Of course budgets can be very useful, it’s just that when created they usually require a great deal of self discipline. The simple fact that you need a budget to get out of financial trouble is exhibit number one that self-discipline was probably absent in the first place. Pinning your financial dreams on the assumption that you’re going to be “good” next month generally leads to devastatingly poor results. Your personal finances are too important to risk with little more than hope and optimism.
Just incase you think that the previously absent self discipline will save you from financial flagrancy tomorrow, take this brief exercise:
Question: How much self-discipline do you have today?
Answer: Exactly the same amount as you’ll have tomorrow.
In his book “How to live within your means and still finance your dreams”, Robert Ortalda suggests that to understand the discipline required to maintain a budget; “you have to think about garages”. He says, and I agree, there are generally two types of people when it comes to garages. There are those that have clean and tidy garages, and those that have messy ones.
The clean ones are maintained by an exclusive group of garage zealots. They have peg-boards on the walls with pictures of the tools and things that should be hanging there. You never get to see the picture of the thing because the thing that should be hanging there always is. Jam jars are screwed into lids that are nailed to shelves. These contain every sort of nut, screw, nail, grommet and widget any self-respecting handy-person could ever need. Everything has a place and everything is in its place. And may whatever god you believe in help you if you move anything or don’t put something back.
The other type of garage is always full of mess. Things go in there and then they don’t come out again. The car has trouble fitting in. It’s full of dust and empty paint tins. The people who have these kinds of garages have a mantra they keep chanting over and over again “One day I’m gunna clean out the garage”.
Finally that day eventually does arrive and after several mini-skips, the garage is beautifully clean. It’s so good its just missing the peg-board with the pictures. But after a while is gets messier and messier and finally it’s back to the way it was. Then the mantra begins again “one day I’m gunna clean the garage”
The people who own the first type of garage demonstrate a tremendous amount of self-discipline. They have to. It takes a lot of thought and a lot of work to keep a garage that clean. Daily maintenance – sweeping, tidying, putting things back on the pegboard after you finish with it – not leaving it where you were working.
For a budget to work, it’s got to be designed with the second type of person in mind. Those who sporadically like to clean out the mess.
If you think it’s easier to tweak the little expenses and do it week after week to save twenty or thirty dollars, then go ahead and knock yourself out. I reckon it’s a lot easier to just to do one or two biggies and enjoy the savings over and over without the effort. Why scrimp on essentials that call out to you every time you shop when you can just scrap the cable TV and save heaps. These are ‘structural’ changes to the way you previously spent your money. Doing things this way makes daily self-discipline significantly less important. Kind of like ripping off a band-aid – do it fast and do it once. Or if you’re into it, you can go the other way and slowly take it off over and over again, day after day of band-aid ripping.
Sure the once off clean-out can cause pain. I know you can’t watch re-runs of Seinfeld and keep up with the latest on Fashion TV when you dump cable but when you get your financial house in order you can always put it back on. When you do you might find that Jerry has come out of retirement and you can watch new episodes – oh but wait, you’ve already seen those on free to air!
Showing posts with label debt reduction. Show all posts
Showing posts with label debt reduction. Show all posts
Wednesday, October 14, 2009
Monday, August 10, 2009
Faux fixed rate: The fixed rate you're in when you're not in a fixed rate
The time to get a fixed rate was about eight months ago. Unfortunately, this was when there still seemed considerable pressure on the Reserve Bank to lower its cash rate. With people talking about cash and variable rates at 2 and 4 per cent respectively, there was naturally some reluctance to fix at say, 5 per cent.
Now however, if you could get a 3 year fixed rate at 5 per cent, chances are, you would jump at it. As we write this, rates are bouncing around a bit but an average 3 year rate is in the vicinity of 6.50 per cent. A five year rate is about one per cent dearer at seven and a half. With discount variable rates at an average of 5.10 it would be difficult to contemplate locking in for five years and to start paying 7.50 even if you were extremely pessimistic about interest rates. Locking into a 5 year rate at seven and a half on a mortgage of $300,000 would increase your principle and interest repayments by around $468.00 per month. You then have to wait until the reserve bank increases rates by over 2 per cent before variable rate customers are paying the same rate as you. However, while those in variable loans have been enjoying lower rates, you need to wait until rates increase a further 2 per cent before you might consider you have broken even on the deal.
All this is a matter of timing of course and it may not pan out exactly this way but its representative of the dilemma customers are now facing when it comes to finding a fixed rate that offers some certainty.
However, if paying your mortgage now at a much higher fixed rate is something you are considering, why not do it within the terms of your current variable rate?
