Are you a Shopaholic?
Severe overspending is a problem for around 10% of the population. Like any other addiction, it is usually triggered by an emotional or behavioural issue and followed by feelings of remorse and guilt. The overspender may then make promises and attempts to change but after that the cycle starts all over again. Often the biggest hurdle to changing this behaviour is for the overspender to acknowledge they have a problem. Denial is an easy way to avoid having to confront the issue. The signs of chronic overspending are:
- Spending over your budget even when you are already in debt or unable to pay your bills
- Overspending on a regular basis (every week, not just a couple of times a year)
- Compulsive spending; that is, buying things you don’t really need
- Spending to make yourself feel better when you are under stress or feeling low
- Hiding purchases out of shame or to avoid an argument with a family member
- Physical or emotional reactions to spending such as an increased heart rate, sweating and headaches from anxiety; emotional effects such as elation, followed by guilt or depression
- Frequent arguments with family members and friends about your spending
Dealing with an overspender by arguing, criticizing, shaming or blaming will usually just make these people feel worse and spend more. The remedy starts with the overspender acknowledging the problem they have and being willing to change. Usually some form of counselling is needed to deal with the underlying causes of the overspending. Lack of self esteem, depression, stress and jealousy of the life styles of others are often root causes. Chronic overspending can affect men as well as women and affects people at all levels of income. Rather than criticism, overspenders need ongoing support and encouragement to change.
To Live Over Again…
There’s a well-known piece of writing by Nadine Stair, an 85 year old from Kentucky, USA, called ‘If I had my Life to Live Over Again’. It talks about how, with the benefit of hindsight, she would have taken more risks, dared to make more mistakes, and taken on more challenges. It is rather tragic that we don’t acquire the knowledge we need to live our life in the best way until it is too late. Here are the key pieces of financial advice I would give young people to enable them to enjoy life more.
- Get into the habit, right from your very first pay, of not spending everything you earn. Saving is not the only way to build wealth, but spending more than you earn is a fast way to lose what you have.
- Have clear goals for how you want to use your money and manage it proactively. You can choose how and when you want to spend your money, so do it in a way that will achieve your goals.
- Take your time to enjoy life and build wealth. Those who acquire wealth slowly and spend it slowly do better in the long run.
- Wait as long as possible until buying your first car. Taking on debt to buy a car that needs a high level of maintenance means high outgoings and less ability to create wealth.
- Take out life and health insurance while you are still healthy. That way, you will avoid exclusions or premium loadings later in life.
- Buy your first property as soon you are able to, even if you rent it to someone else. Property grows in value over the long term and you can use other people’s money (from the bank) to invest in it.
Risks for Retired Investors
Retired investors typically look for security in their investments ahead of return. Superannuation payments barely cover the cost of living from day to day and saving in retirement is not possible without a frugal lifestyle. This means that any loss of capital from failed investments cannot be recouped from income.
Some retired investors fail to realise however, that loss of capital doesn’t only arise from failed investments. An investor with $100,000 in bank deposits, who uses the interest to supplement income, stands to lose over 20% of his or her capital over the next ten years just by leaving it in the bank. Let me explain why.
A ‘basket of goods’ that cost $100 in December, 2000 would today cost around $131. If we project that same average rate of inflation forward, $100,000 in the bank today will only buy the equivalent of around $77,000 worth of goods in ten years time. That is a loss of around $23,000 over the ten years. Not only that, the income from the investment will fall in value. If, for example, interest rates are 6% on average over the next ten years, the income from $100,000 would be $5,370 per annum after tax at a10.5% rate. In ten years time, however, that income will only buy around $4,130 worth of goods in today’s terms. A retired investor who invests for income and uses all that income every year will therefore suffer a significant loss of both capital and income over the long term. Given that many people spend twenty or even thirty years in retirement, the potential loss of capital and income is huge.
How can this be avoided? Investing a small part of your retirement nest egg in a diversified portfolio of growth assets will help prevent losses from inflation and tax.
Student Survival Tips
Managing money when you are studying is not easy. Student allowances and loans fall far short of covering student expenses and the short fall can be typically around $5-10,000 per year. The gap can be closed by taking a part time job, getting help from family, a bank overdraft, a low interest credit card and, in some cases, extra support from Studylink.
Careful money management is very important. Any income should first be allocated to financial commitments such as rent and shared flat expenses for food, power and phone. Next, set aside some income into a savings account to cover trips home, doctor and dentist bills, course costs and special occasions. Allow yourself a small amount each week for having fun and take this amount out in cash so you know exactly how much you have spent. The remaining amount of income can be used to pay for travel costs, clothing and extra food.
Here are some survival tips to help get you through the year:
- Check your bank account regularly to avoid charges for insufficient funds.
- Pay all your bills on time because if you fall behind, it will be hard to catch up.
- Don’t borrow money for non-essentials; use savings instead
- Have a flat account for rent and other shared expenses and appoint one person to make sure everyone’s payment goes in each week and to keep an eye on the balance
- Cut costs by using public transport and cooking your own meals
- Take out insurance for your personal possessions such as your computer and to protect you in the event that you accidentally cause damage to your flat
- Use the help and support that is available. Most banks have free online budgeting software and universities offer free financial advice.
