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MONDAY MONEY – Something Special

Having fallen foul of the flu this week I have been pondering what I would write. Whilst the head is still a little foggy I thought it best to look at something that I managed to do with my daughter in a couple of days as a gift for her cousin.

It is not an expensive thing to do, making a gift for someone, it is something very special, with time and love spent in making it. The commercialised side of Christmas has really taken hold. I would say for most people it is a case of what is the latest gadget that I can get, what piece of technology is there out there that I don’t have. The one that leaps to mind for me is the IPhone. My son has told me that I don’t need an IPhone as I only need a basic mobile, I would never use all the other bits and pieces attached. He’s probably right!

Anyway, I move off the subject. I drew my daughter a picture onto a piece of wood, coloured it in and then cut it into a puzzle for her. Yes you need to know how to do this sort of thing, but there are many gifts to be made. Without prompting she wanted to know if she could make one too, for her cousin we are going to visit at Christmas. She is 4 and I looked at her and said of course, thinking that I would end up doing all the work. How wrong was I, she helped search the internet for pictures of a tractor (her cousin is into tractors), then I drew it onto her board, and she coloured it in. Not the idea I had. Her cousin is going to get a brightly coloured tractor puzzle that she spent 2 days making. How much more special can you get (photo here).

So on a somewhat shortish note, think about the latest gadget you’re thinking of getting. How much love and thought is there in this? I love my gadgets and toys that I have, and yes it is great to have an excuse like Christmas to go and ‘upgrade’ again. At the same time though, isn’t it nice to have that little something special, the thing that says I really thought about you at this special time of the year.

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MONDAY MONEY – Getting the right gift.

As Christmas rapidly approaches I have been watching and listening with interest to friends and people around me at work as they start to get organised for the gift giving and all the associated glitz and glam of Christmas. The impact of the financial crisis might be having an affect as there is more of a feeling about getting the right gift, rather than just getting something to unwrap on the day.

I come from a fairly large family, 4 sisters and a brother, plus several foster kids that have stayed close to the family. We have all grown; married and now have children of our own. For a number of years now I haven’t bought family presents, it just became to expense. I can remember a number of years where I bought everyone something, it all added up, and in the long run I have no idea if the gifts were appreciated or not. I know that a lot of the gifts I received were dust gathers and not anything that I could find a use for.

When I moved further away things became easier. I was happy to say don’t get me anything as I will just have to try getting it home and I don’t have room in the suit case. Problem is that most of my family don’t listen, so I got some amazing gifts, like a 2 metre long pole that my nieces hand painted, or the glass bowls or glasses that were hand painted. It is not the gift, but the thought that counted. I am going to sound very cynical, but I think there was little or no thought at all put into these gifts. Nothing is better than having to throw the item out.

So there is the question of how do you get the right gift. I suppose this sounds a little mercenary, but asking them is a very good place to start. I would suggest however before going to ask people that looking at your budget and working out what you are going to spend would be the best way to go. You can then decide to tell them or not what you were planning on spending on them.

When my son was a teenager (not anymore) he knew what he wanted and was happy to tell me what it was. Most of the time I was able to get the ‘perfect’ gift for him. It was great when he told me that if I couldn’t get what he wanted, cash or a gift voucher would do just as well. Don’t you love the mind of a kid, don’t put yourself out, gimme the cash! I didn’t like doing that because I felt it wasn’t in the spirit of Christmas. It wasn’t until I saw what he did with some of the gifts that I thought were just right, that I realised what a waste of time, and money there had been into the gifts I got.

There is a huge amount of waste from Christmas. It is not just the present; there is the wrapping paper, cards, tape and string, all the trimmings for the present. I don’t want to become Scrooge, but I do think the commercialisation of Christmas has spoilt it for many reasons. I can remember mum spending many hours in the kitchen cooking up treats for family and friends as gifts. Then there were the presents that they made for the children. As our lives became busier the making and love that went into Christmas seems to have been moved onto the back burner.

