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Us Aussies have a love affair with the ‘plastic fantastic’.  According to The Money Smart website Australians in total have about $34 billion in credit card debt or an average of $4,400 per credit card holder.  But how much is that credit card debt really costing us?

Assuming you have the average credit card debt of $4,400 and decide to buy nothing else on the card and your interest rate is 18% (most cards range between 17%-19% depending)… here are the numbers:

Repayment Made Total Cost Time Taken to Pay Off
Minimum (2%) $14,883 over 31 years
$100 $7,056 5 years & 11 months
$150 $5,725 3 years & 3 months

 

Yes, you read it right!!!  If you only make the minimum repayment it will take you over 31 years to pay off the $4,400 debt and cost you a total of $14,883!!!!!  What a rip-off!!!!  This is why only making the minimum repayment on your credit card is a big financial mistake!!!  If you decided to increase the repayment to $100 per month it means that you will pay off the same debt in 5 years and 11 months and it will cost you $7,056.  This is a whopping saving of $7,827 and around 25 years off your debt compared to only making the minimum repayment!!!!  If you choose to increase the repayment again to $150 per month – this will mean you will repay the debt in 3 years and 3 months and it will cost you $5,725.  Increasing the repayment by this $50 will save you $1,331 and it will cut 2 years 10 months off your repayment time.  It is amazing how small increases in repayments can make a big difference in how much your debt actually costs you.

If you are interested in the numbers for your debt, make sure you check out your credit card statement as your bank now have to disclose how much your debt costing you if you only make the minimum repayment.  Last time I checked mine it would take me 49 years and 2 months to pay off my monthly debt at the minimum repayment and cost me many multiples of the current debt!!!!!  Ouch!!!!!  (Needless to say I pay off my credit card every single month J) Or you could click here to head over to the MoneySmart credit card calculator and do the numbers for your own debt.  You might be surprised how much your debt is really costing you, but also what great savings you can make by making even small increases in your repayments.

Credit cards can be great tools if used wisely, however beware, if you don’t pay them off every month they can cost you a fortune!!!

If you liked this you might also like:

Top Tips For Getting Rid Of Your Credit Card Debt

How To Create A Budget

10 Easy Ways To Save Money

How To Pay Off Your Mortgage Faster

Disclaimer:

The information contained in this post is general in nature and does not constitute financial advice.  Please see your financial advisor for advice specific to your individual circumstances.

16/07/2014 24 comments
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How to teach your kids about money

There are so many things I want to teach my daughter but money smarts is very close to the top of my list.  It is an essential life skill and I am very aware that it is my responsibility to teach her.  Many parents feel the same way, and I often get asked “What is the best way to teach my child about money?”   The truth is, like with many things, there is no one correct way.  Each child is an individual and some ways will work well with some kids, but not with others.

I believe there are two essential elements you need to help your children learn about money: you need to talk to them about it and you need to show them about it.  The following are some practical ideas of how you can combine talking and showing, to give your children a solid real-world foundation in the art of handling their own finances.  Here are some ideas are roughly split by age group but some ideas span ages groups and some children might be ready for older concepts at a younger age.  It is an entirely individual process so take the ideas that suit you, your family and your beliefs about money.

3-5 years old

  • Buy them a money-box in which you put some spare change.  Take out the money do some basic counting.  Talk about the differences between the coins, shapes, numbers.   Once they are a bit older, introduce notes and discuss the differences between notes and coins.
  • Play shops.  My daughter loves this.  We even use loose coins from my wallet to “pay” for things.  I ask her how much things cost.  Mind you everything costs either $2 or $30 according to her!  We will work on some more realistic pricing when she is older 🙂
  • Explain why you, your partner or both of you, go to work.
  • Give them $2 or $5 to spend at the supermarket, so they can see how much they can purchase.  This used to be a lot more fun when lollies were 2c or 5c at the local Milk Bar!
  • Start to talk to them about the difference between the things they need and the things they want.
  • Start to talk about how much things cost, they are still very young and they won’t really understand it for a while but it helps to start the conversation.
  • Introduce the idea of pocket money when you think they are old enough to understand it.  You could set age appropriate tasks and have a chart to tick off when a task is done.
  • Help them to start thinking of saving for something they want to buy.  Get them to put aside some money in a jar or money-box to work towards their goal.
  • You are probably like me and you rarely visit a bank branch.  However, opening a bank account for each child and taking them to the bank to make deposits, is a great opportunity to explain to them how the bank works.  (Remember beware of the high tax rates on kids savings after certain thresholds.  Click here to find out more)
  • Start to talk about the ATM and where the money actually comes from, that it doesn’t just magically appear from a hole in the wall.

