16 weeks till Christmas – are you ready?

Christmas day is 16 weeks from Monday (the 4th of September).

Now that this has horrified you, you should be wondering about what you are going to do for Christmas and the spending for it.

Most people tend to overspend at Christmas, on presents and food and usually this goes on credit cards. If you do this, you spend much of the following year paying back the overspend and paying a bunch of interest.

This happens due to lack of planning for Christmas and what you are going to spend.

In the counselling work I do, it tends to dry up in November and December as people don’t want to be told what they can and cannot afford before Christmas.

But in February once the holidays have worn off, I get a lot of people coming in to get help to fix what they did.

Many people will think there is no time to plan for Christmas without borrowing, but there is.

If you get paid this week, you have 8 pay days before Christmas, so have time to save something.

Firstly, work out how much extra you want for food, and for entertainment. If you don’t have the supermarket stamps plan going, then you need to get this in cash. So, let’s assume $200 for extra food etc.

Then let’s look at presents.

Work out who gets a present and what amount each person gets spent on them.

If it’s you, your partner and two kids let’s assume $100 a person, so that’s $400.

Then if we have 8 grandparents, cousins etc, let’s go with $50 each, another $400.

All up this is $1000 needed between now and Christmas.

This equates to $125 a fortnight payday from, this week till Christmas.

Now if you have a smaller or larger family, are travelling or hosting people, your situation will be different.

But whatever it is, sit down and plan it out, work out the total you need and then how much you need to put aside each pay.

If you cannot free up the money to do this, you need to cut the amount you are going to spend, maybe great Auntie Muriel who no one likes and never talks to you anyway, does not get a present?

Then you simply must stick to your limit.

Next year, to make it easier, start this plan in January, you won’t need to save anywhere near as much.

You will find that this makes Christmas much less stressful, and reduces the post-Christmas blues as you realise you overspent.

This is just one step towards taking control of your finances, staying out of debt, and helping yourself to build wealth for the future.

Money Mind-set series – Credit Cards

Money Mind-set is the concept of having the right thoughts about money and setting your mind set accordingly.  It’s about focusing to spending only money you have, not racking up debt, and saving as much as you can for your goals.  A good money mind-set will help you grow wealth better over the years, and remove all the money stress most people have.

 

This entry into Money Mind-set is about Credit cards.financial-planning

 

One of the things that comes up a lot with the debt repayment strategies I help people with are credit cards that have been racked up quite a bit (overdrafts fit into this category as well, but are less common).

 

It’s easy to think of credit cards as only an issue for people who are bad with money, but I am going to go one step further state:

 

NO ONE NEEDS A CREDIT CARD!

 

Credit cards are only for spending money you don’t have.

 

That’s pretty definitive right?  Now you will have a bunch of questions and I will answer some of the key ones (feel free to email with any additional questions you have).

 

My reasoning is this; credit cards are debt, they are about spending money you don’t have, and far too easily allow the risk of you overspending.  If you don’t have a credit card you cannot overspend, but no matter how good you are financially, a credit card increases the risk of you spending what you don’t have.

 

Better to get rid of them and not have the risk.

 

The argument about buying off the internet no longer holds as you can get a Visa Debit card which will do the same job.

 

So, what’s the solution if you don’t have a credit card?

Save!  – have cash for this money, put aside money each pay to cover your expenses, so when an expense comes up you might have used the credit card for in the past, you use this money instead.  It’s a much better feeling to pay for something in cash like an emergency payment or trip, than to borrow money for it and then have to pay it back.

 

So, here are the common questions:

 

What are the downsides to not having a credit card?

For the most part there are none, though you will have to save some money for actual emergencies as you don’t have debt to fall back on.

 

So far the only two annoyances I have found (as I don’t have a credit card) are for hotel and rental car bookings.  They are a bit more of a pain when you ‘only’ have a visa debit card and they want you to pay a deposit.  All that happens is that the hotel so far just takes $100 off you and reimburses it when you check out.  A minor annoyance in the grand scheme of things.

 

When is a good time to have a card?

Never!  Well almost never.  If you run up expenses for work and there is no work card you can use, it might be ok to use a credit card and reimburse it from work, but really eftpos is fine.  You just need to have a bit of a buffer.

 

If you were travelling overseas to a really odd place, maybe having a credit card loaded up with a bunch of cash might help if you get stuck, but again, having enough for your trip will be fine in most cases.

 

What about an emergency fund?

A lot of people justify having a card as an emergency fund in case life hits the wall, the car dies etc.

 

In theory this is okay, if the card sits in a cupboard and has a $0 balance and is only ever used for the 2-3 things that constitute an emergency.