This year there is going to be a different approach to gift giving for me, hopefully I can put into the thoughts of my gifts more love and attention than just the dollars required to buy something. Our family is going to be celebrating Christmas a number of times, in a number of locations, with some members of the family we haven’t spent Christmas with in about 10 years. We have decided that the children of the family will be the ones we have gifts for, rather than all members of the family. A handshake and a hug will hopefully be the special gift this year, along with being able to watch the children have fun on the day. And hopefully the gifts for the children will be something that they get enjoyment from for longer than just a couple of days before ending in the toy box or trash heap.

Rereading this I think it is a little on the negative side, I haven’t changed anything along the way as I went through it again. My reflection on this is that I have for a number of years bought and wasted some gifts that I thought were the right ones for the occasion. Looking back at things I was very wrong. So I am going to stop and consider much more carefully what it is I am going to buy to make sure that it really is the best gift for that person, with all the love and affection I can manage.

So when you are out getting those last minute things, don’t get caught buying something unless it really is the ‘right’ gift, cos it will end up trashed, one way or another!

MONDAY MONEY – GETTING INTO THE MARKET

There needs to be a starting point. It doesn’t matter what market that is being considered to get into, it needs a starting point. There are many different markets that one can consider entering, the main ones being shares and housing. Within housing there is investment and for living in. Some people believe that a house for living in is an investment whilst others may not put it in the same category. I personally think that the house you buy to live in is a good place to start your investing, if done correctly.

So what do I mean by correctly? As with anything we do, there should be plenty of research into what it is you are going to do. As an important question, can we afford what we are about to do? The answer is usually yes, it may stretch us a little, but yes we can afford to do this. I am talking firstly about purchasing a house, usually the most important purchase we make. We plan out our income, look at what we can afford, and then buy the house that is going to use the maximum we can borrow.

Perhaps we should look at this another way. We want a 4 bedroom, 2 bathroom, 2 car house in a nice neighbourhood. Quiet street away from the traffic and hassles. The house we want is at the top end of the market, we can afford it, say over 25 years, going to raise the family here, perhaps even retire whilst we are still living in it. The value of the house will have gone up in the time we are living here, good investment. No question. For the area the house price is say about $600,000.00. Sounds lovely.

Now let’s look at the same thing differently. By finding a house in perhaps a little less desirable location, say a main road, or a little further out of town, or even a less popular neighbourhood, you can buy the same 4 bedroom, 2 bathroom house for a lot less. Getting into the market at the lower price will mean that you can pay the house off in much less time. This may not be as idyllic as the first scenario, but it will mean that you are clear of debt much faster, as well as being in the market.

Another factor to consider is getting into the market at the lower amount, paying off as much of the house as you can quickly, before starting the family etc, and then looking at upgrading at a later stage. Most houses appreciate in value so there is little risk of losing once you are in the market. Houses in the area appreciate at the same rate, so being in the market is better than not at all, moving does cost, but nowhere near what the cost of the more expensive house is going to cost over time.

We tend to buy the end product, rather than looking at ways of getting to it in a more affordable manner. We bought a house on a main road, bus route with a bus stop outside the front door, for some people this would be the last place they would buy a house. There were a couple of factors that helped us when we got it, the location being one of them, the other was that it had been on the market for a while and not sold. We were able to put in a very low offer and luckily made the purchase. For us it was great, lower than we could afford which meant we had room to move with our finances which has lead to us being able to pay it off sooner. Now we have several options available, there is equity in the property that we can borrow against, we can sell it and buy in another location or keep it and rent it out.

I’ve talked about a house to live in, the same goes for an investment property. The range of properties is immense, we don’t have to have the top end of the market to make money. There is a note of caution here though, there are risks at all levels of the rental market, but there can be more at the lower ends, so research is more important along with good insurance. Getting something a little cheaper and being able to get a good return may be better than spending more for the same or a little better return.

I am not keen on shares, I know many people who prefer shares to houses. I have several parcels of shares, I don’t do much with them, they sit there and do their thing, I get annual reports, which I don’t understand most of the time along with a statement and payment for the year. The tax man probably is more interested in this than I am, I pay the tax so make him happy and I get a little extra cash. Along with the house, it required research before I entered into the share market. Having done this, I thought I was well positioned to make the purchase. I now have shares that I can sell if needed or keep, hopefully not losing anything on them along the way.