5-13 years old

  • Consider saving as a family for something fun like a visit to the zoo or local theme park.  Figure out together how much you need then create a plan to save for it.
  • Set up a business for a day such as a Lemonade Stand, or help them set up their own small business for family and friends such as dog walking, babysitting or lawn mowing.  This allows them to understand some of the mechanics of earning money in the real world.
  • Bring them to work for a day.  It gives them a better understanding of where the money actually comes from.
  • Have a garage sale or car boot sale, where your child sells a small number of items that they have chosen.  Help them to set the prices and then they decide what happens to the money once they have earned it.  Talk through their options in terms of spending versus saving.
  • Talk about purchasing items without cash, how items are paid for and where the actually money comes from.  Parents often use their cards so it is difficult for children to understand the relationship between physical money and putting a card in a machine.
  • Give children a set daily allowance for holiday spending and get them to figure out how much things cost, whether they can afford it and how much change they should expect.
  • Understanding the value of money – talk about making choices with your money, buying things on sale versus paying full price, spending versus saving, bringing your lunch from home versus buying take-away.
  • Get them to write a list of things that they need and things that they want.  Explain that sometimes you have to wait to get the things that you want and save for them.
  • Discuss ways to save money around the house such as turning off the lights or the heater.

13-18 years old

  • Once they are old enough encourage them to get a job part-time job or work over the summer holidays.  My husband dug graves and cleaned offices during his formative years and I worked in a library.  Having a job teaches you not only about money but more importantly about the politics of the work place, a critical life lesson and one I did not learn fast enough!
  • Give them a budget for them to cost and plan their own birthday party or major event.
  • Give them a budget to plan, cost and cook a family dinner.
  • Don’t restrict their spending.  My husband always tells me that the best money lesson he ever learnt was spending all his money on the spaceys (as they were known in those days) only to have to survive the rest of the week with no cash.  Let them make mistakes now.  It is much better now than later.
  • Sit them down and explain to them how to read a bill.  Explain to them about different payment options and that some bills are monthly, some quarterly etc.
  • Run them through the amounts of money involved in paying different household bills,  especially the hidden ones such as  insurance and electricity.  Let them know how much things cost, so they don’t get bill shock when they move out of home.
  • Tell them how much your mortgage repayments or rent is every month.
  • Explain how a credit card actually works.
  • Talk about mobile phone plans and how they actually work.

Last but not least, I believe absolutely the BEST way to teach your children about money is to be a good money role model yourself.  As they say actions speak louder than words, and we all know our children are sponges for everything that we say and do.  Let’s face it who hasn’t been shocked by something our child has said or done and thought to ourselves “where on earth did they learn that?”  Model the money behavior that you want your children to learn and you will be successful in creating a confident, financially savvy member of the next generation.

If you liked this post you might also like:

Why Money Is Just As Important As Sex (When Talking To Your Children)

5 Financial Tips You Need To Know Now You’re a Parent

How to Pay Off Your Mortgage Faster

Winter Family Meals On A Budget

Disclaimer: The information contained in this post is general in nature and does not constitute financial advice.  Please see your financial adviser for advice specific to your individual circumstances.

10/10/2013 32 comments
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Financial tips for parents

Let’s face it parenthood changes everything.  From your social life to your ability to go to the bathroom in peace.  Things are no longer just about you and your partner, there are other considerations that must be made.  With parenthood also comes extra financial responsibility, there are extra costs and quite often less income coming in the door as one partner stays home or changes to part time work.

