economic correction and to put off the day of reckoning, it could happen in Europe too with further interest rate cuts and then the lighting of the infrastructure spending fuses as unemployment takes hold.  (Tax cuts will be the last resort on this side of the pond.)

 

If that happens – we could be back where we started in January 2008 with more monetary and price inflation…maybe even hyper-inflation. (Higher taxes and fewer social services will come for all of us when it dawns on the money printers and world improvers that there is a very large bill to pay.) 

 

POSITION YOURSELF

 

So what should we do?  How can you best position your own finances in the face of crippling deflation (that includes major wage and job cuts) and the potential dangers of hyper-inflation if the central bankers don’t turn off their printing presses in time?

 

Spend less.  Save more.  Work harder. Skill up. 

 

Deflation, for as long as it lasts, is a disaster for debtors and not much better for savers who will see their yields reduced.  Re-inflation will help debtors but only if they use all that lovely cheap or free money to immediately pay down their loans.  Unfortunately, savers won’t fare as well as they discover their hard earned money buys less and less.

 

If you have savings and have left it with one of the few safe deposit takers in Ireland, (like RaboDirect) you’ve done the right thing so far.  In 2008, the name of the game was the return of your money and less the return on your money. 

 

That probably won’t change for most of 2009, but you should be using the next few months to also research durable, sustainable assets and strong, debt-free, dividend earning shares/funds (like gold, oil, food commodities and giant consumer durables) to both hedge against inflation and to provide a steady stream of dividends.  Look to the long term.

 

Last year I started this column with a quotation from Vladimir Lenin*.  This year I’m going to end it with one from one of the world’s richest men, John Paul Getty: “I buy when other people are selling.” 

 

If you can overcome your fear, you should be doing so too.

 

* ”The surest way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."   

 

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RESISTANCE IS FUTILE:  LEARN TO GO WITH THE RECESSION FLOW

 

 ‘To my American friends I offer these wise words from your perhaps more frugal neighbours north of the border: Use it up. Wear it out. Make it do. Or do without.’ 

                            - An anonymous Canadian  

 

We never seem to do anything by halves here.  

Historically, the Irish didn’t just have a couple of tough years.  We had a famine. 

Over the centuries our young people didn’t just seek work in other countries… they emigrated ‘en masse’.  

Even our good times have been noted for their, well, over-exuberance.  Ireland didn’t just take its place amongst the rank of prosperous nations in the last decade; we allegedly became the second richest people in the world, after the Japanese. 

“A ‘correction’ is equal and opposite to the deception that preceded it,” says one of my favourite literary economists, Bill Bonner.  It looks now like our bust will be even ‘buster’ than others, to paraphrase our ex-Taoiseach’s pithy description of the boom years. Our house prices, pension fund values and stock market values could all end up reaching depths that other countries, if they’re lucky, will only read about. 

That said, we’ve already reacted - in character - to the bad economic news by dramatically slashing our high street spending and by saving like mad again.  And despite what you may hear from politicians and bank economists (this bank excepted), who have become so obsessed by the concept of the ‘growth’ economy that they didn’t recognise the property bubble until it was exploding under their noses, saving is actually a very good thing.

No one ever got rich by just borrowing and spending.  

Real wealth, as we discovered in the early days of the Celtic Tiger, is created by the accumulation of capital over time, and the prudent investing over time of that capital in genuine growth opportunities, like software development; the creation and manufacture of new drugs and high tech medical devices; high end finished food and agriculture products and high value tourism.  Selling ugly, overpriced houses to each other just doesn’t achieve this end. 

Where to start?

Aside from cutting up your credit card and vowing to live in an entirely cash economy again, how about starting with a contingency fund, if you don’t already have one.  

 

As a nation we’ve already increased our volume of savings by a reported €4 billion in the first eight months of 2008; these savings accounts are your first line of defence in any recession and will support the financial rainy days going forward. 

 

Ideally, you should aim to have between three to six months worth of net salary in your contingency or emergency fund, enough to see you over a period of short-term redundancy, illness or the expensive and unexpected household events that can result, for example, in a plumber having to be called out on a freezing New Year’s Eve, 1997 to replace the central heating pump. (Believe me, that’s an expensive call you won’t forget.) 

