Newsletter 13 July 2007 Pay yourself first Paying yourself first is an easy concept to understand. The difficulty for most people is putting it into practice. The key is to reinforce the benefits of this, put it in place and continually review your performance. It is that simple just like the kiss method (Keep it simple stupid)! Have a read of our pay yourself first subsection. You may find it worthwhile. Mobile Phones & Credit Cards Those first few years of adulthood are so difficult. All of a sudden we are solely reliant on ourselves to make decisions. We are able to make decisions concerning: Driving Alcohol Gambling All of a sudden one day we wake up and our whole world has changed. Unfortunately not everyone is ready for that change. For most the big change occurs when we have a full time job. With a bit of money in our pocket the enticements to spend our money are very shrewd. Easy credit means we can spend what we have and more. The debt cycle is just beginning. Back in the early 1980's when I was at that age shopping wasn't as flashy as it is now. Credit card usage was not as popular as it is today. I think I got my first credit card when I was 20 and hardly used it for many years. ATM's were only just starting to be seen in large numbers at the same time. The advantage was a gradual understanding of handling money. Now they have credit cards as soon as they can. Mobile phones are also a must have item and with that can come very expensive phone bills. If they are not ringing friends they are texting them. Whenever they turn on the television they are encouraged to vote someone in or out on reality TV. It all costs money. Unfortunately some get into real trouble with their credit cards & mobile phone bills. The option these days is to enter a part IX debt agreement. Now these came in 1996 as a flexible, low cost option to bankruptcy for low income people with few assets. For many this agreement still leads to bankruptcy with the resulting black mark being recorded on their credit record. The problem is the administrators fees ends up being just another debt that must be repaid and for some an impossible ask which leads to bankruptcy. If you have family who are struggling with this type of debt maybe introducing them to money100 may be what they need. If their position is particularly grim talking to the family Accountant to provide some advice may be the way to go. If your children are reaching this age then the following guides might be helpful: Have a prepaid mobile phone - A small credit card limit or better still one that only draws on your own funds.
- Don't take an ATM card when going out shopping or to pubs
- Teach them to be frugal with their money
Monthly Quote The easiest way for your children to learn about money is for you not to have any Katherine Whitehorn Newsletter 14 August 2007 Retire comfortably It is interesting the different opinions given when superannuation is discussed or even saving for retirement. Many people make similar statements like: 'I don't want to be rich' 'We don't need a lot of money to live on in our retirement' In your retirement due you want to live or to just exist? For most of those living solely on their age pension that is what they do. They spend their 'golden' years turning off the heater during the day in winter even though they are cold to keep their expenses down. In summer they refrain from air conditioning again to reduce costs. They often are living in older houses and units that are not insulated well. It is easy to see why our parents in the southern states migrate north over winter. Their homes are freezing! Now this is why I am planning for my retirement, so that I can live. I want to live in a modern house that is energy efficient being warm in winter and cooler in summer. I would like to go out for a meal once or twice a week and enjoy a nice bottle of red. To perhaps spend some time in a warmer climate over winter for a couple of months a year without having to live in a caravan to do so. Mostly I want to be able to make choices in my retirement that aren't based on what I can afford. This is particularly true about health insurance. I want to fully enjoy my retirement and live not just exist. If you want to live start planning so that you aren't relying solely on the age pension. A 40 year home loan 30 year home loans are the norm in Australia however in the U.K. and U.S.A. 40 years is fairly common. Some financial institutions are starting to offer a 40 home loan here in Australia. What are the advantages and disadvantages you might ask? The main advantage is the minimum repayment on a 40 year loan is less than a 30 year loan as shown here: $250,000 30 years @ 8 % $1,835 per month Total repayments $1,835 x 30 years x 12 = $660,600 Less amount borrowed $250,000 Interest charged $410,600 $250,000 40 years @ 8% $1,740 per month Total repayments $1,740 x 40 years x 12 = $835,200 Less amount borrowed $250,000 Interest charged $585,200 This scenario has been used to show you the difference in the monthly repayment on this loan but also the overall difference over the life of the loan. The interest rate used is not important we could have used 7.50% or 7 % and the difference between interest charged would have been similar to the above example. Now of course most loans don't last 30 years let alone 40 years. What happens on a 40 year loan if you don't make any extra repayments and sell the house after 10 years? The amount owed is approximately $230,000. So after paying $208,800 in repayments the loan has only reduced by $20,000! If you had paid interest only the monthly repayment would be $1,670 which is only $70 less than the required repayment over 40 years. I am not in favour of a 40 year home loan for a number of reasons. Most of us want to retire where we own our own home. The only way I know to do this is to repay the home loan. Now if you purchased a home at age 20 and then retired at 60 then this is ok. Most people don't have a home loan until their mid to late 20's and if they are still paying off the loan at age 60 it makes it difficult for them to concentrate on saving for their retirement which a lot of people do once their home loan is paid off. If you can't afford the home loan on a 30 year term then perhaps you should reconsider the home loan at the present time. Monthly Quote People don't plan to fail, they just fail to plan Newsletter No. 15 September 2007 Internet Shopping I expect most people who have internet access