 

But in reality, most of this can be avoided by saving an emergency fund.  Ideally a 2-3 months’ income fund is what we should have, but that’s a longer term goal.  What I am referencing is a $1-$2,000 fund (depending on your family size and need) to cover a few emergency expenses out of the ordinary like medical expenses, car repairs, family emergency or giant power bill.

 

You should really be saving for this.  I will briefly allow a card with $1000 limit on it, with a $0 balance, that once you get to $1000 in savings, the card gets cancelled.  But this card has to be hidden (or with your mum who has rules about when you are allowed it) and never used unless you hit the parameters as above.

 

But I am good with money, and I get points/rewards/cashback, what’s wrong with having a card?

 

It’s a false economy.  Are you really that good with money?  Do you only spend what you need and never spend a little extra and justify it on the points?

 

For the most part those points are rubbish and the credit card companies would not give them out if they did not know you would most likely overspend because of them.

 

If you set a limit on an eftpos card of $250 for a fortnights groceries you can only spend $250.  If you have a credit card with $2,000 available there is a very good chance you will end up spending more than this $250 on multiple occasions, because the points have given you permission.

 

Don’t risk it, dump the card.

 

How do I transition away from the cards?

The first thing to do is to stop using the card.  Cut it up, cancel it if it’s paid off or freeze it if it still owes money, and then just stop.  Get a visa debit card for buying online, and make sure you have a robust budget and set aside money each pay for longer term expenses.

 

Work out a payment plan to pay it off, do a balance transfer for a low rate if you want, but just chip away at it till is gone.

 

Once the card is paid off, never get a new one, build up cash etc. if you have to have a credit emergency fund to start with, cut the limit down to the fund requirement and then cut the limit as the fund grows.

 

What do you think about the concept of Money Mind-set?  Let me know if there are any other areas you want me to cover and I will add it to the list.

 

By Alan Borthwick

Easy Finance Is Not Always Easy

It’s not a surprise to read about people racking up lots of debt on the mobile lenders.  People will always find a way to borrow if they are that way inclined.

What is interesting and relevant is that the lady has no idea what she bought or what it cost.

This is because the focus of the client in these case is to get the item, not what the cost (bar the initial price) is.  They have no interest in the long term price because that’s tomorrow’s problem.

When you only live for today, it’s easy to dump stuff on tomorrow.financial-planning

The way to avoid falling into the (self-inflicted) trap of borrowing for consumer purchases is to be very aware of today and tomorrow.

What I mean is:

  1. Be very clear about what your income is.
  2. Be very clear about what your expenses are – i.e. do a budget.
  3. In this budget have a clear breakdown of what is allowed for discretionary spending.
  4. If an item is over this, you cannot by it.
  5. Only buy things with cash, i.e. you have to save. And if you have to save, you have to budget an amount each pay to save so you can spend this money.
  6. have a goal for the future that is more important than borrowing more, i.e. buying a new car, a house, a holiday etc. it’s easier to save for a goal and not spend than to just ‘not spend’.

Doing this will mean you are less likely to wander into a shop and just borrow money, as you will be aware of the impact on your future if you do.

But let’s also get away from this nonsense of these companies ‘preying’ on people.  They don’t drag you into their truck/shop and you have to sign the dotted line to get the money/loan.

Yes, if they are not fulfilling their legal obligations on disclosure, sale of goods act etc., they need to be dealt with, but offering a loan at 25% is not illegal (its less than GEs standard rate btw), as long as you know its 25% and take it with no pressure or fraud.

as you can see from the article most of the companies have already written off much of what she owes them, which shows why they charge so much, to cover the cost of those who they never get money from (it also shows they need a better assessment process).

High interest lenders are a pain in the ass and I enjoy helping them lose money by cashing them out early, but they are part of the market and there is demand for them, otherwise they would go out of business.

The best way to run these people out of business and to lower their rates is for people to stop borrowing for items they should save for, and to live for today and tomorrow, not just today.

DUX Financial Services can provide some advice in this area if you need it.  Check with your Citizens Advice Bureau (CAB) and budget services as well.

By Alan Borthwick

Getting a Student Loan? Get a Budget!

financial-planningFar be it for me to suggest that a student association is unlikely to put out a press release saying everything was fine for students, but they are not exactly the best source for an unbiased opinion.

It is true that most people who study will end up with debt, unless your parents can cover the costs, which most cannot, or should not; without putting their own future at risk.

It’s also true that the student living allowance has not increased since I was a student, so has clearly lost ground with inflation.

However, there is no reason for anyone to end up over burdened with debt as a student (barring a student loan for the most part).

Tertiary study just, like everything else, requires some planning and a realistic expectation of expenses vs income.