The purpose of this weeks Monday Money is really about getting into the market, at a level you can afford. I would like to hope that in the changing times we face ahead of us that people can still get into the market. It concerns me that we are still getting in at a level of affordability which is way higher than perhaps it should be. Are we risking too much to get in? Have we researched what we can really afford? Should we look in an area or at something that is going to ‘stretch’ us less, and therefore put us in a stranger financial situation sooner?

MONDAY MONEY – INVESTMENTS Paying off Debt and Investing for the Future.

My strongest recommendation is to pay off the debt you have, and then plan further investments for the future. Many of us have debt, usually 2 or 3 loans, ranging from short term to long term. With all the loans there are fees and interest that we are paying. It is worth doing a few calculations to see how much you are paying back on all the loans. Once you have done this you will realise how much money you have for future investments.

Starting with the loan (credit card included) with the highest interest rate, how much is the monthly repayment on this account. If it is a credit card then there needs to be a plan not to make any more purchases using the card, the aim is a zero balance and then to get rid of it altogether. Pay the minimum on all other loans and put everything into getting rid of the highest interest.  Once this is achieved, using the monthly payments from the loan you have just paid out, add these to the next highest interest rate loan and pay it out. Adding the 2 amounts together will reduce the loan in next to no time and save you a huge amount in fees and charges. Keep doing this until you have no more loans left.

This sounds so simple, so why is it that we don’t do it? A big reason is discipline! We are not good organisers and really do not handle our finances as well as we would like to. There is always something more important than getting ourselves out of the financial mess we are in from week to week.

I think a fairly new product on the banking scene is the Offset Account. I know more and more people are finding this and starting to use it. I certainly did and it made a difference to my situation. Basically it is an account you have your savings or pay go into. Any interest on the funds is used against a nominated loan account. It is worth talking to your bank about how it all works. They should be able to explain it clearly. The interest that I saved on my loan I added to the repayments and I was able to reduce the loan faster, and in turn save more money.

There is a fine line between investing for the future and paying off debt. I strongly believe that we should be investing for our futures, and those people who make money from having us put money into their funds would agree with me. But I would say that we need to be a little cautious in this area, as we try and sort out what is sound advice and what is perhaps helping keep others employed.

It is all the harder when interest rates are low, there is a real chance to build some savings as I don’t have to pay as much in interest each month. Another way to look at this would be to say, here is a great opportunity to reduce the loan faster and reduce my debt! How many people have looked at this and kept paying the larger amounts into the loan, or have they gone ‘whew’ less strain on the budget and used the money elsewhere. I would hazard a guess to say lots of people have done the latter! I know what I have done in the past, lessen the strain on the budget is usually the path people take.

So how do I plan to make some real changes in my financial situation? My starting point was to look at all my expenses, then my income. From there I developed a budget. 3 simple steps. Making sure that my income was greater than my expenses each fortnight, including payments for loans. Once I had this information I was able to establish what amount I had per fortnight over and above my expenses, and what I could reasonably add to one of the loans I had. With this in place I made sure that I stuck with paying out the first loan. Next as I said before, adding the first payment to the second loan and paying it out. Not long before debt is being reduced very rapidly.

Once you have paid off the loan/s or repaid the money to someone else, you can start to seriously look at your future savings. Over the life of a 30 year home loan, you will have paid back in interest about the same amount as you borrowed. So it stands to reason that if you can repay the money sooner then you will pay less, and therefore start to save sooner.

I really do hope this is understandable as I have had a deal of difficulty putting it together. The main point is to not be paying interest on loans to banks as you try to save for the future, look at paying off your debt and then build a positive investment.

MONDAY MONEY – Debt

I started putting this as part of another topic and decided it needs more consideration. It was going to be part of a topic on Investments and whilst it still is, I think it better to take a look at Debt on its own before exploring other areas.

What is Debt?

Stop and think about this question before answering it. What does Debt mean to you? Perhaps it is worth stopping here and writing your answer down, make a comparison to what I am suggesting. I have spoken with many people and there appear to be many differing views on what Debt really is. I’ll save my answer for later!

Not all Debt is a bad thing. We go into Debt to buy a house to live in. Some people also use it to buy a car. These debts are not all that bad really when you look at it. Who can afford to buy these things outright in the first place? Surely it is better to have a house you are buying than paying off someone else’s loan as you rent? Almost always the answer is yes, this is a good idea. For many people these things are not being in Debt, they are part of our daily lives, an expectation.