at home have at one time or another purchased goods online. It's a growing trend that will have serious ramifications for some retail outlets in the future. For the consumer there are many advantages in shopping online like price, convenience and time. A question you might ask is are we dealing with a legitimate business here? Just because the site looks professional doesn't mean the owners have the same standards. People have been ripped off by providing credit card details and then not receiving any goods or receiving goods of a poor standard. What do they do then? All they can do is send an email complaining and ask for the goods that they ordered be sent. You will struggle to get any satisfaction if the site owners are not ethical. After all the only contact details you have for them is an email address. You could lodge a complaint with the office of fair trading/consumer affairs in your state however it is unlikely that you will get your money back. A good idea if you are considering a major purchase and you don't have any information about their service record is to spend a small amount and see how you go. This won't be foolproof however it is an indication. Loan defaults A recent article in Melbourne's Herald Sun noted the number of homeowners being dragged through the courts for falling behind in loan repayments had tripled in Victoria since 2000-2001! This is the process taken before the lender actually sells the property usually what is commonly known as a mortgagee auction. What was interesting was that 70% of those falling in arrears were from non-bank lenders despite them only having 5% of the total lending market. What the figures are telling is the quality of loans the non bank lenders have are not as good as the bank lenders. As a result their interest rates and fees are higher and also they are not able to be as patient with loan arrears as bank lenders. David Morgan (Chief Executive Officer - Westpac) in an article in January's Smart Investor magazine really spelled this out when he said 70% of their home loan borrowers are ahead in their repayments! Now this is despite home loan interest rates increasing by 2.00% since May 2002 (8 increases of 0.25%) This is the reason the banks are able to be more patient with their borrowers who are struggling. Most of them have equity in their homes giving them some breathing space and providing comfort to the banks. The main point here is if you have borrowed from a non bank lender they will most likely not be as patient as if you had borrowed from a bank. Therefore if you do fall in arrears, quickly sum up your situation. What can you do to get back in order? Monthly Quote If there is money in the wallet, you will spend it! Newsletter No. 16 October 2007 Investment Property costs Have a look at our houses section this month. We have a great new subsection on ongoing investment property costs. 21 Sure ways to save money - Pay off your credit cards
- Pay off your mortgage as quickly as possible
- Walk to do local errands whenever possible
- Do regular maintenance (or have it done) so that breakdowns are less likely
- Select your home and job so that they are within walking distance of each other
- Repair and keep an older car rather than buying a new one. This saves on insurance too.
- Go to a 4 day 10 hour per day workweek
- Eat a proper diet
- Get proper exercise
- Stop smoking cigarettes
- Get proper rest (its cheap)
- Move to a less expensive area
- Relax closer to home
- Take a camping vacation
- Cut down on dining out again until it's a treat
- Develop hobbies that are truly cost effective in eliminating spending
- Select hobbies that don't require you to travel long distances
- Give kids an allowance and allow them to choose how they spend it
- Curb your own spending and your kids will follow suit
- Rethink a high cost education
- Promise children one or at most three toys at Christmas and have them select the ones they want. More than that is more than enough.
Some of us honour our jobs and neglect the rest of our lives. Others of us endure our jobs and make up for it on the evenings and weekends. Bankruptcies on the rise ! Individual bankruptcies in Australia are now 30,000 per year. This figure continues to rise and is alarming when the figure was 13,000 in 1997. Don't let this happen to you. Control what you are spending and live within your means. Teaching your children about money Our children learn not by listening, but by watching what we do. It is important therefore that your behaviour matches what you say. Having good money skills and talking about money decisions should ensure your children grow up money wise. Of course it isn't always plain sailing, and here it is essential that you talk to them about how the increase in interest rates will affect you or how the unexpected large car expense will affect future spending. It is good for them to see how you plan to save for that family holiday in twelve months time. Talking about money should be a part of your family's life. Monthly Quote Money doesn't talk, it swears Bob Dylan Newsletter No. 17 November 2007 New Subsection We have introduced a new subsection this month. The title is 'Letters from Africa' and it is in our scams section. Have a read; it will assist you in avoiding being scammed yourself. Have a no spending day One rule in being successful at growing your wealth is spending less than you earn. Makes a lot of sense however for many it is much harder to put into practice. The key is to be money conscious in being aware of everything you spend. A great way to work on this is to have a no spending day. Not once are you allowed to take out your wallet, purse or credit card. It may be harder than you think and provide a reality check of how much you do spend during a day. This is not just a delay spending till tomorrow day, or spend more the day before ie buy 2 cokes and put one in the fridge for tomorrow. It is what it says in it's simplest form. Be creative and plan your no spending day. These ideas may help: - Make your lunch at home and take it to work - Take a thermos or use the office coffee instead of going out for a cappuccino - Go to the library and borrow a book or two instead of buying them. While there, have a look at what else it offers. Many offer DVD's, magazines etc - On the weekends, go for a bike ride, walk through a park, play cards or a board game. Go on be creative. Have a no spending day once a week and gain control of your spending. Teenagers