What this requires is for you to start paying your mortgage as if you were being charged 7.50 per cent (Remember, you would be doing this any way if you took out a fixed rate loan). The big difference is that under the terms of your current variable mortgage, your loan is only being charged at around 5.10 to 5.50 per cent. (If you are paying more than this you should talk to us right away). This way you can pocket the savings yourself, instead of giving it to the bank, and get ahead on your mortgage. This way when rates start to go back up your loan principle will have been reduced and the amount of interest charged will be lower.
The beauty of a fixed rate loan is its ‘set and forget’ so you will require a certain discipline to operate your loan in suggested way. However, It will offer the flexibility to leave when you want to refinance or sell with out paying the enormous exit fees involved with most fixed rates.
This isn’t a dead set certain interest rate solution because it is possible rates may go up a lot more than we currently expect, but it is an alternative to locking into a fixed rate. If you’re interested, talk to us about the method that will best suit you and your faux fixed rate loan.
Now however, if you could get a 3 year fixed rate at 5 per cent, chances are, you would jump at it. As we write this, rates are bouncing around a bit but an average 3 year rate is in the vicinity of 6.50 per cent. A five year rate is about one per cent dearer at seven and a half. With discount variable rates at an average of 5.10 it would be difficult to contemplate locking in for five years and to start paying 7.50 even if you were extremely pessimistic about interest rates. Locking into a 5 year rate at seven and a half on a mortgage of $300,000 would increase your principle and interest repayments by around $468.00 per month. You then have to wait until the reserve bank increases rates by over 2 per cent before variable rate customers are paying the same rate as you. However, while those in variable loans have been enjoying lower rates, you need to wait until rates increase a further 2 per cent before you might consider you have broken even on the deal.
All this is a matter of timing of course and it may not pan out exactly this way but its representative of the dilemma customers are now facing when it comes to finding a fixed rate that offers some certainty.
However, if paying your mortgage now at a much higher fixed rate is something you are considering, why not do it within the terms of your current variable rate?
What this requires is for you to start paying your mortgage as if you were being charged 7.50 per cent (Remember, you would be doing this any way if you took out a fixed rate loan). The big difference is that under the terms of your current variable mortgage, your loan is only being charged at around 5.10 to 5.50 per cent. (If you are paying more than this you should talk to us right away). This way you can pocket the savings yourself, instead of giving it to the bank, and get ahead on your mortgage. This way when rates start to go back up your loan principle will have been reduced and the amount of interest charged will be lower.
The beauty of a fixed rate loan is its ‘set and forget’ so you will require a certain discipline to operate your loan in suggested way. However, It will offer the flexibility to leave when you want to refinance or sell with out paying the enormous exit fees involved with most fixed rates.
This isn’t a dead set certain interest rate solution because it is possible rates may go up a lot more than we currently expect, but it is an alternative to locking into a fixed rate. If you’re interested, talk to us about the method that will best suit you and your faux fixed rate loan.
Friday, December 5, 2008
Rates on credit cards not coming down
Rates on most Australian credit cards have not budged despite the Reserve Bank (RBA) slashing cash rates by 3 per cent since September.
Consumer advocate, Infochoice traced 140 credit cards issued by banks, credit unions and building societies and found rates had fallen just 0.28 per cent on average since September less than a 10th the Reserve's cuts. In fact, rates on some products have risen.
According to Infochoice, Wizard's Clear Advantage card rate has risen 2.75 per cent and GE Money's low-rate MasterCard is up 2 per cent since the RBA started cutting rates in a bid to boost the economy. Suncorp, Encompass Credit Union and Bank of Queensland have also lifted rates on some cards by up to 0.84 per cent. Card providers have denied rip-off claims, insisting credit card interest rates are linked to risk, defaults and the cost of obtaining funds in a volatile market.
ANZ Bank has bucked this trend by passing on the RBA's latest 1 per cent cut in full to key credit cards, just a day after it was condemned for refusing to pass the full reduction onto home loan customers. ANZ's Rewards Visa and Frequent Flyer Visa rate will drop to 18.99 per cent from next Friday. First and Gold cards will fall to 18.24 per cent. The Commonwealth Bank will cut rates on all cards by 0.4 per cent from December 19. A spokesman for the bank said less than half the bank's credit card customers paid interest, instead paying out their cards in full by the due date.
Australians owe almost $45 billion on credit cards with some incurring interest charges of up to 20 per cent, nearly five times the official cash rate.