 

Whatever amount you designate for your fund – if you earn €40,000 net, you want to build it up to at least €9,000 in cash – start with a deposit of a few hundred a month (think the SSIA scheme), and consider adding bonus and commission payments as well. You’ll be surprised how quickly your fund builds up.  

 

If you arrange your salary contribution to be debited directly – and some companies with deduction software programmes will happily do so if you ask nicely, you won’t even notice the shortfall after a short while. 

 

This cash diversion doesn’t have to last forever – just until you reach your target – but it means living well within your means for a while, at least.  Once the fund is in place, you can either stop the salary transfer altogether or re-route it back into your every day budget.  Or better still, it can pay off the mortgage faster, boost a pension of AVC fund or build up a diversified portfolio of assets and shares. 

 

These are volatile times, so make haste slowly, but every downturn throws up investment opportunities in strong, well-run companies and sectors, with low debts and high cash flow.  

 

The bull run in energy, minerals, food, and other essential commodity products (like water, especially) isn’t over yet, say investment gurus like Jim Rogers (George Soros’ old Quantum Fund partner), despite a sharp fall-off in share prices during August.  

 

The developing economies of China and India could very well slow down if this recession goes global, but giant infrastructure companies don’t just build power stations, roads and bridges and sewage facilities in the developing world.  

The developed world’s infrastructure – that’s us too - is aging and clapped out; western government’s don’t have much choice but to keep the drains running. 

 

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SIDEBAR 

Hurray! for Prudence & Thrift! 

 

It may still be early days in the downturn but even the most profligate Celtic Tiger cub should know by now that it really does pay to shop around for big ticket items like housing, food and insurance.  

There’s also no time like the present to rediscover the joys of ‘making do’, as my mother used to say.  Give or take another 20 years when Peak Oil really does kick in, the joys of endless out of town shopping malls, global trotting Caesar salads and tasteless, out-of-season strawberries will be nothing more than a distant memory. So why not, beat the rush and… 

- dump the €600 gym membership that was used twice last February and start walking or use a bike.  

- ditto the monthly €9.99 DVD club subscription. Rediscover your local library instead, where they not only lend out books, but DVDs, CDs and computer games. 

-  bring a thermos cup of home-brewed coffee to work every day to replace the watery €3 cappuccino (and save €700 a year).  Not smoking is a financial no-brainer, but making a packed lunch, even a couple of days a week, can easily save you another €500 a year. 

- learn to manicure your own nails, massage your own feet, exfoliate your own face and even wash and blow dry your own hair again.  Ubergrooming is not just wildly overpriced in this country but is downright scary now that young men are doing it too.

- wear all your clothes for another season without buying any more; it’s always the autumn here anyway.

- takea course this winter and learn some essential DIY.  Bring you kids so they can also learn how to fix a leaky tap, replace broken hinges, hang some shelves or service a car. Teach yourself and them how to grow and plant a vegetable garden or some fruit trees and then - and here’s a real throwback - learn how to cook your own food… from scratch. 

Doom and gloom?  We haven’t seen anything yet!

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EMERGING MARKETS:  INVESTORS NEED AN OPEN MIND

If investing was easy, we’d all be doing it, and we’d all be rich. 

Of course, during the height of the property boom, it was easy, and yes, we all got rich - on paper.  We bought houses with cheap credit that “earned” more each year than we sometimes did ourselves.  We actually thought, like ancient alchemists that we could turn bricks and mortar into gold by buying buy-to-let properties and watch their capital value rise. 

There’s a big difference between ‘getting’ rich and ‘staying’ rich however, and investing during any boom is no guarantee of the latter, especially when you’ve been used mainly borrowed the money to ‘get’ there.

Make no mistake, the global property boom, of which ours was ‘boomier’ than most, as a certain ex-Taoiseach once said, was more about cheap credit and reckless lending practices than it was about any notion that property was the ultimate investment asset that would never succumb to the laws of physics. 

