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Irish Times
4 days ago
- Business
- Irish Times
Are you living beyond your means? You may have money dysmorphia
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. READ MORE 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. [ Summer holiday checklist - 25 ways to 'save not spend' in the days ahead Opens in new window ] 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.' [ Average pay has passed €1,000 a week. The figure offers some key messages about where the economy is and how households are doing Opens in new window ] 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.' Breaking free from debt: 'I used to see my credit card limit as a target' Listen | 25:54 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. [ Around 15% of consumers unable to cope with €1,000 financial emergency, survey finds Opens in new window ] 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.'
RTÉ News
25-05-2025
- Business
- RTÉ News
Money dysmorphia: When your mind tricks your wallet
You've got a steady income, a roof over your head, and maybe even some savings - but why does it never feel like enough? Welcome to the age of money dysmorphia - a mindset where your financial reality never quite matches how secure, or insecure you feel. Much like body dysmorphia distorts how people see their physical appearance, money dysmorphia warps an individual's perception of their financial health. Some might feel financially secure because they drive a new car, go on regular holidays, or host lavish events, but in reality, they may be carrying substantial debt, have little savings, and lack long-term financial planning. "At the heart of this is emotional pressure fuelled by social comparison," said Nick Charalambous, Managing Director of financial advisory firm Alpha Wealth. "Platforms like Instagram and TikTok often create unrealistic expectations, where people see polished lifestyles and feel the need to 'keep up' even if that means borrowing to fund it," he said. What problems can money dysmorphia cause? One of the most immediate and damaging consequences of money dysmorphia is its potential to fuel excessive borrowing. People with money dysmorphia may take on debt in an attempt to match the financial image they perceive others have. Here in Ireland, borrowing is on the rise. Figures published just last week show that €2.5 billion worth of personal loans were drawn down last year - a record high. Borrowing isn't inherently bad as it helps people get on the property ladder, invest in education or improve their homes. However, Mr Charalambous said it becomes a problem when it's being used to maintain lifestyles rather than build financial stability. "The issue arises when people borrow without a clear repayment plan or use credit to fund 'wants' instead of 'needs'," he said. "This creates long-term strain that can snowball out of control particularly with high-interest loans or credit card debt." In particular, he warned about the consequences of Personal Contract Purchase finance, known as PCP. "It offers low monthly payments that appear affordable, but often come with a large balloon payment at the end. "Many people roll into new deals without ever owning the asset, essentially renting a lifestyle they can't afford," he said. Is borrowing during global uncertainty wise? Borrowing during times of global uncertainty can be especially risky, as fluctuating interest rates and market volatility can quickly turn manageable debt into a financial burden. In uncertain economic climates - marked by inflation, geopolitical tensions, or recession fears - borrowers may find themselves facing rising repayment costs or reduced income, making it harder to stay afloat. "In uncertain times, caution is key," said Mr Charalambous of Alpha Wealth. "Ireland has low financial literacy levels compared to other European countries and many people are not maximising their savings or investing efficiently," he added. At Alpha Wealth, they see some clients with large sums sitting in low-interest deposit accounts while they take out expensive loans. "If people built better saving habits, they would need to borrow less," he said. Before taking on any new debt, Mr Charalambous encourages clients to ask - "is this a want or a need?" "Weddings, for example, are joyful occasions but spending tens of thousands on one day, while taking out loans to do so, may not be the smartest financial decision," he added. He said it's about making decisions that don't cause you to spend extravagantly beyond your means - which may affect you into the longer-term. How to avoid money dysmorphia? Simply put, don't let your finances be driven by emotion. Everyone has a certain amount of money to work with - Mr Charalambous said it's how you manage it that makes the difference. "Whether you're dealing with debt or unsure where to start, don't bury your head in the sand," he said. Money dysmorphia is a powerful reminder that financial perception does not always align with financial reality. Taking a proactive, informed approach to managing your finances can replace anxiety with confidence and help shift focus from comparison to progress. In uncertain times, the experts say clarity - not emotion - should guide your financial decisions.