Consumer advocate, Infochoice traced 140 credit cards issued by banks, credit unions and building societies and found rates had fallen just 0.28 per cent on average since September less than a 10th the Reserve's cuts. In fact, rates on some products have risen.
According to Infochoice, Wizard's Clear Advantage card rate has risen 2.75 per cent and GE Money's low-rate MasterCard is up 2 per cent since the RBA started cutting rates in a bid to boost the economy. Suncorp, Encompass Credit Union and Bank of Queensland have also lifted rates on some cards by up to 0.84 per cent. Card providers have denied rip-off claims, insisting credit card interest rates are linked to risk, defaults and the cost of obtaining funds in a volatile market.
Australians owe almost $45 billion on credit cards with some incurring interest charges of up to 20 per cent, nearly five times the official cash rate.
ANZ Bank has bucked this trend by passing on the RBA's latest 1 per cent cut in full to key credit cards, just a day after it was condemned for refusing to pass the full reduction onto home loan customers. ANZ's Rewards Visa and Frequent Flyer Visa rate will drop to 18.99 per cent from next Friday. First and Gold cards will fall to 18.24 per cent. The Commonwealth Bank will cut rates on all cards by 0.4 per cent from December 19. A spokesman for the bank said less than half the bank's credit card customers paid interest, instead paying out their cards in full by the due date.
Australians owe almost $45 billion on credit cards with some incurring interest charges of up to 20 per cent, nearly five times the official cash rate.
Wednesday, August 20, 2008
Make low-interest-rate cards work for you
You can look at credit cards in all sorts of ways but typically they all fall into two major categories;
- Interest free period and high interest charge cards
- No interest free period and lower interest charge cards
If your current finacial situation doesn’t allow you to pay off your credit card in full each month, and you’re using the first type of card, then you need to look closely at swtiching. This is particularly important if you think your current financial downturn might be protracted. Why pay a higher interest rate on credit that is revolving each month when you could be paying a much lower rate?
There are a number of low-rate cards are on the market which have interest rates up to 9 per cent lower than the higher rate cards currently charging 18 to 20 per cent.
Balance transfers
A number of providers also offer even lower rates for the first six months or so on balances you transfer from another card. Like credit cards, balance transfers can also be placed into 2 important categories.
- Reduced “introductory rates” for a set period (say 6 months) then interest charges revert to the standard credit charge that appies to that particular card
- Reduced rates for the life of the balance transfer.
If you do decide to take advantage of the second type of card, offering a reduced rate for life of balance of transfer, you should consider not using this type of card for additional purchases until the debt you transferred is fully paid out. The cards offering this type of payment arrangement usually don’t have lower rates. Typically you will find that while the interest you pay on the balance transfer will be around 7 per cent (currently), the charge for additional purchases is likely to be around 20 per cent. But here’s the catch, the payments you make go to reduce your original balance transfer amount. New purchases and interest accrue and attract further interest at the higher amount.
In general, if you’re not able to pay your credit card each month switch to a lower rate card. If you think you’re still going to need to use your card for purchases now and then, go for the introductory low rate. If you can avoid using your card while paying off the balance transfer from your old card – consider the low rate for life of balance transfer type but don't ever use it for new purchases.
Wednesday, July 23, 2008
Cut your repayments
ABS statistics show that Australian household debt is at record levels with many people paying high rates of interest, particularly on credit cards.
If you have debts, especially those with very high interest, you might be considering debt consolidation as a way to provide some relief. This strategy can have the benefit of saving you money and making it easier to track and control how much you owe but only if you approach it with the right frame of mind and the correct loan structure.
When it comes to consolidating your debts there are a range of options available. Which one is the most appropriate for you depends on your individual circumstances and factors such as whether you own a home, the nature and number of your debts and your overall financial situation. Working through all your options and taking everything into account can be complex, but very rewarding.
One of the most cost effective ways of consolidating debt is to use the available equity in your home – Rolling your entire consumer debt into a single loan repayment. This can reduce both the repayment amount and the overall interest rate charge. However, in doing this you must be aware that you are probably extending the repayment terms of what was otherwise short-term debt. Any personal loans you had, difficult though they may be to pay now, would have been taken over terms like 3, 5 or 7 years. By putting this debt into a mortgage you will now pay off these amounts over 25 or 30 years. This means that you while you will be paying a lower interest rate, you will pay a lot more interest on the original debt over the term of the loan.
A potential way to avoid this is to structure the loan so that your original property mortgage and the new, consolidated debts are separated through a split loan account. Many banks can offer this facility in one way or another without any increased costs. This will allow you to continue to pay your mortgage at the original amount so it will clear in the least time possible (at least within the original loan term). You can also pay your consolidated debts at the lower mortgage interest rate but with a repayment amount that will allow you to clear this debt at somewhere near an acceptable 5, 6 or 7 year term.