I have a son who has just bought into his first home at the age of 24, he bought in with a friend. Between them the maximum they could afford to borrow was $500,000. How much did they borrow? Yes, $500,000. Both have reasonable jobs and a good income. With the first home buyers they have been able to buy a few things they need to make the place comfortable, you know, the flat screen plasma, new leather lounge and bedroom suite, all new and the better quality!  To me, this is a bad debt because they have left themselves with no reserves.

When investigating the possible loans online, all the loan calculators give you a figure of what the maximum is you can afford to borrow, therefore what you can manage to repay. How many people look at the figure and then look for something less than the amount you can borrow? Check with your friends on what they did? What did you do? Did you look for something cheaper, in an area that you perhaps didn’t want to live in or something run down, or did you borrow the maximum and then struggle with the Debt.

Our venture into the housing market came at a time when prices were going up very rapidly, if we didn’t get into the market soon, it might have been impossible, or at the very least, difficult. So we organised our finances and started to research what was available. We looked in a number of areas and locations, finally making the decision to buy something on a fairly major road. The prices of other houses in the same area but not on such a busy street were considerably more. It got us into the market and we have kept pace with houses in the area, something we couldn’t have done by simply saving. It is by no means the perfect house but we have developed some attachments to the place. We have been able to pay it off quickly because it was well within our affordable range. We now have considerable equity in the house, and could sell and upgrade any time we want to.

I spoke with a young chap about his plans for the future, he wants a house, was paying off the car, planning his wedding etc. His plan was to move into a suburb that was going to stretch his finances. We spoke about what other options he could possibly look at, perhaps a smaller house or another suburb that was more affordable. All good options, yet he stuck with his plan and is probably going to struggle for many years. This isn’t just a financial burden but can also put stress on a young family and limit other options. Why not get into the market with something more affordable and pay a larger amount off, or as much as you can afford, then use it as a stepping stone for the place you really want to be in. Instead he’s struggling, so this is definitely what I would call a bad debt!

The other bad debt is the one to purchase all those things you really can live without but must have anyway. The personal loan or credit card, things you want to have in the house, or items that you should really look at saving up for rather than buying right now. These are ‘wants’ rather than needs. The thing here is to look at what the debt is going to do to you, both short term and long term.

In a previous Monday Money I wrote about Credit Cards, and the money being borrowed. All debt is borrowed money and has to be repaid at some stage. We need to look at ways of changing our purchasing power so we use what is already ours, rather than getting a loan from someone else. The borrowed money needs to be considered as living beyond our means in the first place. Surely if we can afford the item then we can pay cash for it or save the money to buy it.

So what is my definition of Debt? I would like to suggest the term covers any ‘money you have borrowed’ for the purpose of purchasing something you want or need. It is money that you have not yet earned, so belongs to someone else and therefore has conditions attached for its use. These conditions include things like having to repay the money along with interest, fees and charges. In other words it is going to be more to repay than you originally borrowed.

Therefore I would suggest that there are 2 types of Debt. I place these into 2 categories, the good and the bad. The good debt covers the things like a house to live in, something that you can afford to pay off in less than the term of the loan. I would also include a second hand car, something cheap, reliable and affordable, again paid off inside the life of the loan. This should be done without having to stretch the budget, perhaps using the repayment amount for the maximum you could have borrowed, but actually borrowing less to pay it off sooner. Bad debt is any loan, including credit cards, for the items that with disciplined saving you could afford to pay cash for and avoid fees and interest. Or any loan for something you didn’t really need!

I’ll leave you with a question this week. According to my 2 types of debt, which have you got?

Monday Money – CREDIT CARDS – What a misnomer!

I like my credit card, it gives me a sense of power, control and a feeling of financial wealth. When I first got a credit card I had a limit of only $2,000, something small and manageable. It was relatively easy to keep in check, paid off at the end of each month and a really convenient way to pay for things. As time progressed the priorities for the budget changed and the paying off the credit card changed, and before long the card was at its limit. Sound familiar. Minimum payments became the acceptable norm for the month, sometimes a little extra went towards the bill. It wasn’t a debt, it was only the credit card.