So here are five financial tips that you need to know now you are a parent:

  1. You should make sure you have a Will. I know you don’t want to think about it, but a Will is crucial in making sure that your children are well looked after should anything happen to you, your partner or both of you.  It gives you the ability to say how your assets will be distributed and even who should have custody of your children should the worst case scenario occur.  If you have complicated family relations then a Will is even more crucial to ensure that your wishes are clear.  A Will doesn’t have to be expensive, you can get a Will kit from your local newsagents, do it online or do it through your solicitor (definitely worth the money if your affairs are complex).  If you already have a Will make sure it is updated to account for any changes in circumstance such as additional children or divorce.
  2. You should consider Life Insurance.  If it would be difficult for your partner to raise your children without your income, then you should have life insurance.  The same is true if you couldn’t afford to raise your children without your partners income, then you need life insurance on your partner.  Without trying to sound like a bad daytime TV ad, life insurance will give you peace of mind.  If you already have life insurance, you must check it and make sure it is enough now you have children.
  3. Get rid of your credit card debt.  There are several things the banks won’t tell you about your credit card.  Number one is that credit card debt is crazy expensive.  Generally speaking the banks charge you about 19% on your credit card, compared to official interest rates of 2.75%!  Secondly, if you pay the minimum repayment it will take you an eternity to get rid of it.  Just check your statement.  The banks now have to tell you how long it will take to pay off your balance at the minimum repayment.  Last time I checked mine, it was 64 years and 7 months!  The only way to use a credit card is to pay it off every single month.  If you can’t do this then cut it up and ramp up repayments to pay the debt down.  Please click here to see my top tips for getting rid of your credit card debt.
  4. Make sure you have an emergency fund saved.  You should aim to have six months of after tax income saved to ensure that you have the confidence to deal with any bumps in the road that life might bring like another baby or losing your job.  My mother always told me that when financial problems walk in the door love flies out the window.  Having an emergency fund helps to relieve financial stress when things inevitably do not go to plan.
  5. Be aware of the huge tax rates that can be charged on savings in your child’s name.  Most people don’t know this but investing directly in your child’s name is unlikely to be the most tax effective way of saving for your child.  This is due to tough penalty taxes for minors.  The penalty tax is applied to “unearned income”, that is money the child has not worked for and includes income such as interest, share dividends and distributions from trusts.  If you invest under your child’s name, the first $417 of unearned income is tax free but after that tax is charged at 66%!  Any unearned income after $1,308 is taxed at 45%!  Ouch! (Click here to see my full post on tax rates applied to children’s investments)

Parenthood changes everything.  I hope these tips help to better navigate the financial responsibilities that come along with it.

If you liked this post you might also like to read:

How To Teach Your Children About Money

3 Things You Really Should Know When Saving And Investing for Your Children

How To Pay Off Your Mortgage Faster

How To Boost Your Superannuation Balance While You’re A Stay At Home Mum

* Please note this is for your general information only and does not constitute financial advice.  Please see a financial planner or accountant to get advice specific to your individual needs.

20/08/2013 37 comments
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Easy Ways To Save Money

Ok, here is a confession.  I am not very good at sticking to a strict budget.  For me, it’s like being on a soup diet, it is just not possible!  However, on my journey from being a spender to a saver I have learnt several tips that have helped my bank balance to grow.  Most of them are small things but the best part is that instead of being a chore or a punishment they have simply become a part of the way I live my life.

So today I would like to share them with you:

