'Personal Finance'

These offers are a good deal, if you’re smart and disciplined.  Make sure you know what you are getting yourself in to.

Balance transfer offers have the objective of getting you to use them by transferring existing credit card debt to their new credit card facility.  They do this by offering you a special rate for the transferred amount for a period of time. Basically, to get you in, the financial institutions offer you a special credit card interest rate ranging from 0% to 9% for any credit card debt you transfer to them from a foreign credit card provider.

This can be just what you may need as it will significantly lower your monthly repayment commitments, giving you an opportunity make meaningful inroads into paying off the debt.  Resist the urge to take on more debt while paying off a balance transfer. Instead, pay more than normal as more of your payment will go towards paying down the balance.
The way the credit card institutions make money is in the hope you do not pay off the transferred amount but just continue to pay the minimum repayment.  Even worse would be for you to take on additional debt on the credit card.  Once the reduced interest period expires, the credit card rate reverts to the significantly higher rate – thus catching you in the credit card trap.

Some questions to ask before taking part in these special offers are:

• What is the balance transferred honeymoon interest rate?
• How long does it apply?
• Does it apply to new purchases and balance transfers?
• What is the rate for new purchases?
• What will the new rate be once the honeymoon period expires?

My recommendation is to avoid using these special credit card balance transfers unless you are absolutely sure you will be able to pay off the debt before the honeymoon period expires.  If the debt is a significant amount it is better to consolidate the debt within your mortgage.  If possible, the debt should be separated and clearly identified from the home loan and the previous credit card monthly repayments should be made.  This is to avoid stretching a short term debt across a 30 year period, thus making the debt very expensive in the long run.

A new craze is sweeping across the Australian continent – on face value, there are numerous lenders changing the traditional way money has been lent. They advertise slogans like – 24 hour approval, on the spot approval, easy money, very low interest rates, etc. These lenders seem to advertise rates which are as low as half the bank’s standard variable rates. If you recall the old adage of ‘if it’s too good to be true – it usually is’

There are various terms used to describe this style of lending and they extend to car loans as well as personal loans. If you’re lucky, you might not be familiar with the term “payday loan”. This is a loan which is supplied by a third-party lender and it is supposed to help consumers get out of last-minute financial jams by offering a cash advance on an upcoming paycheck. While getting out of a tough spot is certainly a good thing, the interest charged by payday lenders usually exceeds 100%, which could make a tough spot even tougher. In my opinion, payday loans are examples of loan shark companies preying on peoples’ desperation under new marketing campaigns.

The way they work:

A payday loan works like this: You’re short on cash and can’t wait until your next paycheck comes around, so you head off to your local payday lender (many are online these days), and ask to set up a payday loan — usually somewhere between $50 and $1,000, although the higher limits are usually harder to qualify for. You write a post-dated check for that amount plus the fees you now owe to the lender. You get your money right then and there and, when payday rolls around, the lender will cash your check and collect its profit.

Typically, people who use payday loans find themselves in situations where they are presented with few other financial alternatives. In their eyes, a payday loan is a way of staying afloat for a short period of time without having to ask for handouts. People with low credit or no credit are ideal customers for payday lenders.

One step forward, two steps back

In most cases, these loans are not attractive options for short-term financial problems. Exorbitant interest charges, sub-par lender reliability, small loan size, future dependency and the possible negative effects that borrowing from these lenders can have on your credit rating are all valid reasons to avoid a payday loan if at all possible.

The amount of interest charged by payday lenders is no joke. Annualized interest rates of between 200% and 500% are the industry standard. Payday lenders are often able to get around usury laws (government limits on the amount of interest a lender can charge) by calling their interest charges “service fees”, which aren’t subject to the same regulations as interest fees are in many places. The other way is to advertise monthly interest rates instead of the standard annual rates. E.g. the current standard bank variable rate is 8.07% which is significantly cheaper than a monthly interest rate of 3%. A 3% interest rate equals to a 36%pa.

Paltry sums

With all the detractors from these loans, the size of most of these loans seems of little consequence. But when you consider the fact that most of these lenders won’t typically authorize anything more than a maximum of a few thousand dollars, their usefulness — particularly if someone is concerned about keeping up car or mortgage payments — really comes into question. The small loans act in the lenders’ favors in more ways than one: Smaller loans mean more borrower diversification because spreading money over more customers means less risk. Also, limiting loans to small amounts can often disguise just how extreme the interest rates are.