And really, if you are prepared to commit to paying something like the amount you were obligated to before you consolidated the debt, you will pay this new loan off in 1,2 or 3 years.
If you have debts, especially those with very high interest, you might be considering debt consolidation as a way to provide some relief. This strategy can have the benefit of saving you money and making it easier to track and control how much you owe but only if you approach it with the right frame of mind and the correct loan structure.
When it comes to consolidating your debts there are a range of options available. Which one is the most appropriate for you depends on your individual circumstances and factors such as whether you own a home, the nature and number of your debts and your overall financial situation. Working through all your options and taking everything into account can be complex, but very rewarding.
One of the most cost effective ways of consolidating debt is to use the available equity in your home – Rolling your entire consumer debt into a single loan repayment. This can reduce both the repayment amount and the overall interest rate charge. However, in doing this you must be aware that you are probably extending the repayment terms of what was otherwise short-term debt. Any personal loans you had, difficult though they may be to pay now, would have been taken over terms like 3, 5 or 7 years. By putting this debt into a mortgage you will now pay off these amounts over 25 or 30 years. This means that you while you will be paying a lower interest rate, you will pay a lot more interest on the original debt over the term of the loan.
A potential way to avoid this is to structure the loan so that your original property mortgage and the new, consolidated debts are separated through a split loan account. Many banks can offer this facility in one way or another without any increased costs. This will allow you to continue to pay your mortgage at the original amount so it will clear in the least time possible (at least within the original loan term). You can also pay your consolidated debts at the lower mortgage interest rate but with a repayment amount that will allow you to clear this debt at somewhere near an acceptable 5, 6 or 7 year term.
And really, if you are prepared to commit to paying something like the amount you were obligated to before you consolidated the debt, you will pay this new loan off in 1,2 or 3 years.
Tuesday, July 15, 2008
Get thrifty - save some money
Here are some tips that we've used ourselves or that people have told us about that can help you save some money.
- Have a look at your mobile phone bill. Can you cut a better deal. Look at other providers and see what's available. We just moved providers and our mobile bill has come down from $300 per month to $90 pm. Try to text rather than calling mobile phones when its appropriate.
- How high is your electricity bill? With privatisation we're not tied to one provider. Call another and see if they can service you. We just moved to Integral Energy and they guaranteed to take 8% off our bill. That represents a saving of about $60 a quarter. Use your clothes dryer only when you desperatley have to. Turn off lights when not in use and turn off appliances at the power point.
- What about your insurance? Consider consolidating them with a single insurer for extra savings on premiums.
- Do you outsource? If you have a cleaner or gardner come in once a week, consider having them come in once a fortnight. Even better, look at the jobs you can do yourself.
- Consider selling unused items around the house. A client had her kids collect all the Playstation games they have in the room that they don't use any more. They traded them in and received $200. Is there money sitting around your home?
- Cut down on tuckshop for kids and keep bought lunches for yourself to a minimum. Make it yourself, you will save a fortune. Baking cakes from packet mix is fine for their morning tea and let the kids help with the cooking. I do and my little ones think its great.
- Stop the take away! Sure its (somestimes) quick and easy but it really is very expensive for what you get. Haven't you wondered how they can afford all those commercials? Have a no take away rule in your home.
- Cut down on your coffee. At $4 a cup just 2 a day adds up to $40 in a week! And I know people who are drinking more than that a day.
- If its convenient shop 1 hour before the supermarket closes, they mark down a lot of fresh produce - especially meat, just before they close.
- Email, to keep in touch rather than using your mobile phone.
- Cut down on your Austar or Foxtel subscription. Hiring the video is cheaper!
- Do you have consumer debt? Credit cards, personal loans etc. Consolidate them and pay the one loan at a lower interest rate.
- Don't buy bottled water. Get a water bottle and take your own water. Australian tapwater is of the highest quality and you will be helping the evironment by not purchasing more plastic bottles and saving money!
- If you really want to save money, take the savings you have made by using these tips and put it on your mortgage. Over time you will save thousands of dollars.
If you can think of other savings tips, or if there is something you have done that was particularly successful, please let us know.
Monday, June 16, 2008
Relationship breakdown and debt
If money wasn't the cause originally, problems with debt can occur when a relationship comes to an end. To reduce the financial impact of relationship breakdown, ensure that your ex-partner does not take savings and use available credit from any joint bank accounts, home loan redraw facilities and credit card accounts.
