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Interest rate cut

So this week the Reserve Bank of Australia (RBA) cut interest rates by 25 basis points to new all time lows of 2.00%. Wooohooooo!!!! This is great news for those of us with mortgages. Provided the banks pass on the full cut, it is expected that the 25bp cut would save around $45 per month on a home loan of $300,000. So the big question is what should you do with the extra cash that you will have post the cut?

  1. Spend it
    This is one option and it is certainly what the Reserve Bank (RBA) would like us all to do. The whole reason the RBA are cutting rates to put more money in our pockets so we will spend it. This helps the economy as roughly 70% of the economy is consumption – you and me spending. The more we spend (up to a certain point) the better the economy goes.
  2. Pay off other debts
    If you have other debts that have high interest rates like credit cards or personal loans then it pays to get rid of these debts as fast as you can. Putting the extra money you gain from the interest rate cut onto your credit card could save you 20% or more (depending on your interest rate) on each $1 of debt paid off, a great return!
  3. Keep your mortgage repayments the same and pay off your mortgage faster
    The benefit of doing this is that not only do you pay off your mortgage faster but when interest rates eventually rise you will be protected as you are already paying off a higher rate anyway. In order for this strategy to work you need to be already managing ok with your mortgage repayment at the higher previous level.
  4. Put the extra into your emergency fund
    An emergency fund helps to deal with any bumps in the road that life might bring like losing your job or unexpected expenses. You should aim to have at least six months of expenses saved. Adding to your emergency fund always helps to build that buffer for when the unexpected occurs.
  5. Consider putting extra money into your superannuation
    Lot’s of factors are important when deciding whether add money to your superannuation. Make sure you get some good financial advice, specific to your circumstances.

So of all the options outlined above Mr Money and I have decided to keep our mortgage repayments the same and reduce our mortgage even faster. Actually, we have decided to do this for this cut and the previous one. I guesstimate (using a mortgage calculator ) that just by keeping our repayments the same amount as prior to the last two cuts we cut around 2 years and 11 months off our mortgage and save us around $20,000 in interest over the life of the loan if interest rates stay at this level. Whoooppppeee!!!

What have you decided to do with your mortgage rate cut?

If you liked this you might also like:

15 Ways To Save Money In 2015

How to Pay Off Your Mortgage Faster

Should I Fix My Mortgage?

How Much Your Credit Card Debt Is Really Costing You

5 Websites That Will Make Or Save You Money

If you would like to read more from me don’t forget to sign up to my weekly email using the form below:



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.

05/05/2015 5 comments
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Interest free deals

Have you ever wondered how interest free deals work?  On the surface they all sound pretty attractive, who doesn’t want to get what they want now and pay it off interest free over 1, 2 or even 4 years?  Maybe you think it sounds too good to be true?  Well, here are some of the things you should know when considering one of these deals:

  1. Using one of these deals will most likely reduce your ability to negotiate.
    Cash is king when buying big ticket items, generally speaking retailers will not negotiate once they know you require finance. Taking up one of these deals might push you to spend more than you initially expect.
  2. Quite often interest free deals are not available on the cheapest products in each range, this means you might have to end up spending more than you initially thought.
  3. Interest free doesn’t mean fee free. Yes it is true that you are not paying interest for 1, 2 or 4 years on your purchase but you are paying fees and these can add up.  For example, currently advertised is a Harvey Norman 2 year interest free deal. This deal has a $25 establishment fee and $4.95 per month account keeping fee.  On a $500 loan that adds up to $143.80 in fees over the life of the loan or approximately 28% of the initial value of the loan.  On top of that, if you miss a repayment, you will be hit by a $25 late payment fee.
  4. Depending on your deal, your repayments during the period might not pay off the total loan by the time the interest free period ends.  Interest free deals can be structured in several different ways, with a few different parts. Some require a deposit, some don’t.  Some have a minimum monthly repayment, some are equal installments, some require no repayments during the period at all.  Make sure you understand which deal you are signing up for and exactly how it works.  Be warned!  Deals that involve a ‘minimum’ monthly repayment, do not see the whole balance of the loan paid off in full by the time the interest free deal ends.  If you have a remaining balance once the interest free period ends you will be hit with a high interest rate.  Usually around 29%.  To avoid this, instead of making the minimum repayment, calculate how much you need to repay to clear the entire balance and repay that higher amount each month.  For example if you have borrowed $500 over 24 months you need to repay $20.83 per month rather than the much lower minimum payment on your bill, to make sure the balance is cleared by the time the interest free period ends.

We have never tried an interest free deal.  We tend to like to be able to shop around and get the best deal possible on the product we have done our research on.  However, I have had friends who have done interest free deals and have been very happy with the outcome.  So if you are considering one of these deals make sure you understand exactly how the loan works and make sure you stick to the rules otherwise these deals can be costly.  Also watch the fees as these soon add up!

Have you tried an interest free deal?  Were you happy with the outcome?