Learning to live without

Another major risk that goes along with these loans is the risk of dependency. While a payday loan might get you through the end of the month, will the interest charged on the loan make things even more difficult for you the following month? A cycle of dependency like this can cripple a person’s financial health. As these types of loans become more commonplace and are being handled by more established companies, some of these lenders are starting to report to credit bureaus. Given the precarious nature of most payday borrowers’ finances, defaulting on your payday loan could mean a lasting scar on an already weak credit rating.

Better alternatives

Such loans are not the only solution to short-term liquidity problems. If you need money and you find that collateral and credit aren’t major problems, a conventional loan is the best-case scenario. Don’t make the decision yourself as to whether you qualify for personal loans or other types of emergency funds – go to a reputable finance broker and let them advise you. If taking out a personal loan isn’t a realistic possibility, asking your employer for a pay advance is a much better option. Despite the old adage that warns against borrowing from friends and family, you might want to consider it over resorting to taking out a payday or similar loan -especially considering the payback options put you in a deeper hole. The final option is to approach the bank you have your home or car loan with, and advise them of the financial difficulty you are facing. In most cases, they will work with you to get over the hardship period by putting in place a payment arrangement. Contrary to popular belief, finance lenders are not in the business of ‘kicking people out of their homes’ and selling them for a profit. In fact, they do everything they can to avoid this scenario. If your loans are for personal use (instead of business purpose), you are covered under the Uniform Credit Consumer Code which extends many protections to consumers – especially for their primary place of residence.

Conclusion

Resorting to a payday loan must be your last resort and your only option. If this is the case, it’s important to weigh your options and reflect on all your facts before you enter into a financial agreement that’s ‘stacked in the house’s favor’. Ensure you have approached a few reputable mainstream finance brokers which deal with ‘non conforming personal loans’ before committing to these last resort loans. If your past shows you have had periods of financial pressure, be proactive about planning for the next ‘unforseen’ financial pressure by organizing access to emergency funds when you DON’T need them. Ensure these funds are not costing you anything to have them and also ensure you do not use these funds for any other purpose except emergencies. Again, finance brokers are the best way to organize these funds but ensure you speak to a financial advisor and / or accountant who can advise you on the best strategies to ‘stay afloat’ financially and how to get ahead.

A money guide, just for you!

Hopefully you’ve spent every cent during your 20s, partied every night, traveled around Australia and even did a couple of overseas trips. Now, it’s time to start thinking about the future – as well as enjoying life! If this description sounds like you, it’s not too late to build solid financial foundations for the future. Here’s your “to do” list for the decade.

1. Get the basics right 30’s is definitely the new 20’s! This doesn’t mean that you extend the ‘party time’ for another 10 years – it’s just that we are at a different stage of our lives to the last generations’ 30 (something) year olds. Some things, however, remained the same - Mortgages tend to be one of them but under different circumstances; It’s now normal for a single 30 (something) year old, to buy a house on his / her own and live in it. This means getting an understanding about debts, mortgages and budgets. Being single and in your 30’s give you the perfect opportunity to establish the rest of your life to be easier and overturn the way your parents and their parents lived their life. i.e. spent most of their lives raising their children, battling to make ends meet with all the costs, and then anxiously waiting for retirement so they can start enjoying their life. Then, only to find out that they got old. If you get the basics right in your 30’s, the rest of your life should provide you with a certain degree of financial freedom.
2. Get Debt – buy a house! It’s the biggest debt that most of us will ever (fortunately) own — use methods to pay off as much of your mortgage as quickly as possible as it’s non deductible debt. (bad debt) There are different strategies for getting on top of it — number one is to offset your salary with your mortgage, or at the very least pay fortnightly rather than monthly (it means extra payments you don’t even notice), but adding even $20 a week extra to your payment can make a huge difference to your interest bill.
3. Don’t spend the next 25 years paying off your mortgage before creating wealth – invest as soon as you can afford it.
   1. Do something – do anything, but do something!
   2. Don’t be stupid and invest in something which is said to make you rich in a couple of years – invest in property, shares or managed funds – don’t gamble your money.
   3. Let time erode the value of your mortgage. Additional contributions into your mortgage after you have invested are also advised.
4. Surround yourself with experts.
   1. Knowledge is power – especially with wealth creation
   2. Hear as many opinions as possible but make your own informed decisions.
   3. Count as part of your close friends an accountant, financial advisor, mortgage broker, real estate agent and stock broker.
5. Balance immediate needs and long-term goals

‘Live for today and tomorrow.’ Being single and in your 30’s is the time to establish your career. Work hard, put in the extra hours, climb the corporate ladder or establish your business now that you are single – it only gets harder later on.

