For a lot of people debt is a monkey on their back.
Try as they might, they can never get rid of the debt that is keeping them from their financial freedom and the wealth they deserve. Sound familiar?
Well, there is a tried and tested way that you can eliminate your debt and start saving. At first it may seem a little counter-intuitive but it has worked for real people like you who have decided that they would rather keep their money than give it to credit companies and banks.
There are three steps to eliminating your debt:
- Stop taking on new debt
- Start an emergency fund
- Implement a debt snowball
Stop Taking On New Debt
This is the first and probably the hardest step, but it is fundamental. There is no point in paying off debt with one hand and accumulating new debt with the other.
You need to create a budget, reduce your spending and live on only the money you have.
The other thing you have to do is to cut up your credit cards. Yup, you read that right. Cut ‘em up! Don’t cancel your cards, just cut up those slivers of plastic so you aren’t tempted to use them.
This will be really hard for some people, but they are the bane of your debt-ridden existence. And you don’t need them.
You can easily use a debit card in place of your credit card for all online or hotel or rental car purchases, using you own money. And you shouldn’t be using them for emergencies – that’s what your newly created Emergency Fund is for.
Start an Emergency Fund
First I will go over briefly what an emergency fund is, but you can find out more information in one of my previous posts.
Basically, an emergency fund is an amount of money that you keep aside for a rainy day. How much money is hotly debated, but for this exercise in debt elimination I would start with $1000.
Why start to save when you still have debt? Well, for the simple reason that this fund will protect you in case there are other financial hiccups along the way like your car breaks down, you get sick and are off work for a period of time or any other serious financial crisis.
The main thing to remember about your emergency fund is that it is for just that: emergencies. It is not to be used to pay bills, buy food or a night out. Forget you have it until you really need it.
Implement A Debt Snowball
Paying off debt is a difficult process, especially if you have several debts to pay.
The first thing you need to do is to list all your debts in order from lowest balance to highest. Once you have done this write down the minimum payment required for each debt and continue to make these payments.
With any remaining money start paying off the first debt on the list. Pay off as much as you can manage until it has been completely paid off. Then start on the second on the list.
Why pay off your debt in order of lowest to highest? Because, like spending, paying off debt is mostly a psychological process. You will get a nice buzz when you have eliminated that first debt and it will spur you on to paying off the rest.
I know that this isn’t the most rational way to approach debt reduction but trust me when I say it works. I paid of the debt I had this way and it will work for you too. Just focus on paying off one debt at a time and then keep up the payments until all of your debt is gone. And keep imagining how you will feel once you have succeeded!
WHat do you think?
Image Credit: SqueakyMarmot
There are only two fundamental ways to increase your wealth:
- Decrease Spending
- Increase Income
That’s really all there is. Problems arise when people cannot do one or either of these.
Which One Do I Focus On?
From the very start of your journey to financial independence and wealth creation you need to decide which of these two you want to focus on – or whether you want to focus on both.
Most modern personal finance blogs, financial advisors and other money matter specialists tell you to focus on the first one: decrease your spending.
This is due to the fact that people generally get themselves into trouble when they spend more than they earn. They generally start using credit cards and personal loans to buy things they cannot afford (at least at that moment) and then find it hard to keep up the repayments.
There are a few personal finance blogs however that have decided to focus on the other side of the coin: increasing income.
They give (mostly good) tips about gaining skills, getting a better job, bargaining for a raise, starting a second job, starting a business on the side, and other similar money-making ideas.
Time To Make A Decision
So at a fundamental level you have to make a couple of decisions: Do I need to decrease my spending or do I need to increase my income, or do I need to do both?
As I metioned above, decreasing your spending is the quickest way to gain wealth. If you have any debt, then reducing spending is also a good way to funnel that unspent money into paying off your debt.
On the other hand, those who find it hard to decrease their spending, or those who are already spending most if not all of their income on necessities may need to instead focus on increasing their take-home pay.
Most people however, will need to do both of these to become financially fit and wealthy. It’s just a matter of degrees as to which you want to do more of.
Don’t Do It All At Once
You don’t have to try and accomplish both immediately. A perfectly good strategy would be to reduce your spending, pay off any debt, and start saving. And in the mean time, educate yourself to get a higher paying job, start a new business from home, or start selling off some of your unwanted stuff.
When you are trying to “get ahead” it is easy to forget these two basic tenets of money and finance, but it is important to remind yourself of these from time to time because when you boil personal finance down to its simpliest form it is really only a matter of decreasing your spending or increasing your income, or both.
What do you think?