applying for a Tax File Number About a year ago, I was working on an income tax return for a young man who had been working full time for about 6 months straight after leaving school. The problem we had, was that he didn't have a tax file number. His employer had asked him for his T.F.N. however he hadn't gotten around to getting one. His mum decided to take action and contacted the tax office who advised her what needed to be done. Six months later we still hadn't got anywhere. The original application was lost, a visit to the tax office didn't manage to speed up the process and his mother is still waiting on the tax office to provide a tax file number for her son. Now all this could have been avoided quite simply. Almost all private and secondary schools offer a service where tax file numbers can be applied through the schools to the tax office. The advantage is proof of identification is handled by the school who forward the application to the tax office with the tax file number usually returned within 28 days. This is a fantastic service and I think all teenagers once they have turned 15 should apply for a tax file number through their school even if they have no immediate plans to start working. That way when they do start their first job, they provide their tax file number immediately making it easier for their new employer to pay them correctly. Monthly Quote When your confidence goes up, your competence goes up at the same time. Newsletter No. 18 December 2007 Stock Market Entertainment The following letter to the editor was shown in Melbourne Herald Sun’s on 3 August 2007. It makes interesting reading. “The nervous nellies of the share market are raising a horse laugh in the bush. Panic over a 3 per cent fall! Cattle farmers have seen 5 and 10 per cent falls in a week regularly, and prices less than half those of six month earlier. But they know that if you tough it out, there are still the same number of cows in the paddock when the prices climb back up. And investors don’t have to buy feed at three times the normal price to keep the cows alive meanwhile.” D Evans – Moyhu How true when looking at the share market. When the market has a large fall in one day, the press are always quick to point out that investors have today lost $__ billion. Well I own shares and I can’t recall thinking that I am any poorer that night! The reason is that I haven’t sold my shares that day. The day you actually find out your profit/loss is the day you actually sell them. The rest of the time the daily share market prices is an indication only. Some people are nervous with the share market because the prices seem to change so quickly. That is only because the market is so liquid and closing prices are advertised daily. How would you feel about residential property if you received details daily about its property value based on sales in the area? The same goes when you see a share market section in the paper and the experts are saying buy this or sell that and you see they mention something you own. Oh I own that and they say I should sell it you say to yourself. Don’t forget you probably own that stock for the long term and they may be saying we think today a share of that company should be worth $17.50 however it is currently trading at $18.00. Based on this it is a sell recommendation. Tomorrow that company announces some good news and the price rises to $19.00 or market jitters in New York cause shares in Australia to fall across the board by 2% in a day. This gets back to what D Evans is trying to say. Sometimes share prices move that are not the result of anything to do with the company. Nothing has changed at the company but the market has changed. If you liked the company yesterday because it was well run, had low debts, profitable and had good growth prospects don’t be worried if it’s share price fluctuates. After all you don’t even have to buy any feed! Improve your chances of obtaining a home loan It can be difficult to get a sufficient deposit together to buy your first home. This is especially so if you have other debts like a personal loan and credit cards. Lenders have 2 main criteria. Do you have the ability to repay the proposed new loan and existing debts and secondly do you have sufficient deposit? If you have a credit card you don’t use with a nil balance, have it closed as the unused limit is still included in the lenders servicing test. The same goes for a credit card where the balance is lower than the limit. It is worthwhile reducing the limit to again reduce the level of your current financial commitments. Remember there are 2 main approval criteria and it is no good being strong in one and weak in the other. I have seen people pay lump sums of their personal loan to repay it and then fall short in the adequate deposit area. As there income position was very strong they could have kept the personal loan and used their savings for the deposit. It’s a good idea to talk to a lender about 1-2 years before buying a home to see what you need to do have a home loan approved. Stable employment is also a key criteria in that financial institutions like you to have been employed full time with the same employer for at least 6 months. I have seen people leave an employer where they have been for many years and change jobs a month before applying for a home loan. In an application where the decision to approve or decline is close, stable employment can make or break you. Do you need to replace your car soon? The lender will look at this as well. Again in an application where the decision is not easy, having cars that you will not have to replace for at least 5 years is a positive. Make sure you point this out to them. Inexperienced personal lenders/brokers probably wouldn’t pick this up. Are there any other positives that you are able to tell the personal lender/broker that might improve your chances? These might be: · Lower than normal car expenses such as walking to work · Lower than normal food expenses because of _______ · Lower than normal child care expenses because of parents who live nearby · Cheap holidays due to parents owning holiday house near the beach The point here is, if there is an area where you save money for what ever reason then let the personal lender/broker know. For more information please go to our houses section organising finance subsection for more information. Monthly Quote Being cheerful keeps you healthy
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