Newsletter No.7 January 2007 New Section We have had a busy month at money100. A new section called 'Debt Program' has been introduced. This program is based along the lines of the debtors anonymous program in the U.S.A. We hope you find this section of value. Our calculators have finally been installed! They are a loan repayment calculator, stamp duty calculator and savings calculator. Have a look now to see how they work and can help you. $1,000,000,000,000 This large number (1 Trillion Dollars) represents the amount of household debt in Australia ie Home Loans, Personal Loans & Credit Cards etc. It works out at almost $50,000 for every man, woman & child. What does it all mean? To me it just confirms what I already know. That as a country, we are living beyond our means. There is not much we can do about this large number but individually we can work at reducing out own debt situation. Rising interest rates, fuel prices and general costs of living make it seem impossible to reduce your debts. It definitely won't happen if you don't try. Maybe it is time to review some of our subsections like Cash Diary, Latte Factor & the Debtonator. Go on what have you got to lose? Living Expenses Are your living expenses greater than others? I was recently reviewing repayment ability criteria from a major home loan lender. Not so long ago, to work out whether you could afford a home loan most Banks looked at your debt commitments compared to total gross income. It was often the requirement that your financial commitments should be no more than 35% of your gross income. This failed to take into account personal situations. A family with only one child should be able to handle larger repayments than those with 4 children. Better computer software has enabled our lenders to assess loan applications more thoroughly. From statistics they know average living costs (excluding financial commitments) per family member and use this to help work out repayment ability. This can be used as a guide for ourselves to review our own situation. Are our living costs more than these and if so why? Of course the costs of a couple are not double that of a single person and the cost of 5 children is not 5 times that of 1. This is why I am showing quite a few numbers. Have a look and think about it: 1 Adult $890 per month 1 Child $314 per month 1 Adult & 1 Child $1,200 pm 1 Adult & 2 Children $1,515 pm 1 Adult & 3 Children $1,829 pm 2 Adults $1,290 pm 2 Adults & 1 Child $1,600 pm 2 Adults & 2 Children $1,910 pm 2 Adults & 3 Children $2,220 pm 2 Adults & 4 Children $2,530 pm 2 Adults & 5 Children $2,840 pm Monthly Quote Beware of little expenses. A small leak will sink a great ship. Benjamin Franklin Newsletter No. 8 February 2007 New Subsection - 7 Ways to Grow your Wealth We are continuing to add one subsection each month. Our new subsection was started about 6 months ago and shows 7 common sense ways to grow your wealth. Public servants live longer! Now this is a head line grabber! This article in Melbourne's Herald Sun caught my eye as it said that a study of public servants as compared to the rest of the population showed on average they had a longer life expectancy. Less work and stress at first seemed the reason however further investigation revealed the real reason is more realistic. They generally have on average a higher education and income which leads to better lifestyle choices and better access to health services this of course leads to lower mortality rates. Other research has found that high net worth individuals that is those with higher incomes during their working lives and therefore higher retirement nest eggs live longer. This makes us think, do I have enough or will I expect to have enough to retire on. For those who have a family history of longevity the need for retirement planning is even more important. Start working on your retirement now. Have a read of our savings section and set up your retirement plan now. Don't delay. The following example shows the advantage of investing earlier rather than later There are 2 comparisons. The 1st shows someone who at the age of 40 decided to act now and paid $400 per month (about $100 per week) into an investment to be used for their retirement at age 65. The 2nd shows someone who left it to age 50 but invested $800 per month (about $200 per week) Scenario 1 $400 pm 8% 25 years (Principal invested $120,000 ie $400 x 12 x 25) $381,410 Scenario 2 $800 pm 8% 15 years (Principal invested $144,000 ie $800 x 12 x 15) $276,830 Now this really demonstrates the value of compound interest and the need to start working on your retirement nest egg now. Prepaid Credit Cards Prepaid credit cards are on their way to Australia. The 1st card will be a Visa card through Bill Express. More common suppliers are sure to follow. As it is early day's details are not available. We expect there to be no fees with the prepaid amount invested by the financial institutions providing a good return for them. This is sure to be a popular product for both consumers and financial institutions. For the consumer the prepaid aspect allows you to only spend what you have already paid into it. It is your money therefore preventing you from running up large credit card debts. The 2nd advantage is the security on the card being offered by Bill Express. It is not