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Get on Track for 2015

Train TracksGet on Track for 2015

A new year, a new start and new goals to achieve. How nice it would be if we could start the year with a clean slate; no debts and a few dollars in the bank. If your finances have got out of hand with all the craziness of the holiday period, here is what you need to do to get back on track.

Start by taking stock of your financial situation. It’s time to face the music and work out what is left of your savings and how much debt you have accumulated on credit cards and store cards. Make a list of all your short term debts and add them up.

Your two priorities in the short term should be to pay off short term debt and build up a savings fund to cover unexpected expenses. Stop adding to your debts and split any spare cash between paying off debt and adding to your savings. Having a savings fund will help keep you out of debt.

There are three different approaches for paying off debt. The first is to list your debts according to the rate of interest that applies to the debt, starting with the highest. By paying off the costliest debt first you will pay less interest. The second method is to list your debts by size, starting with the smallest. The theory behind this method is that paying off some of your debts quickly gives a sense of achievement that encourages you to keep reducing your debts. The third method is to consolidate your debts into a single loan spread over a time frame that makes the repayments more affordable.

Set targets for paying off debts and building up a savings fund that will allow you to enjoy the next holiday period without going into debt.

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De-stress your Finances

kooshDe-stress your Finances

Worries about money can cause significant levels of stress that affect your quality of life, your relationships, your health, your ability to study and your career. American research shows that money is the prime cause of arguments between couples, with over 30% of arguments being about money. Couples who argue about money are 30% more likely to divorce than those who don’t. For some people, spending money creates a relief from stress and anxiety. The act of spending creates a temporary feeling of elation and hence we talk about ‘retail therapy’. In this way, worries about money can become a vicious circle – increased stress and anxiety leads to higher levels of spending which leads to more financial pressure and in turn higher levels of stress.

Aside from arguments and overspending, other signs of financial stress include feeling as though money issues are out of control, not being able to pay debts on time, making minimum credit card payments, and paying off existing debts by taking on new debts.

If you are under financial stress, the important thing to realise is that your situation is not hopeless. The sooner you acknowledge your financial stress and take action, the easier it will be to rectify.

Reduce financial stress by taking these steps:

  • Find out where your money is going by tracking back through your bank and credit card statements to identify areas of overspending
  • Set priorities and eliminate spending on non-essential items
  • Add up your debts, look at ways to consolidate them into low interest loans, and don’t take on more debt
  • Set up an emergency fund with an automatic transfer into a savings account each payday
  • Get professional help from budget advisers who can help you with options for managing your debts and setting up a budget.
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Get Rid of your Money Hangover

Sick personGet Rid of your Money Hangover

The party is over and it is time to take stock of the financial damage done by holiday excesses. If you are feeling as though you have a money hangover, here is what to do so you can get back in control of your finances.

  1. Face the reality of your position. Make a list of all your assets (house, car, KiwiSaver and other investments) and your debts. The difference between your total assets and your total debts is your net worth. If you are managing your money well this figure should be higher than it is was at this time last year.
  2. Find out where your money goes. Go through the last three months of bank and credit card statements. Put the transactions into three categories: financial commitments (such as rent, mortgage, insurance), discretionary spending (eating out, entertainment, gifts and other non-essential items) and essential spending (food, transport etc). Look in particular at how much you are spending on non-essential items.
  3. Start saving. Decide how much you want to save each payday and set up an automatic transfer into a savings account for this amount on your pay day. Allocate your remaining income into each of the three categories above and set up a bank account for each one.
  4. Make good choices with your savings. Use your savings to progressively do the following:
  • pay off high interest short term debt
  • set up an emergency fund
  • save for short term goals such as holidays and home renovations.

 

Feeling a bit overwhelmed by what needs to be done? If nothing else, set up an automatic transfer to save a small amount each payday, even if it is only $10. Gradually increase the amount throughout the year and you will be surprised how it mounts up.