1. Start saving for your children’s school today The sooner you start putting a bit aside now; the easier it will be down the track. If you plan on ever having children, buying properties now, investing in shares or looking at investment options you can ‘cash in’ when you need the money is a great way to plan for your future.
2. Get serious about tax Technically, your 30s are a period in which your earning capacity is high. It makes sense, therefore, to ensure that your tax management is efficient. Non-deductible debt (that mortgage again) should be reduced and tax-effective ways of earning more cash put into place if possible. If I told you that for $130 per week you can buy a $370,000 investment house in the suburbs, would you consider doing it? That is possible, by having the correct depreciation schedule, gearing and good tax advice.
3. Time is still on your side One of the biggest financial pluses of being in your 30s is the fact that there is still time to change spending habits and adopt better financial strategies. Moreover, you are still in an employable age group, which means that seeking out a higher-paid job remains a possibility. Make the most of it!
4. Salary sacrifice for super gains Given the ageing population, there is little doubt that most of us will need to be self-supporting in our old age. Salary sacrificing now (out of pre-tax dollars) will mean that the amounts required to ‘top up’ your super as you get older will be (hopefully) more manageable. “A person can be looking at 25-30 years of retirement!” This is if you are very conservative – you may want to look at purchasing properties or investing in shares to balance your ‘retirement’ fund.
5. In case of emergency Above and beyond the mortgage payments, grocery bills, holiday savings, school fees and all the other sundry expenses of life, have an ‘emergency fund’. The amount will depend on what you earn, but the aim remains the same — “have enough in it to cover those unexpected expenses that always occur when you own a home,”. That way, the $1000 you need when the hot-water tank blows up doesn’t need to come out of the holiday fund. Don’t leave the money in a savings account, offset it against your mortgage and have it always working for you.

Above all – don’t forget that ‘life is for living.’ Don’t delay enjoying your life for that imaginary time in the future. We don’t know what the future holds – only what is today. Spend your time wisely and have no regrets in doing this!

The above opinions do not constitute advice of any nature. For specific and tailored advice to suit your situation, please consult a financial advisor, accountant or a lawyer.

Harry Pontikis

Finance & Property

For those who consider themselves to be on the financial ‘edge’, here are 10 chocolate coated tips to cope with the latest predicted rate rise.

1. Don’t panic by bad news and be rushed into making a decision based on reporter’s knee jerk reactions to the interest rate rises. Everyone’s financial circumstances are different and there are often quite straightforward solutions to problems. You need to be aware that the opinions of experts are often just that. For example, while many experts are talking about another interest rate rise before the end of this year, others are suggesting rates could fall next year.
2. If you are feeling pressured by your mortgage and other debts, consider ways to reduce the payments. One thing worth checking is whether you already pay more than required or by consolidating your more expensive debts (personal loans and credit cards) into your home loan, you could halve your monthly repayments.
3. If you are on the brink of making any investment that involves borrowing a large amount of money, either for a home or an investment property, subject yourself to a stress test. Check your income to assess how you’d cope if interest rates were much higher at the end of this year by sitting with a Chocolate representative and going through various ‘what if’ scenarios.
4. If you are tempted to borrow money to invest in the share market, perhaps because the price of some stocks has fallen, don’t rush into it. Always regard such investing as a long-term strategy. Make sure to check if you could afford the interest payments, should rates increase again. (another good time to sit with a chocolate Lending Consultant and go through scenarios)
5. Consider positive gearing for share investments, especially during volatile times. This means limiting your borrowing to a point where your investment portfolio will pay for itself. That is, the portfolio is self-sufficient because dividends cover the interest payments.
6. Don’t be distressed if you recently put money into a term deposit at a lower interest rate. If it is an investment where you reinvest the income when the term deposit rolls over, the income will be reinvested at higher rates. This will boost your long-term return. When interest rates are volatile, consider shorter-term investments that offer the best rate. But make sure you roll these over when they mature to an equally attractive investment.
7. If possible, keep some money in a cash fund for an emergency. Leaving it in an offset account may be the best way to save money on your home loan at the same time.
8. Have a budget - and then try to beat it. You can save a lot on petrol if you have a fuel economic car. Always shop around for large items like televisions, computers or white goods. There can be huge price differences at different stores - and don’t be shy about haggling.
9. If there is no money left over at the end of the month, consider locking in your current home loan rate to ensure you don’t get ‘pushed over the edge’ and cannot afford to meet repayments with any future rises.
10. Avoid expensive credit cards unless you plan to pay off the balance within the interest free period. Where you can’t rid yourself of a sizeable credit card bill, consider converting to a lower-interest debt by setting up a cheaper interest line of credit linked to your mortgage. But make sure you pay it off. Or opt for a cheaper credit card, perhaps one that charges little or no interest on debt transferred from another card.