Money Makeover - Part 2
by Peter Switzer
At the risk of being called dull and boring, let me remind you again that the main game has to be to find money and get it into income-earning assets.
At the same time, you must have a serious look at the disastrous debt situation you might be in, and then you have to do something about it.
Let’s understand the nature of our problem.
How do we wind up in debt?
That’s easy – we want things our current income and savings can’t bankroll. Houses, cars, furniture and holidays are the key culprits, but some ambitious types do the debt-thing to start a business or to buy shares.
Along with homebuyers, these latter groups from Never Never Land show us all the way. In the end, there is good debt and bad debt, and borrowing for an asset that appreciates (goes up in value) or generates income is good debt. Cars are famous for depreciating the minute you drive them out of the caryard. A car is a classic creator of bad debt. (Apologies to car salespeople.)
How can we make ourselves less prone to debt?
If you are living a life that always ends up with a forever-rising debt-ridden bottom line, try doing the opposite. For the uninitiated, it’s called saving.
How do you become a saver?
There are lots of boring recommendations – like stop spending and you will instantly see savings but the best starting point is to do a budget.
Come clean with yourself
It’s the only way to reform your bad habits.
How do you do a budget?
Pick up a pen and fill in the blanks ...
What you spend ................. (write down $ the amount you spend)
1. Holidays ....... $ .......
2. Mortgage/rent ....... $ .......
3. Other loans ....... $ .......
4. Credit/store cards ....... $ .......
5. Food bill ....... $ .......
6. Petrol ....... $ .......
7. Alcohol ....... $ .......
8. Cigarettes (give them up!) ....... $ .......
9. Train or bus fares ....... $ .......
10. Books ....... $ .......
11. CDs ....... $ .......
12. Newspapers, etc ....... $ .......
13. Entertainment ....... $ .......
14. Sports spending ....... $ .......
15. Hairdressers (don’t forget blowdries!) ....... $ .......
16. Gifts (Christmas, etc.) ....... $ .......
17. Childcare ....... $ .......
18. Clothing ....... $ .......
19. Eating out ....... $ .......
20. Council rates ....... $ .......
21. Water rates ....... $ .......
22. Car rego ....... $ .......
23. Car insurance ....... $ .......
24. Car repairs ....... $ .......
25. School fees ....... $ .......
26. Gas bills ....... $ .......
27. Telephone ....... $ .......
28. Mobile phone ....... $ .......
29. Electricity ....... $ .......
30. Pharmacy ....... $ .......
31. Doctor fees ....... $ .......
32. Dentist fees ....... $ .......
33. Others ....... $ .......
Weekly expense total....... $ .......(a)
Now for the scary bit…
1. Put your weekly take home income here ....... $ ....... (b)
2. Put your weekly expense total here ....... $ ....... (a)
3. Deduct weekly income from expenses ...... $ ....... (c) Your weekly savings
Now, if you are game, take this weekly saving amount and multiply it by 52 to see what you are saving each year, (or you might be dis-saving if this amount is negative).
………….. (c) x 52 weeks = ……………..(Oh no!)
What this means and what you have to do
This exercise can be nearly as scary as standing on a set of scales after an overseas trip or Christmas day lunch. If it’s a big positive, you are sitting pretty in stage one of the ‘how to get rich’ stakes. If it’s a small positive, well, that’s a start. But if it’s a negative, you have a lot of work to do.
My tip? GST your life!
If I tell you to take $100 out of your pay each week, you may think, “Too hard!”
But, look at what you spend each week and ask yourself these questions:
• Can you cut your $200 supermarket bill to $180?
• Can you drink VB instead of Crown Lager?
• Can you go to a restaurant and not have dessert?
• Can you buy a 10 per cent cheaper wine?
• Can you ask for a 10 per cent discount for paying cash?
This is how savings happens. Simply, adopt a ‘get even strategy’ against all the businesses that overcharge you because your spending life is chaotic and not planned. Here’s an example: Do you pay $3 or $4 for a coffee? If you drink three a day, opting for the
former saves you $900 a year, which translates into a $30,000 saving of interest on a $100,000
A surprising and helpful hint
Experts say 30 per cent of the bank fees we pay are avoidable and, in May 2009, the Australian Bankers’ Association said analysis shows there is considerable scope for households to reduce their total fees paid to Australian banks. By some simple changes in behaviour and using tools provided by banks, customers could save a reasonable amount.