Image Credit: oskay
Apparently not.
Back in 2006, outgoing Reserve Bank boss, Ian Macfarlane, prophetically predicted that the rosy economics times could not last indefinitely, and that Australians were accumulating too much credit card debt.
Back in 2006, Australians owed a pultry AU$26 billion on their credit cards – a figure which was to grow over the next 3 years, and one finacial crisis later, into a massive AU$45 billion!
That’s a AU$19 billion growth of credit card debt in just 3 years! An increase of almost 58 per cent.
And the latest figures that are out indicate that while credit card usage is slowing (although still growing), Australians are paying off less of their debt than they have done in previous years (probably thanks to the financial crisis). Which means that their interest charges will become greater over time and they will owe even more.
We seemed not to of learned anything from this financial crisis and seem to be heading towards even greater mistakes and debt levels.
Now is a great time to be thinking about clearing that credit card debt once and for all, and finally achieving greater financial freedom.
How do you do this? A great place to start is to create a budget and start paying off that debt.
And to get you inspired to do so, here is the growth of Australian’s credit card debt over the last few years:
2004 = $19.4 billion
2006 = $26 billion
2009 = $45 billion
Scary, isn’t it?
Have you got a credit card debt? If so, are you planning on ridding yourself of it soon?
Image credit: Linh_rOm
As part of my personal financial development I have read a lot of personal finance and personal development books. One of these is called The Millionaire Next Door
While I recommend this book, I just want to say that it isn’t a book on personal finance, but rather a great book to get you thinking about what it really means to be wealthy.
It shows you who the real wealthy (in America) are and how they got that way. And it wasn’t through spending lavishly on imported sports cars and gold watches, but rather by working hard on their money, living below their means and being frugal.
The great thing about The Millionaire Next Door is that it will get you thinking about money and wealth, and will place you in the right frame of mind for budgeting and saving.
This is what I learned from The Millionaire Next Door:
- Live below your means.
- Be frugal with your money.
- Invest heavily.
- Reduce your taxable income (legally!)
- Research and comparison shop on large purchases
- Spend time each month on your finances
- Hire a good accountant
- Keep your investments for the long-term
- Invest for your retirement (Superannuation)
- Risk is part of life and sometimes necessary
- Don’t accept expensive gifts
Out of all the above list the last one was the one that stuck with me the most.
The authors tell a story of a millionaire, Mr Allan, who was going to be receiving a Rolls-Royce from some of the people he had helped to stay in business over the years – as a kind of thank-you gift. He was uneasy about receiving this gift and eventually told them thanks, but no thanks.
Why did he do this?
Because Mr Allan understood the dangers of having expensive status symbols such as a Rolls-Royce, and how having just one status product can lead to the purchase of others “to fill up the socially conspicuous puzzle.”
In other words, expensive items have a way of changing you. And it is much harder to stay frugal and within your means if you have expensive items surrounding you.
Have you also read The Millionaire Next Door? What did you learn from it?
Sometimes taking your own advice is the best medicine.
A couple of days ago I wrote a post upon the importance of comparison shopping and how it can save you a lot of money. Well, today I just wanted to quickly give you another example of this.
I have been after two movies on DVD for sometime now but I could never find them cheap enough. One was Rocketeer and the other Dick Tracey. About a week ago I saw both of them together in one of those 2 movie collection packs on eBay and decided to buy it.
It was a Buy Now so I could purchase it any time (assuming someone didn’t beat me to it) and today I had a few spare minutes so I decided to buy it. The movie double pack was cheap enough (so I thought) at $15, but the delivery charge was $10, for a total of $25. But I rationalized this as still being fairly cheap as each movie would come out at a mere $12.50. Not too bad.
I was all set to hit the Buy Now button when I thought it may be prudent to have one last quick look around the internet to see if I could get it any cheaper. I mean, who knows, right?
I simply typed in “Rocketeer and Dick Tracy Double Pack” into Google and clicked on two Australian-based websites that were also selling it. Quickly looking at the price they charged I was surprised that one had it for only $12.95, and what more their delivery charge was only $5.95. For a total of $18.90.
A saving of $6.10 for the same DVD from eBay!
You should take away two lessons from this post:
- Always comparison shop as much as you can.
- eBay isn’t always the cheapest place to buy something.
Have you found something similar when shopping online?
Image Credit: Retinafunk
Not long ago I mentioned that Australians were using ATMs a lot less than they once used to, but it seems that cash is king. Well, change is king anyway.
A study by BankWest found that each Australian has roughly $2000 on average sitting around in loose change. Wow!