 

Now that the dot.com and property markets have both proved the old axiom that what goes up must come down, are we simply blowing up new balloons by switching our attention to commodities and emerging economies?  They have soared in value in recent years, fallen in recent months are in a volatile up and down stage now.  Have they boomed out, or are they genuine investment opportunities with the potential for solid growth?

 

Commodities like steel, iron, oil, wheat and corn, etc and emerging markets like Brazil, Russia, India and China (the BRIC countries) the Gulf states and south east Asia are really two peas in the investment pod. 

 

These countries have things in common that established western economies no longer have:  billions of young, hard-working, thrifty people who are desperately keen to improve their standards of living and trillions of dollars of earned, mainly western, currencies sitting in their national treasuries and personal bank accounts. 

 

Sounds like a winning combination to me, and one that the Americans in particular had in abundance 100 year ago or so at the beginning of the Great Oil Age.  

 

Every economic (and mililtary) empire eventually gets tired.  They expand their borders of influence too far; they get lazy and arrogant and greedy; they inflate their money and borrow too much. They believe they can do all the thinking and let others do all the sweating.  The United State is no different than the British, the French, Spanish or Romans before them.   The East is rising in its place, along with all the other places that are unburdened (or less burdened) with a culture of debt and entitlement.

 

Which brings me around to the notion of cashing in, if we can, on this global economic shift without being caught up in the boom and bust cycle that unfortunately has also emerged along with these new super-economies. 

 

NO EXPOSURE

 

Just a couple of years ago I wrote an article about Irish pension funds investing in ‘Chindia’ and with the exception of a few Irish fund managers, none of them had any direct exposure to Chinese or Indian companies directly. Instead their funds were represented only by UK or US companies with a presence in the two countries or with established Hong Kong based finance and insurance firms with long links with the West. 

 

Today, not only does every fund manager have some sort of exposure via this model, but many have created their own funds, or linked up with others in which indiginous Chinese, Indian, Brazilian, Russian, Malaysian, Vietnamese, etc global companies are present, often with western interests of their own. 

 

These companies – Baoshan (iron and steel) of China, Gasprom (energy) of Russia, Tata (consultancy, autos) of India, Petrobras of Brazil – are some of the biggest in the world; they’ve helped to drive their surging stock markets. 

 

They too have got caught up in the share mania in which hundreds of millions of people, with lots of earned income in their pockets and lousy deposit rates on their savings – thought they’d get instantly rich if they bought their shares at the pre-credit crunch peak last year.  That stock markets look like pyramid schemes sometimes has nothing to do with the underlying value of the Baoshan, Tata or Petrobras’ of this new economic world. 

 

Despite the volatility, the bubble risk, even the medium to long-term dangers of investing in companies that are fossil fuel dependent dependent (are Indian  motor car companies really a good long term pension bet?) the best emerging market shares should have a place in your investment and pension portfolios. 

 

Finding the right shares or funds is the part that’s going to require effort on your part:

 

Compare the makeup and cost of Irish-based emerging market managed funds, the equivalent passively-managed share indices and ETFs (which you buy directly from a stockbroker).  RaboDirect provides transparent, detailed information about all its funds, including its new emerging markets ones.

Use the internet to dig up background information about the countries, companies and commodity markets.  Check out the excellent free archives that Forbes.com, Bloomberg.com and the MotleyFool.co.uk make available.  

Subcribe to weekly magazines like The Economist and MoneyWeek. 

Only risk money you can afford to lose: a 60 year old speculator in Chinese bank shares has the potential to lose a lot more than a 30 year old investor in Chinese engineering firms that build nuclear power stations. 

 

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GOOD DEBT, BAD DEBT: DON’T GET CAUGHT ON THE WRONG SIDE OF THE DEAL

 

It hasn’t gone away, you know - the global ‘credit crunch’. 

 

OK. It seems to be taking a breather, thanks mainly to sovereign wealth funds and central banks stepping in to bail out the investment banks that were most seriously exposed to US sub-prime debt.  

 

But the smooth lending between banks hasn’t yet been restored and there’s some way to go before they all ‘fess up to how much they owe each other and how they still need to write off. 