Five things you should do in the event a relationship turns sour.
- Establish a new transaction account in your name only and ensure that your salary and other payments are diverted to the new account immediately.
- Close joint accounts unless these are being used to pay joint debts of the relationship, childrens expenses etc.
- Tell your bank or lender about the relationship breakdown and demand, in writing, that it stop any further use of the any loan redraw facility. This will be critical if the redraw facility allows either party to access the available credit without the other borrower's authorisation.
- Cancel any right your ex-partner may have to access your credit card account as a secondary card-holder.
- Arrange for copies of all joint account statements to be sent to you in the event you change address.
If the breakdown is permanent, you will generally need advice from a family law lawyer about dividing the property of your marriage or de facto relationship.
Sunday, June 1, 2008
Tame your mortgage monster
by Jaeneen Cunningham
Getting debt under control is not as difficult or as daunting as it seems. Coming up with strategies to tame your mortgage monster is easy - it is implementing them and sticking to them that requires will power.
Home loan customers have probably known for some time that the best way to save money on a mortgage is to pay it off as fast as you can. The longer you take paying back the principal loan amount the more interest you pay along the way, the higher the overall cost of the loan. You can do this in a number of ways: you can pay slightly higher repayments on a regular basis. You can make your payments more regularly than required – say weekly instead of monthly. This means two things: there will be a slightly lower interest charge as your loan balance reduces each week, and more significantly, you will be making one full extra repayment each year.
You can get even more savings if you 'park' your spare cash in your mortgage. A popular product to help achieve this has been the Line of Credit. A loan like this lets you put all you money directly into the loan account and then lets you access your money as you need it through a debit or credit card. In theory the result is a lower regular loan balance and therefore less interest charges. No set repayment amount is required as long as you pay the interest each month. On some loans the interest can even be 'capitalised' up the limit of the original loan that was first approved.
However, we have found many customers using a line of credit have tended to pay the interest charges only. It has only been with the passage of time that they have come to realise that the loan isn't coming down the way they planned. The idea that you would pay more into the loan than you were taking out seemed like a good idea at the inception of the loan. However, as time passes so do priorities and maybe those goals that were set three or four years ago have had to make way for other important life changes like career moves or family.
In general there are really only two simple ways to clear debt quickly and save money: use a product with the lowest possible interest rate that fits with your current circumstances, and pay the bank more than you are required to under the terms of your loan. With the booming property market many customers have not been concerned about the persistent level of their line of credit debt and if it suits your lifestyle, why not spend a little of the capital gain that you are making now rather than later when you sell the property. On the other hand, If you have found yourself struggling with a line of credit limit that just wont come down and you are concerned, then maybe its time to restructure your debt into a loan that is a bit more restrictive on your spending habits.
Home loan customers have probably known for some time that the best way to save money on a mortgage is to pay it off as fast as you can. The longer you take paying back the principal loan amount the more interest you pay along the way, the higher the overall cost of the loan. You can do this in a number of ways: you can pay slightly higher repayments on a regular basis. You can make your payments more regularly than required – say weekly instead of monthly. This means two things: there will be a slightly lower interest charge as your loan balance reduces each week, and more significantly, you will be making one full extra repayment each year.
You can get even more savings if you 'park' your spare cash in your mortgage. A popular product to help achieve this has been the Line of Credit. A loan like this lets you put all you money directly into the loan account and then lets you access your money as you need it through a debit or credit card. In theory the result is a lower regular loan balance and therefore less interest charges. No set repayment amount is required as long as you pay the interest each month. On some loans the interest can even be 'capitalised' up the limit of the original loan that was first approved.
However, we have found many customers using a line of credit have tended to pay the interest charges only. It has only been with the passage of time that they have come to realise that the loan isn't coming down the way they planned. The idea that you would pay more into the loan than you were taking out seemed like a good idea at the inception of the loan. However, as time passes so do priorities and maybe those goals that were set three or four years ago have had to make way for other important life changes like career moves or family.
In general there are really only two simple ways to clear debt quickly and save money: use a product with the lowest possible interest rate that fits with your current circumstances, and pay the bank more than you are required to under the terms of your loan. With the booming property market many customers have not been concerned about the persistent level of their line of credit debt and if it suits your lifestyle, why not spend a little of the capital gain that you are making now rather than later when you sell the property. On the other hand, If you have found yourself struggling with a line of credit limit that just wont come down and you are concerned, then maybe its time to restructure your debt into a loan that is a bit more restrictive on your spending habits.
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