I know I have a jar of loose change sitting on my self but I am sure it doesn’t contain $2000 – not yet anyway. But after having seen the statistics, it got me thinking, why do I have that change just sitting there, not earning any interest?
The study went on to state that Australians are missing out on approximately $115 per year due to lost interest because they didn’t deposit their change into an high-interest online savings account. That’s quite a bit of money from loose change.
So maybe it’s time for us to have a look around for that loose change and take it into our nearest bank and start saving a little more, or pay off that debt a little quicker.
How much change do you have laying around?
Image Credit: martinhoward
This is the first in a series I want to present each and every Sunday that will showcase a book that I recommend reading.
The books will be finance- and lifestyle-related and will (I hope) keep you entertained, empowered and educated.
The first book I want to showcase is Affluenza: When Too Much is Never Enough
If you have ever felt like you are on a fast track to nowhere financially and want to escape the capitalism treadmill, then this is the book for you.
It is written in a simple and straight foward style and while it doesn’t pull any punches, it offers solutions and positive stories to offset the sometimes downright scary statistics.
Here is the back blurb:
Our houses are bigger than ever, but our families are smaller. Our kids go to the best schools we can afford, but we hardly see them. We’ve got more money to spend yet we’re further in debt than ever before. What is going on?
The Western world is in the grip of a consumption binge that is unique in human history. We aspire to the life-styles of the rich and famous at the cost of family, friends and personal fulfilment. Rates of stress, depression and obesity are up as we wrestle with the emptiness and endless disappointments of the consumer life.
Affluenza pulls no punches, claiming our whole society is addicted to over-consumption. It tracks how much Australians overwork, the growing mountains of stuff we throw out, the drugs we take to ‘self-medicate’ and the real meaning of ‘choice’. Fortunately there is a cure. More and more Australians are deciding to ignore the advertisers, reduce their consumer spending and recapture their time for the things that really matter.
What I love most about this book is that it is written by an Australian for an Australian audience. Which is a breath of fresh air as the majority of these books are directed at Americans. But now that Australian’s debt levels have surpassed those in the US for the first time in history, this books is required reading now more than ever before.
Have you read this book? I would love to hear your thoughts on it!
Too many times in the past have I gone into a store looking for an item I wanted and, after finding it, buying it right there and then. This is the worst way to shop and the worst way to save money!
Shop Around
If you really want to save money and spend wisely you need to comparison shop. It does take a little extra time and effort but in the end it will almost always save you money. And it is so easy to do now with the internet.
I want to illustrate what I am talking about by using a recent purchase I made of the book The Millionaire Next Door
I have been wanting to read this book for a while now and so I went into my local Borders store and had a look at what they were selling it for. Borders was charging $34.95 for it brand new. I was pretty keen to get it at this point but I thought $34.95 was a tad over-priced, especially for a book that was originally published in 1996.
I put it back on the shelf, left the store (with my $35), and decided to have a look elsewhere. I knew that most of the other book stores in the city would all be selling it for the same price so I decided to head home and jump online.
I have two main places I go shopping online: eBay and Amazon.com
Amazon.com
My first stop was Amazon. Even though they are American-based and delivery costs can be quite steep for a one-off purchase to Australia I usually have a list of half-a-dozen books that I want to buy from them at any one time (I read a lot!), so delivery becomes less important as I buy several items at once (although I still factor this into the final price I pay for anything).
The main reason I headed to Amazon first was to get an idea of the price as well. Amazon had it’s RRP for US$15.00, but were selling it with a 32% discount for US$10.20. Already way cheaper than Borders.
This is where Amazon really shines. It offers great discounts on many items and books are usually heavily discounted. I want to do a little calculation at this point to illustrate how Australians get ripped off regularly from brick-and-mortar stores (especially “big-box” retailers like Borders).
Before I do however, I want to state that the laws in Australia are the reason why we pay too much for books. I do not know the exact details behind it but the way I understand it is that books stores like Borders and Dymocks are prevented from selling books that come from overseas publishers (unless it is a one-off special order).
The conversion from US-Dollars to Australian Dollars is (at time of writing): US$1 = AUS$0.93. So our US$10.20 book works out to be only $10.90 in Australian Dollars.
Not that I would do this, but lets assume that I ordered just this one book from Amazon and had it delivered on its own. The delivery costs would be US$19.98, which works out to be $21.34 in Australian Dollars (you can see now why I combine items). Add this to the price of the book and you get a total of AUS$32.24 – still cheaper than what I would of paid at Borders!