We can be our worst enemies because we don’t make an effort daily, which costs us dearly over a lifetime of dumb money practices.
Don’t let debt drag you down – get on top of it to scale new heights.
A bank, by tempting us with credit cards, is the modern day pariah that seduces many of us into a life of wealth-killing debt. Though I have met people who have used credit cards to kick off great businesses, in pure numbers, these people are few and far between.
Credit cards and mobile phone plans suck us in
Don’t get me wrong – debt is essential for most of us when constructing a wealth plan, but not all debt is a good way to get to where you want to go. Bad debt, like a credit card balance of $6000 built up from a Bali holiday, only has value if it refreshes you and opens up your mind to money-making possibilities. If it just meant you came home more worn out than before you went, then it’s bad debt.
Destroy debt, before it destroys you or your relationship
A study by AC Nielsen for Relationships Australia found the following financial facts prevailed for three out of four people, who said their relationship had a major problem:
• They have less than three months’ salary to cover any unforseen money crisis.
• They fork out more than five per cent of their net income in covering creditors’ demands.
• Credit card cash advances are used to pay off other credit card balances.
• They only manage minimum payments on credit cards.
• They are always copping late fees or over-the-limit charges.
• They carry more than three credit cards and all have been taken to the limit.
• They have been rejected for credit. It looks like a case of until debt we do part!
Get smart – it’s in your interest
For credit cards, it is smart to switch from high interest credit cards to low interest ones. My website has information from RateCity that looks at the range of interest rates on cards.
If you have debt everywhere, think about debt consolidation. Here, a whole series of small debts at high interest rates could be lumped together into one big loan at a lower rate of interest and over a longer period of time. These tactics could save you so much interest that they effectively reduce your future debt.
Here is one example that should make you want to be your own debt expert: National Australia Bank has done the figures on a $100,000 mortgage at 8.5 per cent for 25 years. This would mean a monthly hit of $811 and there would be a total interest slug of around $141,000.
By paying an extra $25 a month, the total interest hit falls to $125,300. And if you throw $100 a month extra, the interest bill falls to $45,700. That’s nearly $100,000 saving for an extra $100 a month payment. That’s only $25 a week! You also knock about seven years off the loan.
Instead of being an expert on all the crap you read in the tabloids, become a debt expert – use mortgage offset accounts, build up tax deductible debt and use debt to get wealthy rather than it sending you to the poor house!
Those who fail to plan, plan to fail. So get planning! “The secret of success is sincerity. Once you can fake that, you’ve got it made.” So wrote Arthur Bloch in Murphy’s Law Two.
Everyone wants a reputation for being really charitable but few of us are prepared to sacrifice a whole lot to get this high community rating. Well, to be good with money, you can’t fake it. You have to sincerely commit to a smart plan. A successful money strategy is not simply copied, as your circumstances could differ largely from others.
The anatomy of a good plan
To at least give you an idea of what constitutes a good plan, you will see below some of the best money tips going around. Note, not all of them will suit you, but at least they will give you an idea of what the smarties all know and what they’re doing.
• Assess your current financial position and set some money goals.
• Do a realistic budget to find out what you can save.
• Go to a financial adviser or train yourself.
• Treat ‘insider’ tips or get-rich-quick schemes with suspicion.
• Don’t invest or save in only one area.
• Pay off a house or a unit as quickly as you can.
• Use negative gearing to buy things like an investment property or units in a managed fund.
• Superannuation is sensible and tax-effective – maximise your payments into super.
• Tax tricks can help a good investment get better.
• Copy the wealth-building habits of the rich.
• Research where your money is heading – it’s dumb to lose a fortune then complain that “so-and-so told me to put my money there”.
• Always remember, the higher the promised return, the higher the risk.
• Setting up your own successful business can absolutely kill the returns possible as a passive or sideline investor.
