Happy New Year 2022. A lot of people make new years resolutions about getting financially organised and find the conviction on New Years eve loses impetus early in January. Why is this so ? Is this something that you notice in your own situation ?
The problem is, going from where you are now to where you want to be will not happen over night. You need to make resolutions and take actions that you can see work early. You need to see reward for the actions you take.
This will make you feel better and you get confidence that you are on the correct path. As you see progress will get motivation. Reward for effort is always a strong motivator.
A lot of resolutions revolve around the generic resolution of getting my finances in order however what does that mean ? It means different things to everyone reading this as we are all different. So what is the circumstance that is worrying YOU. You are the key. What does getting financially organised mean to you ? Common goals are pay off the credit card debts, paydown the mortgage, get rid of my consumer debts, What about After Pay and Buy Now Pay Later facilities.
Some people think of boosting their super however more people think of getting their super organised in one place. Other people want to have emergency savings. Education Funding is another concern a lot of people have and just having an emergency stash of money is what drives other people.
Financial Security – Important First Steps
Do i spend more than i earn ?
This is simplistic however simple works. If you earn $100 per week you can not reduce your debts or get financially organised until you KNOW that you spend less than $100 per week. Change that $100 figure for what you actually earn.
Understanding your cashflow is the first step to financial security. Spending less than you earn is the one and only guaranteed key financial security. That is as hard as it gets to be financially secure. Using the numbers above earn $100 spend $110 then at the end of the first week you have $10 outstanding on a credit card or payday loan.
This is not a big deal until you do it for 10 weeks. At that time you will have a weeks pay outstanding on a credit card or payday loan. The credit card is then on 20% interest so your spending over time will increase as you are no longer spending just the $110 on items, you now need to add interest to your weekly spend and you have to make repayments as well. Your cost of living has gone up or you constrain your lifestyle. No body wants to constrain thier lifestyle so this is when people get the second credit card and you are on the road to Doom.
If on the other had you earn $100, spend $90 then in 10 weeks you have a weeks wages $100 in your emergency fund. That is how you get money to spend or invest.
You can see in a matter of 10 weeks using simple numbers that the strategy of spending less than you earn is the key. You need to spend time on your cashflow, understand exactly what your earn and where it all goes. This allows you to make good decisions as to what you buy and why.
After working on your cashflow the next most important thing you can do to organise your financial affairs is to get an emergency pool of money. Try to get your savings to $500 as first priority. When you get to $500 and think about the cost of a tyre, a fridge, a power bill you will realise that $500 is not enough. You should try and boost those savings to $1000 then $2000.
What this does is that next time you need to buy a loaf of bread or carton of milk you can use your money and not credit. You are breaking the cycle. If you get your Council rates bill then pay it quarterly and you are still not using your credit card you are using your money.
Your $1000 will drop to close to $500 however try not to get it below $500 by not spending money. The key to financial security is that you feel confident that you can meet your obligations and that comes from having money in the bank. Whilst money in the bank doesnt earn much it buys you peace of mind. You are in control and the next power bill is not going to be a crisis.
As your savings grow you will have confidence in your next months cashflow. This is when you will have the confidende to make decisions about new investments or bonus sustainable loan repayments.
Whatever your goal is you need a clear plan of what you are trying to achieve and a realistic time frame of when you will be able to achieve it.
I will work through a couple of strategies for common issues,
If you have $5000 outstanding on a credit card and it has been stuck at that level for 6 months or longer you are not going to be able to pay it off immediately otherwise you would have already done that. What is a good plan?
The usual advice is to use every spare dollar to pay into the cards as the interest rate is very high. On the surface that appears to be a sensible plan however it does not allow you to make sustainable progress.
If you use all your money for credit card payments then when next you need petrol, bread,other basic items, pay your power bill then how do you pay? The only choice is the credit card so your cycle does not stop.
How do i break the credit card cycle
The best choice is to try to build savings in the bank as per the emergency savings mentioned previously. Depending on your earnings you may try to save $500 and try to have that as you base level. What you want to do is stop using the card and you can only do that if you have savings in the bank. So rather than paying everything into the credit card pay the minimum whilst you boost your savings in the bank. When your savings are at the $500 level then work towards $1000 in the bank. Start to use your savings for all of your day to day requirements and stop using your credit card and keep meeting your minimum repayments.
After a month or so when you have some more confidence, you know what bills you have in front of you then you can take your money in the bank from $1000 back to $500 by making a bonus payment into your credit card debt. Your minimum payments, plus some bonus payments on top of not using the card will see the debt start to come down sustainably.
You will have a plan, you will be in control and your will be making good progress based on realistic expectations of how the debt will be repaid. The key point is that you cannot keep using the credit card and hope to pay it off at the same time. You have to do something different to break the cycle. It will not be a quick process however it will be quicker than you think when you stop using the card and you do make repayments whilst living your life.
When you understand your cashflow and have emergency savings you can take control.
Buy Now Pay Later
These arrangements are similar to the credit card although whilst they dont charge interest they charge a fee if you miss a payment. If you dont have an emergency balance in your bank account and you miss a payment then a fee will be charged. If it is a $10 fee on a missed payment of $50 on a $300 purchase then that is similar to an interest payment. There is no free lunch someone will make money somehow.
BNPL works well if you have your emergency account. You will have your goods now, pay later and no fees. That all makes good sense.
Credit cards are similar where most of the cards will give you interest free days and if you pay the debt in full on the scheduled date then no interest. The issue is that credit providers of all types know that we are human and we will spend now more than what we earn and they will make money out of us because of it.
The key is to know your cashflow, have a surplus and then boost your savings in the bank. You can then use your cash in the bank for day to day requirements and then if you wish you can use a credit card or BNPL service benefits that yo will get knowing you will make the repayments when due and pay no interest.