Through the post came the first increase, an offer from the bank to increase the limit, take the pressure off, and couldn’t I use the extra money. The limit was now $5,000. More power, hey, look at what I can now use to buy things, bigger and better. Stroke the ego somewhat. Great way to pay the various bills on time, and leave the cash for other expenses. It was terrific, but in the long run a huge trap. The card remained out of control soon reaching the limit again, now the problem was even greater. Still the same income, but now the bill has increased, no wait, it is not a bill at all, just the credit card, make the minimum payment and things are sweet. Next bill in, the payment from last month only just covered the interest and charges.

As I said, I like, no, loved my credit card. I eventually let the limit increase to over $20,000. So much power with that amount of money. I refinanced the housing loan a couple of times to pay out the card, the aim was to get rid of it because I couldn’t control it. When completing the paper work the bank encouraged me to keep the card, and I let them. I worked with the best of intentions to keep the card zeroed each month, for the most part kept it that way, then the odd big item on the card, not so easy to get back to zero, slowly but surely it crept back to its limit, back in the same situation.

The name ‘credit card’ needs to be changed! It is not credit at all, and if we change the way we view and use this money then I know that people’s financial situations would be completely different. It is not your money that you are using; it is over and above what you have as an income. This money needs to be returned to its rightful owner, and it comes with additional costs, the money you use is probably going to cost you double what it would if you paid for the item up front with your cash. So the big ticket item that you want, need right now, on the credit card. Intention to pay it off in less than 6 months, at say 20% interest, the catch is that you don’t and the charges keep adding to the original cost.

To replace the credit card with something else is not easy. Firstly you will have to pay off the card, then what is there in its place. I suggest that you pay the card down, attack the debt, have a planned approach to reducing the amount. I liked to see on my statement at the end of each month an increase in the balance available and a decrease in the amount owing. Online banking is great for this as there is immediate gratification as you pay it off. Print out your statement and celebrate your success. Take control of the card altogether and start to reduce the limit available, this doesn’t have to be huge amounts, small is good, as the balance goes down, look at increasing the reductions on the limit as you take charge over the card, not the card over you.

As I thought about the credit card, I realised that to replace the card I would need to have the same amount in savings as I had as a limit. This is a really daunting thought. Think about it, if your card has a limit of $5,000, and then to replace it you have to have $5,000 of your own on in saving account. That is a swing of $10,000 if you are to be in control; perhaps this is why we don’t do anything as the cost of setting this up is beyond what most of us see as even the remotest of possibilities.

Have a look at your credit card statements for the last 12 months, go through and total up the amount of interest that you have paid? Think about the items you purchased and make sure these are items of need, not wants! The money you borrow needs to be for very special, emergency situation, and then a strategy put in place to pay it off as soon as possible. Keep a track of what it is costing you for each item, it will change the way you use the card.

I used this process to reduce the limit that I had on my credit card. I didn’t totally get rid of the card, I have a much smaller limit and basically use the card for emergency purposes only, and the balance is paid at the end of the month if I use the card, costs me nothing otherwise. I now have a Visa Debit card, the convenience of a Visa card, but using the funds that I have in savings. It really means that I have to have the money saved for the purchase, rather than just wanting something.

In the long run, the money you save by not having to pay additional interest and charges will help you gain control of your financial health.

Monday Money – WHAT AM I WORTH AND HOW DID I GET HERE

This is a little personal history about where I am coming from when I am writing about the financial achievements which have occurred during my life. Hopefully this will give some insight into where I am coming from and that there is some real experience that I am basing my comments and information on. There are many experts in the field that are worth listening to, Paul Clitherow and Robert Kiyosaki are two authors that I would recommend reading and listening to the suggestions they make, following their advice is an even better choice.

I left school as soon as I could, not one for the classroom from a very early stage. I am left handed, so what you might say, but a year 2 teacher decided that I should use my right hand and broke several rulers across the back of my knuckles. Not character building or anything like that, just put me off school for a very long time. My first job lasted for a couple of years, full time employment, working for a children’s organisation on the grand sum of $85 a week after tax, heaps of money to a young man who didn’t have many over heads still living at home. I had some savings, not much and to my shock, was fired along with a couple of others, down turn in funding and we cost too much, replaced by a couple of 17 year olds.