Over the next six steps, I will look at these wealth-building gems that can make your bank balances have the sparkle of diamonds!
It’s now time for the actual stuff you can do to start getting wealthier – the money nitty gritty.
In the earlier steps, I have given you the fundamentals for changing yourself, setting your goals, finding the money to invest and destroying debt.
Over the next six instalments, I’ll look at plans that work and that have helped others. There is no silver bullet or magic pudding – outside of luck with Lotto or Powerball – that will build your wealth. But there is a very consumable cocktail that will deliver you the pleasure often only reserved for French champagne (and that’s what you will be drinking if you follow my rules for getting richer).
Aussies love property
Let’s start with what most people love and trust most of all and that’s property, real estate, bricks and mortar! I like property because the banks will lend you a lot more money and that’s how people build wealth – borrowing for assets that have great capital gain.
Worst house, best street
The easiest way to build wealth is to buy a poor property in a great street and suburb. You get it for a good price, you renovate it sensibly and you pay it off and own it. On the other hand, you could pay interest-only money, say for five years, which reduces your repayments, which helps fund the renovation, and then you sell to trade up. Remember, there is no capital gains tax on your principal property, which makes it a great money-maker.
Pay it off fast
Many people pay off this home really quickly by throwing bigger weekly or monthly repayments at the mortgage. They then might buy an investment property. This was a great tactic of immigrant families who culturally, like us, have loved trusted property big time.
With an investment property, the tax office helps you. Yes, this is true, so stay with me on this.
Investment properties, unlike the principal property you live in, attracts a capital gain tax if your property increases in value but you can claim a tax deduction for your interest repayments and any other expenses you incur in running the business of being a landlord or property investor.
Negative gearing is when you borrow to fund a property where the money in rent will be less than money out, including interest, agent fees, maintenance costs, rates etc.
Why do people consciously lose money? The answer is simple – capital gain! They think over time the tax deductions and the gain will make the whole deal pay off.
You can use a good accountant or, better still, a quantity surveyor who can help you increase your expenses and this can make the whole thing cash flow positive. Lots of people don’t claim their rightful deductions and this makes the exercise less profitable over time.
Some people decide to rent so they live exactly where they want, say in a trendy part of a city, but they own five or six homes as a landlord. If they have good income and they work the tax deductions well, it can be a good wealth-building strategy.
Buying cheap properties
In contrast, I knew a guy who always bought what he called ‘penny dreadfuls’ in a poor area where the rent was high enough so that the money coming in was more than money going out. These were positively geared properties and many of them became very valuable over 20 years and his plan was a ripper. These can be hard to find, but they are out there.
A word or two of warning
Do a lot of homework on the property, the suburb, the rents you can charge and any other factor that could ruin your investment, such as termites! Don’t pay or borrow too much and make sure you can cope with a three per cent increase in interest rates. By the way, if you are not an expert and won’t do the homework, talk to an adviser or expert who can show you stuff that could make a real difference to the profitability of the wealth-building plan.
The story so far...
• Get smart when it comes to money: Read books (or e-books, like this one), speak to experts and make sure you’re across your finances.
• Make a change: Make a real change when it comes to your money habits. Write down your financial goals and practical steps to achieve them.
• Save money and build wealth: Follow the habits of successful wealth-builders: have a money plan (and stick to it!), save every month, stay out of dumb debt, make sure the price is right before you purchase, buy pre-loved goods, take care of your stuff and get into shares!
• Save some more: Put the spotlight on your debt – do a budget! – and get smart about how you can save and stop shelling out unnecessarily.
• Destroy your debt: Don’t let debt drag your down – learn how to get on top of it to scale new financial heights.
• Perfect your money plan: Remember, those who fail to plan, plan to fail! Make sure you have a money plan that works for you.
• Know the trick of the trade: Property investment – the pros and the cons – in plain English.
Click here to view Money Makeover - Part 1. Steps eight to ten will be available in the next edition of Switzer News. You can also download the full eBook on the link below.
12 STEP MONEY MAKEOVER: DOWNLOAD THE FULL eBOOK HERE
Published on: Wednesday, January 02, 2013