 

Meanwhile, back here on planet Ireland Inc., a positive spin has been put on last month’s ECB decision to keep their base interest rate at 4%; this signals that there will be no rate increase this year say the optimists.  

 

This is some consolation, but not much, to anyone still trying to pay off a €300,000 negative equity mortgage, not to mention the fuel, food, transport, health insurance and myriad of other day-to-day expenses that are still going up. 

 

Credit crunch or no credit crunch, life goes on.  Lots of us are still planning to buy new homes (or at least an extra bathroom or upgraded kitchen), cars, furniture and holidays. And some of us have no choice but to replace the banger with another banger or fix the clapped out central heating system.  

 

Anyone looking for credit this year should be prepared to come under a little more scrutiny, so let’s keep the positive spin going:  this is an opportunity to reflect on the true cost of debt, an unfashionable notion during the boom years when it wasn’t so much a matter of how to raise a loan, but how much of a loan to raise.  

 

I mean, who cared how much that €300K mortgage or €40K car loan really cost when the house was rising in tandem with your annual salary and that SUV with the bull bar was… well, it was just soooo cool. 

 

Now that the free bar is closed, the empties are being recycled and everyone’s sobering up, it is time to revisit the concept of ‘good debt’ versus ‘bad debt’. 

 

For example, good debt is the kind you use to pay for third level training or education because you can expect to eventually be rewarded with a higher income. 

 

Good debt buys you the home that not only provides shelter, but, historically, an annual value hedge against inflation. Given enough time, it can also produce a decent capital return.

 

Bad debt, meanwhile, buys liabilities:  expensive, depreciating cars, holidays, furniture, electronics, clothing, etc. These short-term purchases often end up with very long-term interest bills, especially if generated by the most expensive kind of revolving debt – credit cards. 

 

‘A bad loan is a bad loan is a bad loan’, Gertrude Stein would have said, if she was in the credit-seeking market today.  So for debt that smells of roses instead, consider the following: 

 

Only borrow what you need at the most competitive rate. A €300,000 mortgage repaid over 35 years at 5.24% interest will ultimately cost you €20,000 more than the same loan at 5%.

 

Always ask for total repayment costs – in writing.

 

Headline interest rates are… just that. Only a minority of borrowers will be offered that rate, this is because either your credit rating or the amount you are borrowing is insufficient. If your bank doesn’t automatically disclose the true cost of borrowing upfront (as RaboDirect does with its revolving ‘Credit Account’) you could end up with a nasty last minute surprise. Ask to see all borrowing rates and terms and conditions before you make a decision.

 

Aim to keep your loan repayment period as short as possible. The effect of compound interest, especially on a long mortgage or endless credit card debt can have a devastating effect on your long-term wealth. On-line banking can help you keep track of loan repayments.

 

If you haven’t already done so, switch to a 0%, low cost (ie under 10% interest) credit  offer that gives you between five to nine months to reduce your balance. Pay off your credit card balance by monthly direct debit and avoid paying any interest at all. 

 

Ask about fees and charges that apply to fixed rate loans. 

 

Be careful about balloon-end car loan payments.  They are seldom more competitive than a conventional loan. 

 

Beware sub-prime loan offers, or brokers who sell these products.  These toxic loans are only for people who are confident of quickly repairing their credit record so that they can avail again of conventional rate loans. 

 

Don’t bother with expensive payment protection insurance.  It is poor value compared to PHI or a serious illness policy that should meet repayments if you fall ill or disabled.  Savings will get you over a short-term income loss.  If the worst happens, you can sell the house and the car. 

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Lenin once said the surest way “to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."   

 

Comrade Vladimir was clearly never the owner of a high carbon-spewing SUV or he would have also added driving one to those petrol guzzlers to his list, but he certainly knew a thing or two about the soul-grinding business.  

 

So if you’re thinking of making any resolutions this New Year, they really should include this one:  finding a safe route between the inflation virus that is going to sap your income and savings of its spending power and the government’s determination to squeeze as much direct and indirect taxation out of you.  