linked to any other account which makes it more secure for internet purchases. Whether this advantage is common for other prepaid cards remains to be seen. We believe the ability to use own funds makes it better on your budget and prevents credit card blowouts that presently occur particularly with our banks being so upfront about limit increases. This type of card seems the ideal card for those 18-21 year olds who can find it difficult coping with our buy now pay later consumerism lifestyle. Watch out for this type of card. For more information on the Bill Express card go to www.billexpress.com.au and then click on bopo homepage. Credit Rating Every now and again whether in the media or talking to people their credit rating is mentioned. Often it relates to someone in there 20's who is saving up for a house or unit to live in. They may not have had to borrow before and someone has asked them whether they have a good credit rating? There is a misconception that you need to have a credit card and possibly paid off a personal loan or two before you will be approved for a home loan. This is just a myth. As outlined in the organising finance subsection the 2 most important criteria are can you afford the loan repayments and have you a deposit that is acceptable. Monthly Quote If there is money in the wallet, you will spend it! Newsletter No. 9 March 2007 New Subsection - It's OK to be frugal We are continuing to add one subsection each month. This month's new subsection fits in nicely with the following story. It's Jennifer, $4m woman This article was recently in Melbourne's Herald Sun. It has some good points which I will outline after the article. She uses a pre-paid mobile phone and has driven the same car for years. After signing a history-making $4 million contract with retailer Myer, she still agonises over buying a pair of jeans. Such is the world of Jennifer Hawkins, the unassuming former Miss Universe whose idea of a good party is a barbecue and a glass of champagne with her girlfriends. 'It's hard to believe' she says of the four-year deal struck last month on her 23rd birthday. Not only will Ms Hawkins be paid almost $1 million a year to continue her role as the face of Myer, she has been awarded stock options in the new privately owned company. When Myer floats publicly (possibly in 2009), she will have the option of selling her stock or retaining a nice chunk of the company. Either way she stands to make a lot more money. The deal, which includes a bonus if sales targets are reached, may be the most lucrative struck by an Australian-based model, hinting at the same kind of canny business sense as her idol, Elle Macpherson.? After reading the article and of course looking at the picture, a number of simple money skills were demonstrated. The first is that Jennifer is money conscious. She thinks before spending any money and this hasn't changed since her income has skyrocketed. She doesn't have an extravagant lifestyle. The other key factor is the stock options show she is planning for the future. She understands the benefits of using this money now to invest for the future. $37 Billion on credit and charge card! Reserve Bank figures as of October 2006 show in Australia, we have outstanding credit and charge card debt of $37 Billion. What is disturbing is that the figure was $32 Billion mid 2005. Christmas is sure to have seen this figure go even higher. Where will it end? What we are starting to see in increasing number, is the level of arrears/defaults/overdue amounts on anything from loans, credit cards and utility bills. Do you have too much debt on your credit cards? Do something now have a read of our budgeting, handling debt and credit card sections. The price of Home ownership The dream of home ownership for most Australians is a reality. It is not always Easy, however increases in property values over time and determination to make loan repayments sees most home owners eventually own their homes outright. At the present time we are seeing more and more people failing to make the required repayments and either voluntarily selling their homes or having the lender undertake a mortgagee sale. In Victoria the number of forced sales doubled in 2005 and again in 2006. We expect figures in most other states to be similar apart from Western Australia, Darwin and parts of Queensland. The reason is these areas have had property price rises over this period. People who are struggling with their loan repayments here often take advantage of the increased property value to refinance and avoid legal action. In the other states property values haven't gone up and in some cases have dropped thereby preventing an easy option to refinance elsewhere. The difference with the home loan market today is there is so much competition. 