Tag Archives | pay off debt

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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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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Get Rid of Dumb Debt

Get Rid of Dumb Debt

The most common financial mistake people make is to borrow money at a high rate of interest in order to buy something they don’t really need or without considering whether they could borrow at a lower cost. This type of borrowing is what the Retirement Commission calls ‘dumb debt’ and they have launched a campaign aimed at encouraging people to get smarter with their debt. Examples of dumb debt are:

  • Paying only the minimum repayment on your credit card
  • Buying a large item such as a car without shopping around to find the best finance deal
  • Buying on hire purchase without checking all the additional charges such as set up costs and  insurance
  • Being tempted by interest-free offers on hire purchase without being able to pay off the debt in the interest-free period

There is a very useful debt calculator on the Retirement Commission’s website, www.sorted.org.nz, which helps you work out the total amount of interest you pay over the period of your loan. For example, if you make a purchase of $2,000 on a credit card with an interest rate of 20% and monthly repayments of $100, you will take just over two years to pay it off and you will pay $453 in interest. If, on the other hand, you save $100 per month at 3% interest, you will be able to save the $2,000 you need within just over 19 months.

The best way to avoid dumb debt is:

  • Never borrow money to buy things you don’t really need
  • Always shop around for the cheapest deal on finance, taking into account the interest rate and additional charges
  • Don’t borrow unless you know you can afford the repayments
  • Save the equivalent of your debt repayments before you make your purchase

 

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Get Rid of Debt in Five Easy Steps

Get Rid of Debt

Starting the New Year with a pile of debt is not a good situation to be in, but it is a common problem. If you are serious about getting ahead financially, then getting rid of debt should be one of your top priorities. Here are five steps that will help you get rid of debt faster:

Step One – Don’t add to the debts you already have. Debt arises when you spend more than you earn. You can avoid adding to your debts by living within your means.

Step Two – Confront your debts by making a list of them. If you have many small debts you might be surprised at what they add up to. Rank your debts in order of priority for payment. Some people prefer to pay off the debts with the highest interest rate first, and some prefer to start by getting rid of the debts that have the shortest repayment period so they feel like they are making progress.

Step Three – Check on any penalties or fees for early repayment. Contact each lender to determine how quickly you can repay your debt without incurring penalties or fees.

Step Four – Consolidate and/or  refinance. Look at options for consolidating your debt and/or refinancing it at a lower interest rate than you are currently paying. If you are struggling to keep up with payments, this may also allow you to repay debts over a slightly longer period of time to make the payments more manageable.

Step Five – Set up an automatic payment to make additional voluntary payments on the first debt on your list. Leave your other debt payments at their minimum level. When the first debt is paid off, start on the next one on the list and keep working through until all debts are repaid.

 

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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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How to Rebuild your Wealth After a Recession

Rebuild your Wealth

Coming out of a recession is like emerging from winter into spring. There are opportunities for new growth if you get rid of the dead wood and prepare for the new season. If you have lost your job or lost income there are four steps you should take to rebuild your wealth.

Focus on Survival

The first priority is to make sure you are living within your budget. A lower income means your expenses need to be lower as well. Find ways to make ends meet and make your dollars go further. You may have to adjust to a lower standard of living for a while.

Have a Clear Out

Get rid of your financial dead wood. Make paying off your debt a top priority. If your debt has become unmanageable, make arrangements with debtors to pay it off over a period of time

Sell off household ‘stuff’ that you don’t need to free up cash. Get rid of investments that aren’t producing a good return. For some, it might be a case of selling up assets and starting again.

Consolidate and Strengthen your Financial Base

Start saving so you have money to call on if needed. Review your goals and the resources you have available for meeting them. Reflect on the lessons you have learned from the recession and decide what you will do differently for the next one.

Rebuild

Look at ways of increasing your income, for example by up-skilling or retraining to get into a new field. Find businesses which are growing and see what kind of skills they need.

In investment markets, look for early signs of where the new opportunities are – for example investing in emerging markets such as China.

Take the chance to be a leader; it is the early bird who catches the worm.

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