Are you living beyond your means? You may have money dysmorphia

Irish Times

4 days ago

Do you have money dysmorphia?
If there's a disconnect between how you feel about your financial position and the reality, this may well be you.
Money dysmorphia means some people overestimate their wealth, overspending or borrowing to
fund the lifestyle
they feel they should have. Others underestimate their finances, hoarding savings, but at a cost.
Being at either end of this spectrum can leave you short.
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If you can meet the
monthly loan repayment
on a loan for that new car, big holiday, or the bells-and-whistles wedding, why shouldn't you borrow?
If you're funding lifestyle expenses with money that isn't yours while neglecting basic savings or your pension, this can mask a less than glossy situation.
'There can be a disconnect between how people feel about their financial position versus the reality, and this is leading some people to over borrow and overspend,' says Nick Charalambous, managing director of Alpha Wealth.
Cars, kitchens and holidays, events – people in the Republic took out a record €2.5 billion in personal loans in 2024. This was a 20 per cent increase in value of borrowings on the year before, according to
Banking and Payments Federation Ireland
(BPFI) figures, and the highest it's been since 2020.
Nick Charalambous managing director of Alpha Wealth
Demand for personal loans is largely driven by how well the economy is doing, interest rates and consumer confidence, says the Central Bank. But just because you can borrow doesn't mean you should.
'This surge in borrowing could signal more than just consumer confidence – it may also be a red flag,' says Charalambous.
'This kind of upward trend often reflects deeper financial pressure, or a distorted perception of personal finances,' he says.
After the spike in living costs in recent years, some people are dealing with the new reality by increasing personal borrowing rather than cutting their cloth, says Cian Callaghan, private client manager at Metis Ireland.
The number of new car loans jumped by more than 29 per cent in the last three months of 2024 compared to the same period the year before.
Repaying loans and interest at the expense of building your emergency fund or pension first can stem from a risky presumption that you will always have income, it will always rise, and so the future will take care of itself.
If you take out a personal loan, your money is earning money for someone else ... Eschew the purchase and invest the amount instead
Not getting these basics right first is something you may pay for down the track.
'Maybe they feel their income will catch up, but if your mindset is: 'I'm going to enjoy the journey first with no clear plan for the future', you will end up just spending everything,' says Callaghan.
Not all borrowing is bad or a result of money dysmorphia though. Some loans, like a mortgage or education spending, can help us to progress in important ways.
There is an opportunity cost to spending and paying down debt on more discretionary items however – repayments and interest can represent lost growth.
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If you take out a personal loan, your money is earning money for someone else – namely, the bank, which is charging you interest. Eschew the purchase and invest the amount instead, and your money could be earning money for you.
'If you invest in the global stock market, you could be getting 7 to 10 per cent annualised return,' says Callaghan.
'Or if you put the money into your pension, you are getting tax relief on the way in,' he says.
'The gap between you paying that money out [in personal loan interest] and you investing it through a pension is kind of 15 per cent upwards,' says Callaghan.
'Compound that over the next few decades of your life and it makes a staggering difference.'
Borrowing so that you are always driving the 'right' car, for example, comes at a cost, says Charalambous.
'Some electric cars can cost €50,000 to €60,000. If you work out the overall cost of buying it with a car loan, it can be another 50 per cent on top,' says Charalambous.
'And these cars are depreciating, so they need to be updated every three to four years. That's a real expense on your financial budget.'
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Even if it's a small loan that you can service, it can come at the cost of using that money more productively towards your long-term financial health.
Taking time to zoom out and assess your overall financial position can help you get real, says Callaghan.
'I try to give those only living in the present a view of the next five to 10 years,' he says.
'If you have borrowed the last three times you have changed the car, your goal should be saving enough money so you don't have to borrow the next time,' says Callaghan.
'For people who are finding themselves in that debt trap, if you can afford the repayments on that car, you can afford to save the money in advance to buy it yourself and not have to pay interest on it.'
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This will take discipline over time.
'Be intentional about what you are going to save,' he says.
'Automate it, get it out of your bank account within 48 hours.
'That's how you start saving intentionally rather than: 'I have a bit of money left at the end of the month, I'll throw it in a savings account.''
Where there is money dysmorphia in a relationship – where one partner has a much more optimistic view of household finances than the other, speaking to a financial planner together can put you on the same page.
'There is no point in having money in the bank earning zero and then borrowing money at 8 or 9 per cent interest'
While for others, money dysmorphia can mean they underestimate their wealth.
Rather than spend their cash on needs, they take out a personal loan. They may neglect pension or other investment opportunities that would grow their wealth in favour of an oversized war chest.
Inflation in recent years, and now the threat of tariffs and redundancies in some sectors, are increasing for some the drive to batten down the hatches.
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This scarcity mindset can lead to hoarding cash and keeping it readily accessible. Cloth cut too tight can come at a cost too.
A preference among Irish households for 'shorter-term, more accessible deposit accounts' cost them almost €800 million in unearned interest during 2024, according to Central Bank of Ireland estimates.
'I have clients who have large amounts of cash on deposit. They have, almost, a fear of not having money available,' says Charalambous.
'It's typically at rates of less than one per cent, and yet they borrow money for things like personal contract plan car loans that are costing them seven plus per cent a year, or they have a big balance on a credit card.'
'There is no point in having money in the bank earning zero and then borrowing money at 8 or 9 per cent interest,' says Charalambous.
'That makes it very difficult to reach certain financial objectives like retiring early.'
Financial planning can help you figure out the right amount of money to keep in savings, and how much is too much.
Six months net expenses on deposit is enough for a rainy day fun, says Callaghan. This means having enough to cover your mortgage, direct debits and usual expenses.
'If your family is spending €5,000 a month, every month, you will need to have €30,000 of a rainy-day fund,' he says.
Having this war chest provides self-insurance in case of job loss or illness.
'Once you have an emergency fund and you are contributing to a pension, then I'd be more inclined to say, enjoy the journey along the way'
If there are known expenses coming up, you should start to put some money aside for these things too, he says.
'We usually look three years into the future, so if you have definite expenses on the horizon like changing the car or a big holiday that aren't covered by your cash flow, we'd be trying to get that on deposit as well,' he says.
'You want to get anything more than that invested, you want to get it working for you,' says Callaghan.
Keeping excess money on deposit can mean you have a more pessimistic view of your finances than is necessary.
Once savings are in place, the next best step is to max out pension. Contribute to the threshold for your age to maximise your income tax relief.
'Rather than you being the person paying the interest on a personal loan, you are the person receiving the return,' he says.
'Once you have an emergency fund and you are contributing to a pension, then I'd be more inclined to say, enjoy the journey along the way,' says Callaghan.
'But if your mindset is, I'm going to enjoy the journey first with no clear plan for the future, you will end up just spending everything and borrowing.'
If your financial plan is to get through life on a succession of high-cost personal loans, this can be its own kind of money dysmorphia.
'Borrowing can be part of a healthy financial strategy – but only if it's done with clarity and control,' says Charalambous.
'I understand that many people are borrowing to stay afloat or maintain a sense of normality during financially challenging times. But even small changes – like choosing the right repayment method or seeking advice – can make a big difference,' he says.
'Only borrow for needs, not wants. While weddings and holidays are meaningful, so is your long-term financial wellbeing.'
Understand interest rates and hidden charges too, particularly on personal contract plans and short-term loans. A 7 per cent loan can cost thousands more over time.
With outstanding consumer credit now exceeding €13 billion, people need to take a more informed, intentional approach to borrowing, he says.
'Borrowing needs to be a conscious, informed decision – not an emotional reaction to short-term pressures.'