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Christmas Leftovers

Christmas Leftovers

Christmas is the time of good cheer but when the guests have all gone and the wrapping paper and dishes have been cleared away, there are the leftovers to contend with. Unfortunately, for many families, the most problematic leftovers are debts. Just like turkey and trifle, left over debt needs to be packaged up, cooled off and dealt with as soon as possible. Start with a quick assessment of your financial situation; how much cash you have on hand, and how much you owe. List your debts in order, ranked according to the interest rate you are paying and noting the amount owed and the minimum monthly payment. Now look at whether you can refinance any of your debts at a lower interest rate. There are many different rates available from banks and other lending institutions. Here are some options:

  • You may be able to increase your mortgage to repay credit card or hire purchase debt
  • Assets other than your house such as a car or an insurance policy can be used as security for a loan, so you can borrow at a lower interest rate.
  • Shop around for a low interest credit card
  • Contact a finance company that offers debt consolidation to see if you can reduce your interest cost

With all of these options you will need to be aware of any penalties, additional administration or insurance costs that may be incurred. Once you have shopped around for the best interest rate, plough all your spare cash into reducing the debt at the top of your list by increasing your regular payments, making lump sum payments, or both. Your goal should be to have no debt other than a mortgage and to then repay your mortgage as quickly as possible while still enjoying life.

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Three Reasons Not to Pay Your Mortgage Off Quicker

Three Reasons Not to Pay Your Mortgage Off Quicker

Reaching retirement age with a debt free home and a pile of money invested is the aim of most people who plan to enjoy a comfortable retirement. Each of these goals requires a significant amount of saving. The big question is: which should take priority? Having a long investment time frame can be advantageous when investing in volatile growth assets such as shares and property. Saving for your retirement from a young age is therefore a good idea. However, if you have a mortgage, your investment portfolio would need to produce a tax paid return higher than the rate of interest on your mortgage to make investing a better deal than debt reduction. From a strictly financial point of view then, it can make sense to pay off your mortgage as quickly as possible and then save for retirement. There are there are three main exceptions to this.

  1. Joining KiwiSaver is likely to give you a better financial return than paying off your mortgage quicker. That’s because once you are a member you may be eligible for employer contributions and/or tax credits as well as receiving investment returns.
  2. You may be one of those people who prefer to spend rather than save, so putting a little aside each payday into an investment portfolio will help you develop a savings habit and feel as though you are getting ahead.
  3. The interest on your mortgage may be tax deductible if the borrowing was done for investment purposes (e.g. property investment or business). In that case, the expected tax paid returns from investments may be higher than the net interest cost after tax.

Ultimately, getting rid of all debt is good, even if the interest is tax deductible, and the sooner the better. It is just a question of priority.

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Get Rid of Debt

Shrink Your Dumb Debt

One of the biggest barriers to creating wealth is dumb debt; that is, high interest, short term, avoidable debt. Last week, the Commission for Financial Literacy and Retirement Income launched a campaign to educate New Zealanders on the implications of dumb debt and how to get rid of it. Research by Colmar Brunton shows that 42% of New Zealanders with credit cards do not pay them off in full each month. Reserve Bank figures show that interest-bearing debt on credit cards in April this year equalled $3.6 billion. That’s a lot of debt for around 4 million people.

Having dumb debt means you are paying interest to your lender that could otherwise be available to cover your living expenses or to save for such things as holidays and retirement. While seasonal sales are a great time to shop and save money, making your purchases on a credit card can lead to you paying more than full price. For example, if you buy a pair of shoes for $280 using your credit card and only ever make the minimum monthly repayments, the Commission has estimated it will take you over three years to pay them off and the final cost, including interest at current average rates, will be around $351.

Getting rid of dumb debt involves three steps:

  • Avoid taking on more dumb debt. Don’t use debt to buy non-essential items and if you have to borrow, find the lowest cost option
  • Make a repayment plan. Rank all your debts in order of their interest rate and plan to pay off the debt with the highest interest rate first.
  • Manage your mortgage. Only borrow what you need and pay it off as fast as you can

For tools and resources to help with these steps, click here.

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How to Pay Off Your Mortgage Faster

Pay Off  Your Mortgage Faster

One of the best ways to get ahead financially is to pay off your mortgage as soon as possible. The first step towards doing this is to create more surplus income; that is, the difference between what you spend and what you earn. This means either cutting back on your expenses or finding ways to increase your income.

Next, look at how your mortgage is structured. There are a number of factors to consider, including the term of the mortgage, the frequency of repayments, whether the interest rate is fixed or floating, and the type of mortgage you have. The most common types of mortgage are table mortgages where you pay back both principal and interest, lines of credit (or revolving credit) and interest-only mortgages.