  1. I always write a shopping list and stick to it.  Supermarkets are the land of temptation.  They are deliberately designed that way.  Where and how each product is placed is planned to get you to spend more.  They call it the “theatre” of the shopping experience.  Have you ever wondered why the milk is always on the back wall of the store, furthest from the door?  It is so you have to walk through the whole store to get to this one essential item, hopefully picking up a few unintended purchases on the way.  I find a  shopping list helps to keep me focussed on the task at hand.
  2. At the supermarket, compare products on a per unit basis.  The shelf pricing sticker for each product shows how much the product is on a per unit basis (per 100g or per litre etc).  I sometimes find that the largest size does not represent the best value on a per unit basis, especially if the smaller version is on sale.  This method also gives you a common basis to assesses whether the branded good is worth it versus the “home” brand, without having to worry about different package sizes.
  3. I have a $100 single purchase spending limit.  This means that anything I want to buy that has a price tag of over $100 (you can pick the number that suits you), I have to wait until the next day to buy it.  Let’s just say it helps slow down my spending and gets me out of the shop environment where I can think more clearly.  It is surprising how many times I have decided with the clarity of time that I don’t need to go back and purchase something.
  4. Embrace the hand-me-down and buy second-hand!  I am so grateful to have a wonderful friend who has given me loads of hand-me-downs, anything from clothes to toys and bedding.  She gets great joy in seeing her children’s things having a second/third life and it has saved me a fortune.  I am continuing the tradition by handing Miss Money’s clothes etc on to someone else.
  5. Buy an Entertainment Book and use coupons when you can.  Ok I realise that it is a complete oxymoron to tell you to buy something to save money!  (Though I have tried using this argument on my husband!)  However, there are great savings to be had using this book of coupons and part of the proceeds raised from the sale of the book go help great causes such as hospitals and charities.  Back in our pre-children days, my husband and I used to be regular users of “fine dining” section of the book.  Now, it is all about the coupons at the back.  So far we have used the vouchers to get 25% off our local pizza, 25% of Adult entry to the zoo and buy one get one free ice cream.  It doesn’t take long for the savings to add up, even after accounting for the cost of the book.  If you are interested in checking it out click here.
  6. Hook into your local networks to find ways to entertain your children for free.  Check out your local council’s website for free activities for children, especially during the school holidays.  There are also websites such as Kid Size Living that tell you of free activities going on in your area.
  7. Turn off the lights and don’t leave electrical goods on standby.  It’s an oldie but a goodie and such a simple way to save money.
  8. Avoid fees where possible.  This includes things like fees for using another bank’s ATM, or fees for using your credit card.  I have an ATM finder app on my phone which directs me to the closest ATM for my bank.  I also do my best to avoid parking and all other fines as I see them as a big fat waste of money.
  9. Pay off your credit card.  Running a balance on your credit card and not paying it off every month is costing you cash.  Cut it up and pay it down.  Click here to see my tips on how to do so.
  10. Make your savings work harder.  Making sure you have the best account possible for your savings is another easy way to move towards your savings goals.  This means an account with low or no fees and the best interest rate possible for your timeframe/goals.  Great places to compare accounts include Canstar and Money Buddy.

I hope you found my tips useful!

If you liked this post you might also like to read:

How To Pay Off Your Mortgage Faster

5 Financial Tips You Need To Know Now You’re A Parent

How To Make Your Savings Work Harder

Is Costco Membership Worth It?

* Please note this is for your general information only and does not constitute financial advice.

02/08/2013 21 comments
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Credit Card Debt

Credit card debt is a major issue for a lot of parents.  Let’s face it having children is expensive and income is often reduced as parents take a break from the work force or return to work part time.  However, like most things, when used wisely credit cards can be a handy tool in managing your finances.

My number one tip and the key to success when it comes to using credit cards, is to ensure that the balance is paid off in full every single month.  For us, we have found setting up a direct debit through internet banking as the best way to ensure this is done.  My other key strategy is to only ever have one credit card.  This makes it easy to keep track of our spending.

But if you already have a credit card debt what is fastest way out?  Here is my simple four-step plan to get you out of debt and back on track:

(1)  Identify how much credit card debt you have.  You can’t fix a problem until you know exactly how big it is.  Be real with yourself, take a good look at your statements so you know how much you owe on each individual card and add them up so you know the total.  The reality of the total figure might surprise you and give you further motivation to rid yourself of the debt.

(2)  Find out what is the interest rate you are paying on each card.  The big secret the credit card providers don’t want to tell you is that credit card debt is crazy expensive!  Most charge interest rates of 19% or more!  Compared to official interest rates of 2.75%, it is massive rip-off!  You’ll find your interest rate on your statement. If you can’t find it, ring up your provider and find out.

(3)  Ramp up your repayments.  Here’s a shock, paying the minimum credit card repayment will not be enough to get your debt paid off.  All credit card statements now tell you how long it will take you to pay off your card if you only make minimum repayments.  When I last checked mine, it would take me 64 years and 7 months!  Let’s just say it’s much longer than my expected lifetime!  The only way to get rid of the debt is to increase repayments as much as you can, prioritising the card that charges the highest interest rate first.  Some prefer to pay off the smallest debt first, to get a sense of achievement.  This is a valid strategy too.

(4)  Get rid of your cards.  While you are paying down the debt, cards should be placed in a safe place (not in your wallet!) or cut up.  However, as each card is paid off you must remember to close the account so you are no longer charged annual fees or reward membership fees if they apply.

Credit card debt is a financial noose around your neck.  Getting rid of your credit card debt is a huge achievement.  By following the steps I have outlined you will get there.  Then with the money you save in interest you can then focus on building your savings and working towards financial freedom.

Happy Investing!

 

Money Mummy

28/03/2013 5 comments
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