My savings depleted I decided to look for a job, that very morning a call from my mother asking me to help her out and cover a job due to a bus accident. Not a big issue as I didn’t have anything else to do, and I knew it would be paid or at least I was able to stay at home and not feel guilty about not working. Without dragging out the love book and all the soppy stuff, I moved out of home at the age of 19, and for the first time had the experience of having to fend for myself. No one taught me how to manage the situation; hey I thought it would be a piece of cake. Wrong! After a few weeks I was in a total financial crisis, more money going out than coming in. The results of which I moved into a shared house with 3 others, and boy did that make a difference. Things started to change, financially as well as long term as one of the house mates later became my wife, we lived together for 4 years, gradually not replacing flat mates until we were on our own.

If this isn’t interesting, then skip a paragraph or two and pick it up later. I am sure that it will or won’t make more sense later; it is parts of what has helped shape the decisions that I make today, ones that I hope you can look at and perhaps think about how these might change things for you. I bought my first house after having a lease on a rental come to an end and looking at what we paid in rent and what we could afford to pay on a mortgage, 2 incomes and no children sounded good at the time.

Oh how quickly things change, and I am sure that some of you will be reading this and gasping, saying that is what happened to us! In my case, it was the most fortunate things that could have happened we moved into the house in May, found out that we were expecting our first child in February, got married in September, and experienced the eighties increases in interest rates, up to 17.5% in 1987. I learnt a lot about managing the financial running of the house.

We struggled from pay to pay for a number of years, the credit card became maxed out very early on and meeting the minimum monthly payments was usually all that I could manage. The insurance on the car didn’t get paid more and more often, more good fortune than management that we didn’t have an accident because that would have really stretched things further. As I have said before, there was a limit to making ends meet, and having a 2nd or 3rd and even a 4th job became the only way to keep things going. I could ramble on about the next umpteen years but that would be rather dreary, but suffice to say things slowly improved, especially when the interest rates went down. We didn’t change our lifestyles; rather I was able to cut back on the hours that I worked.

So jumping further forward, I divorced a number of years ago, with 1 child to support, as well as leaving most of the contents of the house and a significant part of the savings. We had a year before sold the family home so only had cash and possessions to sort. The credit card debt and loan on the car became mine, some $50,000 all up. There are no winners from this; both parties are going to come away with their own perceptions of who got what and what it was all worth. At the end of the day, I believe that I was left with what was reasonable.

I had a new lady in my life and we settled in together. It took me a couple of years to sort things financially. We took a punt on buying an investment property, something we talked about and researched for a few months before going ahead with. We looked at areas of growth, costs of housing in the area and what the rental returns could be. Fully armed with all the information we thought we needed we looked at 2 bedroom units, we set our price at under $100,000, armed with a newspaper and street directory, drove around looking. We had our finances organised, knew from our discussions what we wanted to buy and set about doing exactly that. Within a short period we had bought 4 units staying within our budget and the rules we had laid down.

We purchased our house over the Internet, using the photos online and asking the agent to take and email others to us. We found several houses and set about researching each of these, the purpose for the house was to get into the market, not as a life long commitment to the place. We found a place and put an offer in what we were prepared to pay, if the vendor was unhappy with this then we would move on, I made this very clear to the agent. So when he phoned back saying the vendor wanted $5,000 more than we offered, we thanked him for his time and hung up. A day later the offer we had put in was accepted. Sounds hard nosed, it was but we wanted into the market at the lowest price we could get and were prepared to work to get what we wanted.

So where has this put me now. We sold 3 of the units as they had increased in value by about 200% in four years, paid off the house, and have now bought another 2 properties. Our property portfolio is worth about $900,000 with less than $150,000 in loans. The $24,000 limit on the credit card is gone! We have no other debts.

This isn’t bragging, I want to show you what can be achieved. It does require work to get things in the right place, yes there has been an element of luck in what we have done. This sort of thing can be done anywhere with the courage to get in and have a go, not just hope that things will work. And yes there are risks involved, hopefully managed so they are minimal.