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Savings and Social Media

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silent saving
Saving is silent, consumption is conspicuous

At the most basic level, the only way to grow wealth is to earn more than you spend and save the rest. If you can get that wealth equation to work for you, then you’re not going to have to worry about financial independence at any time in your life, but we all know that life happens, and more importantly – emotions happen. Humans are complicated, add money into the equation and it really becomes a mystery. Money has the power to completely change someone’s character, and let’s face it, it is even one of the major motivations for murder. We all have a ‘money mindset’, and often that is deeply entrenched in how we’ve been brought up, or the challenges we have had to face getting to this place. The past doesn’t always stay there, it lives in your mind and can influence everything you do, positively or negatively. That doesn’t mean to say that that mindset cannot be changed, the brain is a powerful thing, and more importantly it has plasticity, the ability to grow new connections all our life. We might have the most neurons we ever are going to have at birth, but considering we only ever use 5% of that brain, we have billions of ‘spare parts’, so we can make new pathways and those neurons can grow new connections all the time.

Building up a habit is the equivalent of walking a well-worn path in the brain, so deep it can become a rut. When we’re out and about doing our daily thing, we naturally walk down paths, they are easier and more comfortable – the same with our habits. We are often oblivious to our habits – how we dress, eat or talk. We all have money habits that we are probably just as unaware of, and most of those are wrapped up in emotion. Do you get a sinking feeling in your stomach at the beginning of the month when the cacophony of notification after notification signal the decimation of your bank account? There is a very good reason stores have payday specials – it isn’t that we are all looking for a great deal, we’re often looking to get a retail therapy high – because we deserve it.

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Pay-off Debt, Invest or both?

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do it anyway

Do it anyway…

One of the most common questions I am asked is “Should I pay off my debt or Invest?” Logically, the answer is simple, pay off expensive debt before you invest, but this doesn’t take human behaviour into account and in the long term can result in someone ending up with no investments.

 

Why? Debt has a habit of being continually paid down and built up again, despite the best of intentions. So basically, unless you have never built up debt again having paid it down, invest anyway. This blog will give you one way to do that – sensibly.
In this uncertain world, you have to look after number one – you and your family. Keeping yourself ‘liquid’ is a very smart move. We are quick to forget a short nine years ago when the credit crisis really hit and banks stopped lending money – to anyone. Even “access bond” accounts were frozen. Going even further back into the 90s, interest rates went over 20%, doubling and tripling bond repayments. How would you fare if that happened again?
You’ve probably heard the phrase ‘pay yourself first’ numerous times – but what does that really mean? Does it mean you invest and your creditors must wait? No. It’s important to preserve your credit rating (some employers look at this too.) It means that you put yourself in the position that you get rid of the albatrosses around your neck, and gradually take back their share of your pie.

Cleaning up your act so that every month you put something into investment is a phased approach. It’s like all good intentions, if you want the habit to stick, you start to do something PHYSICALLY – but you don’t go all out or you – and your goal – will burn out. This is why I like the step-by-step approach. Putting your money on ‘diet’ is like going on diet to lose weight, you can’t go ‘cold turkey’ – money has to be spent on necessities and food has to be eaten so you don’t die – but you’re not going to die if you stop smoking, drinking or spending on luxuries – even if it feels like you might.
Step 1: You need to know what your present status in broad terms – what your ‘liquidity’ looks like. In other words how much money you have left after all the fixed and regular payments have come off, including your credit card payment (irrespective if it was in full or partial) from the previous months. If there is nothing or you’re going deeper into debt every month, you have little option but to dig deep into those expenses and find out what or who is poking holes in your wealth bucket. The lowest hanging fruit is day-to-day expenses. You have to break the cycle and find the best way to do it – for you. If you’re this far down the hole, you need to stop digging. Take out the cash needed for the bare minimum of day-to-day expenses and don’t touch your bank account or cards for a month or two. This ‘cash diet’ can break unhealthy habits pretty quickly.

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Debt – Love it or Hate it?

in Debt, Investment Leave a comment
debt

Love it or hate it, just understand it before it kills your wealth

At some time in our lives, (usually early on) debt is unavoidable, especially for high ticket items like houses or cars. Depending on how you were brought up, it was either dead easy or as scary as hell. As time goes by we get used to it, so the next debt we take on is easier, and if we’re too complacent or have a run of bad luck then it can spiral out of control. Debt isn’t just a number on your balance sheet, it often has a physical effect on you. Obviously it is going to depend on your risk appetite, but usually, the more debt the more stress you take on. Some people relish in that stress, but they are in the minority.

We are often sent mixed signals about debt, especially if we are in business. ‘Leveraging’ (which is just a fancy word for debt) is seen as ‘smart’. “Use other people’s money” we’re told over and over, so how do we fix our relationship with debt, get it into perspective and understand ‘good’ and ‘bad’ debt?

For a start, if you’re in business and you have limited liability then leveraging your business is often smart and necessary so you can gain critical massJust be aware that banks have cottoned onto this ‘limited liability’ and directors now have to sign personal surety for any ‘accommodation’ (yet another euphemism for debt) you’re given (read the small print). They prefer it if that surety is backed up by a physical asset too of course so if you don’t pony up when they ask, they can just take your house. Lose/lose much?

Being in debt early on in your life is like being on diet, you can’t eat nothing or you will die, so you have to find a happy balance. Of course, everyone’s balance is going to be different, but again, like weight, there is going to be an ‘acceptable’ zone. If you decide to have zero debt ever (and don’t have a trust fund to live off) then you may wait decades to get onto the property ladder. Owning your own home is not a necessity, far from it, but let’s look at when it is sensible, and when not. A mortgage bond is made up of two components, interest and capital. These days even the banks will split this up on your statement. The interest is rent, the capital is your investment. If you rent, then your payment should not exceed the interest portion of a new bond. Why a new bond? As time goes on, capital is built up in the asset and the interest portion comes down until the last few years when it is almost all capital/investment. As a landlord you usually want the tenant to pay off the entire bond, interest and capital, and more often than not that is what happens. A landlord will justify the rest as ‘risk’, with good reason. Regulations are not landlord friendly and defaulting tenants are on the rise. So, basically, if your rent is more than the interest on bond you could get on that property you should get your own. Having your own rental property is a whole different topic, but you can read about it on my blog HERE (or HERE or HERE - it is a pet topic of mine).

When deciding what is good and bad debt there are two things to take into consideration, the interest you’re paying on that debt and what percentage that debt is of your annual income. It is also important to read the small print in that debt agreement and make sure you’re not tied into something for years with no escape clause (without penalties). If you’re unfamiliar with ‘cheap’ or ‘expensive’ debt it’s time to do a bit of research – it will only take minutes but will save you thousands in the long term , thousands that you could be ploughing into your wealth.
The Reserve bank sets the ‘repo rate’, at the moment it is 7%. Prime interest rate is usually 3.5% above this, i.e. 10.5%. That is the bank’s ‘margin’ aka profit. One can usually get a ‘prime’ interest rate on a mortgage if your deposit or equity is more than 80%. Do you know what yours is? Credit card debt is usually around 18% which is clearly ‘expensive’ and should be avoided at all costs. Personal loan interest rates can get much higher than this – up in the high 20%s, and payday loans as much as 500%.

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