There are two ways to use your surplus income to pay off your mortgage quicker. The first, and easiest way, is to increase both the frequency and the amount of your repayments. If your interest rate is fixed, check with your bank as to how to avoid paying penalties for earlier repayment. The second way is to use a combination of a small line of credit and table mortgages which have either a fixed or floating rate. Save as much as you can into your line of credit in the knowledge you can draw down the funds again if necessary. Once the balance in your line of credit is zero, draw all or most of the funds down and pay off a chunk of your table mortgage. If your table mortgage has a fixed interest rate, the repayment should be done when the fixed rate period ends. This process can be repeated until your mortgage is gone.

The keys to success are good saving, structuring your mortgages correctly and staying focused on achieving your goal.

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Be Credit Card Smart

Be Credit Card Smart

Credit cards are both a convenient way to pay for purchases and a trap for those who are easily tempted by access to credit. Being smart with your use of credit cards can help you manage your money better and avoid getting into too much debt. These simple tips are all you need to be credit card smart:

  • Set your credit limit at a level you can afford to repay within the interest free period.
  • Know the due date of your payment and pay on time.
  • Always pay more than the minimum due on your credit card to help reduce your balance and your interest charges.
  • Avoid interest charges altogether by paying your credit card balance in full each month, preferably by direct debit from your bank account.
  • Use online services to keep track of your card spending so you can keep within your limit.
  • Avoid taking cash advances or paying utility bills with your card as they usually incur additional fees.
  • Regularly review your monthly statements to ensure that there are no errors or unauthorised charges on your account.
  • Use your card only for essential purchases and not for luxuries.

Consider having two cards – one with a low limit for everyday purchases which you pay off in full each month and another for emergency or large purchases. It pays to shop around for the right type of card for you with a fee structure that suits your needs. For example, some low interest rate cards have higher monthly fees and are more suitable for those with high credit balances. If you need a card only to make online or telephone purchases, consider using a debit card. Your bank account will be debited straight away and you will therefore pay no interest.

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What to do with your Tax Cut

Tax Cut Priorities

There is a great opportunity right now for everybody in the work force to improve their financial situation. Unfortunately, the majority of people will miss out on this opportunity through not taking the right action.

From 1 October, income tax rates will be cut and Government benefits will be increased. While GST will also be increased, most people in the work force will be better off. For example, someone on a gross income of $50,000 will have around $20 a week extra as a net result of the changes.  There is a useful calculator here which gives you an estimate of the net benefit based on your income.

Most people will allow the extra dollars each week to slip away on extra spending. It only takes a coffee a day to see it all disappear. Working on the old theory that you don’t miss what you have never had, the best financial decision you can make right now is to estimate your net benefit from the changes and make a proactive choice about what to do with it.

There’s an order of priority with the choices you have. If you haven’t yet joined KiwiSaver, make that your first priority as this will give you the highest return on your money. Next on the list is paying off your credit card or hire purchase, so set up an automatic payment for the extra amount. If you have no short term debt, set up a payment into a savings account to build up an emergency fund. If that is already under control then increase your mortgage repayments to repay your debt quicker. The next priority is to make sure your retirement savings are on track. Finally, if you have all these things in hand, it’s yours to spend as you wish!

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The Eight Worst Credit Card Mistakes

Credit Card Mistakes

Credit cards are one of the most useful yet also one of the most dangerous modern financial inventions. Use them wisely and you can make money from them. Use them unwisely and you can lose everything you have. The worst mistakes you can make with your credit card are:

 

  1. Paying only the minimum balance. You will lose the interest free period on new purchases and it will take a long time to repay your debt.
  2. Having too many cards. It is much harder to keep track of your total debt when you have multiple cards.
  3. Using cards for non-essentials. Getting into debt to buy luxury goods will set you back financially.
  4. Not getting the best deal. There are big differences between cards when it comes to interest rates and features. Choose the card that is right for you.
  5. Forgetting to pay or paying late. You will add to your interest bill and your credit rating may be affected.
  6. Having too high a credit limit. The higher your limit, the more you may be tempted to spend and the harder it will be to pay off your bill each month
  7. Being tempted with low interest offers. Look at the fine print before you accepting an offer to get a new card at a low interest rate.
  8. Refinancing without reducing your limit. Increasing your mortgage to repay your card will reduce your interest if you are maxed out, but only if you stop spending on your card.

To use your credit card to advantage, set the limit to a level that you can afford to pay off every month by direct debit. For emergencies, have a second card with a higher limit which you keep hidden in a safe place (not your wallet or purse!).

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