Irish Times
22-04-2025
- Business
- Irish Times
Tariffs and your pension pot: Whatever you do, don't look now
The best – or at least the most sanity-saving – advice for anyone considering having a quick gander at how their pension pot is doing so right now might best be described as the anti-Nike. Just don't do it. We're not advocating long-term ignorance but, given the level of uncertainty and stock market volatility caused by Donald Trump's tariffs in recent weeks, there's probably little to be gained from a forensic assessment of where the finances of the 'future you' stand right now. Equity markets have been all over the shop, to put it mildly. They tanked when the world was told Trump was not for turning on tariffs and surged when he turned and fell when the scale of the economic conflict with China became clear and then bounced after another U-turn as key electronics and phones coming from the east were exempted from tariffs of almost 150 per cent. READ MORE As it stands, no one – including, we suspect, the White House – knows what the road ahead might look like or what impact the road's twists and turns might have on our pensions. But there is no need to panic. Yet. [ What Trump tariff turmoil means for your savings and pension Opens in new window ] Markets are cyclical, and while we can't say what crisis will cause the next upheaval, we know they come and go and come and go again. In recent decades we have seen the dotcom bubble bursting, 9/11, the banking collapse and the property crash, the chaotic years of Trump 1.0, Covid-19, war in Ukraine and the chaotic first weeks of Trump 2.0 all causing serious upheaval and giving pension fund managers and those on the cusp of retiring sleepless nights. [ More than one in five Irish adults do not have a pension Opens in new window ] Nick Charalambous, managing director of Alpha Wealth, has 'spent the best part of a week having conversations with my clients about the state of their pensions. The first thing I say is: it's best not to speculate. We can't predict what's going to happen even in a day never mind from week to week.' He's been hearing from two types of people of late. 'Those who think now is a great time to invest and those who say 'move into cash'. In my opinion, neither is correct.' His advice 'is to take the noise away. Anyone with a relatively well diversified fund over the last five years will have performed quite well. If they'd left the planet five years ago and arrived today not knowing what happened over the last two weeks, they'd feel fairly comfortable about their position.' But while many managed funds have performed well over the past five years – some are up by about 50 per cent – 2025 has been a different story, with some funds losing close to 10 per cent of their value so far. People who have years to go before they retire can probably ride out this storm, while people looking to retire sooner rather than later should be insulated to at least some degree with much of their pension pot now in the form of cash and fixed-income investments such as bonds, says Charalambous. He understands how people are spooked but says it is worth remembering that 'things like this have happened before. This is not the most extreme event that we've witnessed over the last century'. How much do I need? The basic rule of thumb is that 'adequate' gross retirement income is about 50 per cent of gross pre-retirement income. So if you were on €80,000 at retirement, you need a pension income of €40,000. How do you get there? The State pension is worth about €15,000 a year, which leaves a shortfall of €25,000. To get to that, a fairly sizeable fund is needed. Charalambous says 'somewhere between €400,000 and €600,000 is a suitable pension pot for most individuals'. The State pension aggregated over an expected lifetime is worth about €250,000 so if you want to bring it up to €600,000, you will need €350,000. To get to that point, someone who starts saving at 25 will need to put aside about €300 gross per month. With tax relief at the top rate, that actually costs you only €164. If they start at 35, they need to save about €500 a month before tax, while at 45 the monthly gross savings required come in at close to €1,000. 'There's no point in saying to somebody you should be paying more into your pension when they've got other financial obligations,' says Charalambous. 'It's all about trying to find the right balance.' Tax benefits Saving for a pension gives a triple bounce when it comes to tax. There is the tax break on contributions and on the investment growth, and a 25 per cent tax-free lump sum at retirement. On contributions, you can receive up to 40 per cent income tax relief (after USC and PRSI are paid) if you are a higher-rate taxpayer. Deposits in banks, credit unions and the rest charge Dirt at 33 per cent, while investment growth of the fund over 30-40 years or more is tax-free and compound interest also performs its magic. And, at retirement, members of a defined-contribution pension scheme are entitled to take 25 per cent of their fund tax-free. The returns depend on where you invest the money and when it is cashed in but, over the past 30 years, the average actively managed pension fund has returned about 8 per cent per year. Someone who saved €250 per month over three decades would have saved close to €100,000, and their total pot would be more than €500,000 after charges, or almost six times your money back. When should I start? Yesterday. Almost half of pension holders wish they had started their pension earlier, while a fifth wish they had paid more sooner, according to a survey published last week by insurance broker Gallagher. A fifth of Irish adults say they don't have a pension at all, with women more likely than men to be in this group. [ Women, take control to ensure you have enough income in retirement Opens in new window ] The survey also examined attitudes around the upcoming auto-enrolment (AE) mandatory workplace pension scheme. It found that 71 per cent of people believe the Government should offer workers financial advice in advance of the roll-out of the scheme so that people are aware of what's involved. Auto-enrolment will capture up to 800,000 workers between the ages of 23 and 60 who are earning more than €20,000 and are not yet part of a pension plan. [ Q&A: What is pension auto-enrolment and what does the latest delay mean? Opens in new window ] The research suggests that financial literacy is a problem, with three in 10 pension holders admitting they did not recognise the importance of early contributions, and many citing a lack of understanding of pensions as the reason for their delayed savings. Jonathan Roche-Kelly, of Gallagher, says the research 'shines a light on the fact that there is a critical gap in Ireland's retirement planning landscape, and many people lack awareness around the importance of pension contributions'. He says the 'fundamental issue at play here is that too many people fail to grasp the long-term impact of delaying pension savings until it's too late'. He believes 'starting a pension early is one of the shrewdest financial moves you'll ever make and could help ensure you are financially set for retirement'. He says the sooner people start saving into a pension, the more prepared they will be for retirement – and the more benefit they can gain from the available pension tax reliefs. 'You'll have a much better chance of achieving the pension you're hoping for in retirement – and in turn, the standard of living you want at that stage of your life – if you start a pension early. Even contributing small amounts into a pension in the early part of your career can help build a significant pot at retirement – particularly when the benefits of compound investment growth are taken into account.' No country for old people: Otto von Bismarck in 1871. Photograph: Hulton Archive/Getty And when will I retire? It might not be 65, the age settled on by Bismarck in the 1860s in an effort to ease social unrest by showing himself to be socially progressive. He didn't want to pay too much for pensions, however, and with the average German dying well before 65, he was pretty sure most people would never see the money. But life expectancy – at least in the wealthy West, has increased dramatically over the past 150 years and, today, Irish women can reasonably expect to live beyond 84 while – all things being equal – men will live until they hit 81. That is a lot of years of retirement income. Retiring before 65 is a pipe dream for most people. According to a recent survey by Royal London Ireland, 53 per cent expect retire at either 65 or 66, but one in five say it will be 70 before they can afford to retire. 'The concept of Fire (Financial Independence Retire Early) has gained momentum in recent years, with some people tempted by the notion of retiring early,' says Mark Reilly, of Royal London Ireland. But in truth very few people believe they'll be able to retire before the age of 55, and 'for most people, their present financial circumstances mean they would be unable to retire before the ages of 65 or 66. It is interesting that women are slightly more likely than men to see themselves retiring at 70' . That is because the gender pension gap , which sees woman's pensions amounting on average to 35 per cent less than a man's, putting them in a more financially perilous position, something the State would do well to address meaningfully sooner rather than later.