 

I know a few people who’ve already jumped on a plane for overheated tax-havens like Dubai and Panama.  Or you can stay here, stop throwing your over-taxed money around like an eejit and discover that it really doesn’t take a genius to ride out an economic downturn.  You might even make some money.

 

ASK FOR A LADDER

 

But first, if you are in the proverbial hole, ask someone for a ladder. 

 

If you’ve never had someone review your taxes, assess your debts and assets or picked out a decent pension fund for you, 2008 should be your ‘Year of the Advisor’.  

 

The rich didn’t get that way through sheer hard work; they had help. Since most of us are basically just good at our own jobs and not at other peoples’ as well, you should pay money to consult someone who knows about maximising earnings, minimising tax and creating genuine wealth.  

 

If you don’t have the name of a fee-based, independent financial advisor (ask friends and family for a referral) contact the Financial Regulator at 1890 200 469 and get them to check their register to see if there is one listed in your area.  Expect to pay in the region of €150 an hour for the advisor’s service and expertise but don’t waste their time or your own money – go prepared with a concise list of all your financial accounts, contracts and policies so that these can be easily accessed and reviewed. 

 

Then take their advice. 

 

BE A TAX TIGHTWAD

 

The Government has just admitted to being down about €1.6 billion in tax at the start of this year.  This doesn’t auger well for those of us who not only pay income tax, but VAT, CAT, CGT, and all the other little ‘Ts’.    

 

With no obvious tax fraud campaigns on the horizon, the Exchequer will be counting on the Revenue to bring in every tax penny from the tax compliant as well as the evaders.  

 

If you don’t get a professional tax check, at least take the time to claim all your legitimate tax reliefs and allowances in 2008. Go onto the Revenue website www.revenue.ie where they have provided a helpful list of these deductions.  The most obvious ones that are overlooked (to the tune of over a billion euro a year) are for health and dental expenses, private rent payments, bin charges, trade union fees, etc.  Mad as it sounds, there are still stay-at-home mums with small kids who don’t claim the €900 annual per child tax credit to which they are entitled.

 

INFLATION BUSTERS

 

The official inflation rate is 5% at last count, but anyone who eats and drinks, pays a mortgage or rent, travels via public or private transport, pays for health insurance or alas, has an expensive shoe habit, knows it is much, much higher.  

 

So here’s a novel thought:  spend less and save/invest more this year.   

 

Spend less by buying fewer shoes …or cappacino’s, takeaways, dvds, alcohol, cigarettes, electronic gadgets, widescreen tv’s, weekend breaks.  Eat the groceries you buy, rather than throw a third of them away due to spoilage and waste (that’s over €4,000 for the average family). Drive a smaller, fuel-efficient car and save thousands in tax, petrol, insurance and maintenance costs (especially after July when new VRT rules come in.) 

 

On the savings front, open the highest yielding demand and savings accounts you can find (you might want to start on this site) for short-term interest and access.  But realise that inflation and DIRT – just as Vladimir predicted - are going to reduce your nest egg by at least 6% a year if you spend your interest. In just five years a €10,000 stake earning 5% will only have the spending power of about €7,400, a 25% loss in wealth. 

 

Instead, you need to start investing in the stuff that is so in demand, and so short on (and in) the ground -  such as oil and gas, metals, water, foodstuffs and the machinery that extracts and produces all these goods and commodities.  

 

Set aside a portion of your salary every month to buy into these sectors through individual shares or funds of shares; ETFs and the RaboDirect investment suite of global commodities are worth a look.  

 

Precious metals like gold, platinum and silver have also surged in price, not just because they’re useful to wear and put into catalytic converters, but because an increasing number of people are concerned not just about getting a return on our money, but of our money. 

 

If you can wind these funds into a tax-efficient pension, all the better. 

 

Without the benefit of a crystal ball, I’ve no idea if the optimists who say that everything will be wonderful again in Ireland Inc in 2009 are right or not. I look across the pond to America and I have my doubts.

 

All I know, dear comrades, is that bracing yourself for a bumpy ride sounds like a better option than standing in front of what might turn out to be a runaway train. 

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