10-15 years ago there weren't that many players in the market. As a home loan lender we would sometimes tell a client 'we will add the personal loan and credit card debts to the home loan this time'. However as this is not the 1st time you have done this it is doubtful whether a request again would be favourable?. You could say this knowing people didn't refinance as much back then and the major banks all had similar credit criteria. Another thing is the loans officer used to look after the arrears as well, so they were reluctant to pick up another banks problems. This would sometimes spur on the client to get their act together. Now people are more willing to refinance with the choice being so great. The threat of next time we most likely won't help won,t work and is hardly used anyway. The arrears rates of Banks versus non bank lenders also reflect the quality of lending. Arrear of over 90 days is at 0.3% for the Banks versus 4.5% for the non bank lenders. Given the tight budgets of many homeowners, often the arrears is caused by an unexpected expense. This with the 0.75% rise in interest rates in 2006 and increase in petrol prices has tipped some people over the edge with no hope of turning it around. Are you struggling with your debt repayments? Perhaps it is worthwhile to revisit our budgeting and handling debt sections. Monthly Quote In the long run, its not how much money you make that will determine your future. It's how much of that money you put to work by saving and investing it. Peter Lynch Newsletter No. 10 April 2007 Subsections This month we have made improvements to the following subsections: Type of Home Loans, Kids (Miscellaneous section), Prepaid Credit Cards and Buying Used Cars. Payday lenders I have never used a payday lender or know anyone who has. My closest experience is walking past a pawnbroker on my way to work about 20 years ago. Pawnbrokers mainly bought jewellery, cameras and sporting equipment, whereas payday lenders offer short term cash loans between pay days. From your local pawnbroker the business became more professional with the cash converters stores opening up in droves in the late 80's early 90's and now there are over 100 in Australia. From selling off some old jewellery that you no longer wear the business now offers short term finance ie personal loans as well as cash advances ie very short term loans. Payday lenders have taken this short term loan to another level. As it says borrow now and pay it back on pay day. Why is there so much fuss? Payday lenders attract customers with the promise of cash being able to be obtained very quickly. The trap is the interest rate is very high ie up to 1300% add on an upfront fee and that amount borrowed becomes larger. The problem is that these lenders don't assess your ability to repay. Usually they only require proof of income and confirmation of where you live. As a result inability to pay back that money next payday means you are caught up in an ongoing financial nightmare. It basically all gets back to budgeting. Have a read of our Budgeting Subsection to work on your money situation. Low Doc Loans These loans are gaining in popularity. They are loans provided by lenders for those who are unable to prove they have the income to repay the loan being requested. Most of these loans are being written for the self employed who are unable to prove their income. What is often not explained in media articles is that the borrower has to sign a document to say what their income is. Some of the lenders insist the borrowers Accountant confirms this in writing while other lenders are satisfied with only the borrower signing a document. The problem is the Australian Taxation Office are going through lenders portfolios to see who is borrowing with this type of loan and what they are stating that they earn. This can be a big problem. In some cases borrowers are just making up a figure to get the loan (how they intend to repay the loan is another matter). While others are those illegally lodging false tax returns ie they usually don't record all the cash sales! Both these types of borrowers may get investigated by the tax office. In the 1st case the borrower may find him or herself in a catch22 situation. They may be unable to make the loan repayments because the loan amount was too high and the tax office may decide they have not been declaring the correct amount of income tax. In some of these cases their income tax return was correct but the form they signed with the lender was incorrect. Not only can't they make all the repayments on the loan they also may be faced with a fine from the tax office and have to make extra tax payments on past tax returns! In the 2nd case, they will most likely be fined as well and made to pay back money owed to the tax office from previous years. I must admit to not being sorry for the 2nd group. After all we all use the roads, hospitals, our children attend schools and therefore we should all pay our fair share in tax. Those in the 1st group I do feel sorry for. In some cases they have not really understood what they were getting themselves in for. I have heard stories of mortgage brokers working out what amount needs to be recorded on that bit of paper and writing the amount in. It is then explained to the potential borrower, don't worry it is just another form to fill out. After all you do want that house don't you? If you do apply for this type of loan make sure you understand what you are signing and the possible implications. The interest rates are also higher than other home loans and other additional fees may apply. Beware! Monthly Quote 'When your image improves, your performance improves." Newsletters 11 & 12 May - June 2007 We are having a siesta for a few months from our newsletters to enable us time to revamp the site.
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