For example, it’s cheaper to stay at home and study than move out of town.

It’s better to work part time, than rely all on a student loan, and the less you drink, the better of course.

Most students revel in their freedom and burn through money pretty fast, and then have to borrow to cover the debts they have already racked up.

Certainly, I don’t see how most students can afford to go into town with the costs of drinks, but they seem to do it.

The other thing is, is University really the best plan?  If you are just going to end up another unemployed arts major, hoping for a government job, there may be better options.  Trades pay very well, and will be more in demand over the coming years than another policy analyst.

So, in summary, like all things, choosing to go to university takes planning, and budgeting; will require sacrifice and could end up with some debt.  It’s not meant to be easy, but if you do end up better off, then it’s worth it, if you choose the right degree and plan appropriately.

By Alan Borthwick

Student Loans – No Interest, Doesn’t Mean No Cost

financial-planningI am guessing the journalist on this story was not a student in the mid to late 1990s when you could download your entire living allowance money in one go.

That meant that many people used their money to buy cars, travel, stereos (back when CD players cost money) and alcohol of course.  Me, I bought magic the gathering cards with my first loan money (I was 17 and a career in financial advice was a long way away in my own defence).

So, none of this surprises or worries me particularly, students have spent their loan money on whatever they want for a couple decades now.  Sure there is the issues that this money is only for course costs, but that’s minutiae more than anything.

With student loans essentially free now, there are some bits relevant to students to think about.

  1. Just because it has no interest, does not mean no cost. You have to pay this back when you are earning more than $19,000 a year, at 12% of every dollar you earn above that. This is going to take you a few years to repay, and the more you borrow, the longer it will take.  The longer it takes, the longer before you have the money in your pocket to do more fun things.
  2. It’s going to impact your ability to go overseas with no worries. If you go overseas, you need to pay the loan back at a higher rate and so you cannot quite so carefree head off on your overseas experience.
  3. The expense makes it harder to buy a home. The balance of your loan is not taken into account by the bank, but they will take the actual cost into account. For example, if your loan payment is $100 a fortnight, they take that off your available money, which could impact your ability to get the loan you want.
  4. Saving will be harder, as you have less surplus funds left each pay, making saving for goals take longer or require bigger sacrifices.

The government who made student loans interest free stated that no one would borrow more money.  And they were proven to be very wrong, as governments who ignore incentives always are.  Borrowing has gone up, and voluntary extra repayments dropped 99% when the changes came in.

There is a block of young adults, (anyone who was studying in 2005 and past), who has a bigger loan than those before them, and now has to deal with it.

So, before booking that stripper on your student loan, thinking about how long it’s going to take to pay back.  Are they worth it?

By Alan Borthwick

DUX Financial Smart Tip: Saving for a Baby

Preparing for a new addition to your family? DUX Financial Services can help you make a plan for your financial future as a family. Most new parents have to cope with less income and more outgoings. DUX has a budget system that has helped loads of clients manage the financial stress of a new baby.
If you already have life insurance, it’s a good idea to check your policy before your baby is born. You may need to increase it. Other types of insurance may also be worth considering, such as income protection for the working parent.
Having a baby is an exciting time so you don’t want money worries spoiling things.

By Alan Borthwick

financial-planning

You first, charity second

financial-planningTime for me to be a contrarian here, and disagree with Liz Koh, who is an Adviser I respect.

I think people in general should give less to charity, and many people should give nothing, and pay themselves more.

Why do I say this?

Giving money away is an opportunity cost against using that money for yourself.

I don’t mean using it to just buy more stuff, but to save for emergencies, pay down consumer debt faster, or save for retirement.

Money you give away needs to be money you don’t need or have a better use for, and too many people I meet are giving away money they need for the altruistic feeling that the giving provides.

It’s why the charities want to build on that ‘feel good’ factor, by encouraging people to be open about giving and put it on Facebook and wear a badge etc. so you can show to others you have done so, and guilt them into it.  Still others that will highlight what you gave, so the more you give the better you feel.

Personally, I keep my charitable giving secret, I am not doing it for outside accolades or to compete with someone else, as no one else’s financial situation is the same as mine.  I only give away money after I have paid my bills and put money aside for the future.

Here are my guidelines for when to give money away.

  1. If you are trying to pay down consumer debt – don’t give money to charity.
  2. If you struggle to afford to put contributions into KiwiSaver – don’t give money to charity.
  3. If you don’t have at least $2,000 in an emergency fund – don’t give money to charity.
  4. If you are planning an upcoming period of time off work (say for having a baby), don’t give money to charity.
  5. If you feel you cannot afford core insurance costs (income protection, life etc.) – don’t give money to charity.