Now imagine how much less it would cost you if you ordered 3 or 4 more books at the same time.
eBay
But I didn’t stop there. I then went to eBay.com.au and see what other people are selling the book for. Typing in the name of the book and hitting search I came across a few copies for sale.
To cut a long story short, I ended up getting the book for $11.71 plus delivery of $6.30 for a total of $18.01. That’s a $16.94 saving than if I bought it that day at Borders. And I had it in about 5 days from first finding in on eBay.
I could of gotten it new from Amazon.com but I didn’t want to buy any other items at that point to save on delivery costs and it would of worked out about the same any way (depending on how many items I had ordered).
That’s just one example of how comparison shopping saved me money. And it can save you money too.
Imagine if you comparison shopped every time you wanted to buy something? You would be saving quite a considerable amount of money! Money that could be working for you in your high-interest earning savings account or paying off your credit card debt.
Do you comparison shop? If so what’s the most you have ever saved?
Image Credit: Ranoush.
Creating a budget is a great idea as it helps you manage your money, pay off debts and create a savings plan. But situations change (these days all too rapidly) and budgets can become obsolete pretty quickly.
That’s why it is important to stay ahead of the curve when it comes to creating a budget and managing your money.
The curve I am talking about here is price increase – both inflation, and general price rises. The Perth Now newspaper recently published an article on their website showing how cost of living will rise dramatically in 2010 for the average household.
They stated that the average household will need to find an extra $76 per week just to meet their current standard of living.
They listed a few areas where costs would rise, which I have listed below from highest to lowest:
- Mortgages – set to rise about $44 per week on an average $300,000 mortgage
- Private School Fees – increasing by $20 per week
- Health Insurance – a $4 weekly increase
- Electricity and Gas – increases of $2.30 and $1.70, respectively
- Transport – Almost every state has or will be increasing public transport costs (Brisbane has increased theirs already this year by 20-40 per cent!)
I am sure there are other areas where prices will rise as well. So are you prepared for all these extra costs? If not, now may be time to have a re-think of your household budget.
What Can You Do?
Keep your current budget, but take the numbers above and pretend that they are the current costs and draw up a new budget based on these new numbers.
After you have done this see where you stand, and have a look at where you can cut back to meet your new financial oblications.
Once you have done this file it away and be prepared to bring it out once the prices head north. You will be much better prepared for the coming year and there will be far fewer surprises for you in 2010.
Have you thought about how you will handle increased prices this year?
Image Credit: nDevilTV
Online savings accounts are a must-have when budgeting your money. Not only are they generally high-interest payers, but they can be used to help you budget and save.
I have eight of them and I use every single one.
What Are Online Savings Accounts?
These accounts are generally accessed via internet (and sometimes phone) banking and they earn a much higher interest rate than your standard account, even sometimes higher than term deposits, and you have access to your money 24/7 via your computer.
Ways To Use Your Online Savings Account
The best way to use your online savings account is as a savings account. Open one and start making automatic payments into it each pay and watch your savings grow.
It doesn’t have to much to start with – $20 per pay would do – the idea is to get into the habit of saving. I did this when I was saving for an overseas holiday (it’s a great idea to have a goal!) and I started with $50 a week and it grew over the next few months into $120 per week. I just got the saving bug!
Use One To Help You Budget
You can also use it when budgeting. I have created seperate accounts for each of my payments listed in my budget, so I can control what I am spending and I know exactly how much I have saved.
You simply divide up your seperate payments – like rent/mortgage, bills, food, transport, and such – and then create a seperate online bank account for each one. Online accounts are usually free with your standard bank account (or totally free with some online only banks, like ING Direct) and so you should be able to set up as many as you need for no extra cost.
Then, each pay, move your money into these accounts as per your budget. This is a really easy way to seperate your money, allowing you to control where your money goes, which will help stop you from over-spending.
Making You Money
The best thing about online savings accounts is that they earn high rates of interest. So while your money is sitting in them, waiting to be spent, it is earning you money. And with interest rates on the increase again (at time of writing) they will only be earning you more over the coming year.
How To Find An Online Account
Now that you know how useful they are, it’s time to find one. These two sites are a good first stop, but it’s worth looking at your own bank’s offerings, and then have a look at other bank’s accounts as well, for comparison.
Also, don’t forget the online only banks, like ING, as they might be able to offer higher interest as their overheads are lower than traditional banks.
Do you have any online bank accounts? How do you use them?
Image Credit: Don Hankins – sorry about the American dollars in the image, but it I couldn’t find anything like that with Australian dollars!