Pay yourself first, clear debt, build your emergency fund, make sure you put money aside for retirement, get your risk protection plan in place, and then give money away.

Or, pick something you spend your discretionary money on, such as Friday drinks, a sport, a hobby etc., and give that money away instead.  It’s easy to give away long term money as it’s ages till it will hurt you, but it will hurt now if you give away money that would otherwise be spent on fun.

If you don’t pay yourself first, you may need charity one day, somewhat defeating the purpose of what you gave away now.  Only give away when you are in a position to not need charity yourself.

By Alan Borthwick

Premium Credit Cards Are For Suckers

I have being saying for a while now that there is no good reason to have a credit card anymore, now that debit cards exist. Credit cards are only for spending money you do not have.

The looks of terror on some people’s faces when I say that, or their defence of their card (otherwise conservative people too) and its worth, is astounding.

The excuses I get are typically:
1. I need it for emergencies
For a short time yes, but you should actually be saving for an emergency fund, not borrowing. Once you have the buffer fund in place, cut the card up.

2. I need it for the internet
Nope, debit cards work just fine.

3. The rewards are good (air points etc.)
Sometimes, but usually not, they usually cost you more than you gain and take far too many to be worth it. And, they encourage spending, I would not be surprised if people spend more, just because they have the rewards card (even if subconsciously), I know I did.

4. They are useful when travelling
I will concede this a bit. It’s a pain in the ass being in a hotel with a debit card as they fart ass about with the deposit thing for the mini bar, etc. I expect that to fall by the wayside as debit card use grows and hotels get the point that I am not to be treated as a child just because I don’t carry $10K of debt everywhere.

I have not travelled extensively but I never saw my debit card treated any differently overseas than a credit card. Only difference was I was spending my actual money, not borrowed money.2014 credit-card cut up by SocialMoms.com

Credit cards are not a symbol of status or anything other than an indication you are prepared to borrow to pay for your stuff.

Cut the sucker up and get used to living on cash and savings, it’s much better for you in the long run.

By Alan Borthwick

Overdrafts (and other consumer debt)

This article is common when a journalist looks at financial areas. It’s very product and very price focused, and you are lucky for there to be any discussion at all on advice, or habits. This is because the journalist understands the product, and so can consider themselves an expert (compared to most people), but may have no real insight to how people use them, or the habits around them.

Unfortunately, it’s also what the public want, because advice is not ranked particularly high in our Do It Yourself (DIY) country. financial-planningAdvice = $ cost, so must be avoided.

If there is any comment from an adviser it is usually a bank employee (or non-customer facing manager), a lower level adviser (such as the quoted budget adviser who may be very good but may not be an actual financial adviser) or one of the favoured companies who may, or may not, actually do what you are writing about (Enableme seem to be experts in everything).

So, the very long article focuses mainly on the costs of an overdraft, and who is cheaper, and how to borrow money.

The real discussion should be why we end up with overdrafts, and what can we change to get out of them.

Is essence, a credit card and overdraft are simply there to let you spend money you do not have. Hire purchases, and mortgages are as well, but at least there is a specific product being purchased.

So, why do we have them, or allow ourselves to end up with an unarranged Over Draft? We usually get them because we are spending too much, or in the case of the unarranged, we misjudged our budget.

Now, this is not to say they are not sometimes a good idea. I have one on my business account, because sometimes funds take longer to get paid to us than I would like, and I want to pay wages. Now, I have not used it in 5 years, and so it may go soon anyway. So, if you have fluctuating income and the Overdraft is just to smooth out the bumps (not give you more money), then it’s probably okay if used well.

But, if you are on a stable salary, you really have no reason to have one.

So, how do you wean yourself off one?

Firstly, you need to change your habits. If you do not know what you spend, how will you ensure you spend less than you earn, so you can pay it off?

Then you need to assign an amount each pay cycle to reducing it. Remember, that an overdraft or credit card does not count as repaid until the limit is reduced. Available funds do not count.

Then, you need to monitor your spending to keep on track, and build the habits to stop this happening again. If you do it once then ignore it, you will end up back where you started (or worse off).

You can do this the Do It Yourself (DIY) way, and most people will try, or you can get advice. The banker will just sell you a product, the budget adviser may help, but the financial adviser who has both expertise and insight will develop a plan to help you work out WHY to do this; not just how, and will keep you honest as you progress.

The adviser way will cost you money, but it’s also the best chance you have of getting out of debt and staying out of debt.

At the end of the day who the overdraft is, what it costs etc. is irrelevant if you are just trading one debt provider for another. Rather than spend your focus on the product, spend some time getting the advice and habits in place.

By Alan Borthwick