If you liked this, try:

How To Create A Household Budget

5 Websites That Will Make or Save You Money

How I Saved On My Electricity Bill

Where To Get Financial Help For Free

15 Ways To Save Money In 2015

If you would like to read more from me in 2015 don’t forget to sign up to my weekly email using the form below:




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

09/04/2015 7 comments
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Nimble MoneyMe

I am sure you have seen the ads on TV: having problems with paying your gas bill/phone bill/car repairs/nursery for your new baby?  “Why don’t you Nimble it?” says the guy dressed in a rabbit suit.  Nimble call themselves “smart little loans” but in reality there is nothing smart about them, as behind the humor and quirky advertising, lurks the most insidious form of lending the ‘payday loan’.

But what is a ‘payday loan’?  Typically a payday loan is for a small amount of money, usually less than $2,000 and which is lent for only a short period of time.  Traditionally it was until your next payday and hence the name.  The other trademark of a ‘payday loan’ is the extra ordinate interest and fees interest they charge.   In Australia, fees are regulated at 20% of the value of the loan and a maximum interest rate of 4% per month.  Yes, you are right 4% per month is 48% per year!  So if you borrow a $1000 over 6 weeks it will cost you $1,280 in interest and fees!!!  And that is just for 6 weeks!!!  Worse, in the case of Nimble if you miss a repayment they will spank you with $35 fee and $7 a day until you have cleared the debt.  Yep, they don’t tell you all of that in the cutesy hipster advertising.  Now you understand why it is so easy to get yourself into trouble using this form of lending.

To help you get trapped in a cycle of debt Nimble will even put your hugely expensive loan directly onto a Nimble prepaid visa card for you – just to make sure it is even easier to spend!  And to apply for these incredibly expensive loans all you need is the Nimble app on your mobile phone or internet access on your home computer.

And this is what makes me fear for our children.  You see the clever, soft, hipster advertising isn’t aimed at me, a 40 something  mother, it is aimed at young people who are unaware of the danger that this type of lending represents.  Combined with easy access over the internet or an app on your phone, these types of loans have become far easier to access and more socially acceptable than ever before.  That has got to scare any parent.  No-one wants to see their son or daughter trapped in a debilitating cycle of debt, taking out loans to repay loans, where the horrendous interest costs and fees cripple any chance to clear the debt.

So what are the alternatives to a payday loan?

  • Ask yourself the question “Do you really need it?????” Are you absolutely sure you cannot do without it? Are there other ways to achieve the same goal?
  • If you need the money to pay a bill as the adverts suggest, make sure you negotiate with the supplier first. All utilities, whether you are talking about your telephone, electricity, water or gas bills have hardship programs you can utilise to get the bill paid without incurring more debt.
  • If you are on low income and qualify, you could take out a No Interest Loan (NILS). If you are interested in finding out more please click here.
  • If you are on Centrelink, see if you can receive an advance.
  • Talk to your family and friends and see if they can help you. Usually I don’t believe in mixing family and money but when it comes to payday lending it is a far better alternative than paying extortionate rates of interest and fees.

It is important to know that Nimble and MoneyMe are not the only guises of the payday lending blight in Australia.  Cash Converters, Cash Train and Cash Stop are all payday lenders and so is pretty much anyone else who offers easy short term loans, hipster advertising or not.

So as your child approaches adulthood make sure you talk to them about payday loans and all their different guises.  Tell them about all the things that the snazzy advertising and bouncy jingles forget to mention like the high fees and huge interest rates these loans attract and how easy it is to slip into a cycle of debt.  If they don’t believe you, as most teenagers don’t, tell them to check out this youtube video from “Last Week Tonight with John Oliver”, it is a comedic view of the horrors the payday lending industry have unleashed on the US.  It is exceptionally well done and well worth a watch for both parents and children (though the language gets a bit colorful at the end!).

 

 

I know that when my daughter is old enough, she will be watching it and  I will be telling her all about how payday lending works.   It is only through knowledge and education that we can protect our kids from this insidious form of lending.

p.s If you have a problem with payday lending a Financial Counsellors can help you, call 1800 007 007 Australia wide to hook up with one in your area.  Their service is completely free.

If you liked this you might also like:

15 Ways To Save Money In 2015

How Much Your Credit Card Debt Is Really Costing You

5 Websites That Will Make Or Save You Money

5 Financial Tips You Need To Know Now You Are A Parent

If you would like to read more from me in 2015 don’t forget to sign up to my weekly email using the form below:




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.

17/01/2015 11 comments
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Financial Help For Free

I am sick of being bombarded buy constant radio and TV advertisements flogging financial help for high priced fees.  There are plenty of reputable, independent places where you can get similar financial help completely free.  Here are some of the places where you can access financial help for free:

(1)    Financial Counsellor

Financial counsellors are completely free.  They provide an independent and confidential service.  They can help you with a range of issues such as:

  • Helping you to look at different ways to improve your financial situation eg. budgeting
  • Check your eligibility for government payments/programs
  • Negotiating your debts with those that you owe money to, including banks
  • House eviction, rent arrears, disconnections of services such as electricity or gas
  • They can talk to you about debt, bankruptcy and other alternatives
  • Help you deal with debt collectors and fines

Financial Counsellors deal with a range of issues and are completely free. To find on in your area click here.  Or if you wish to talk to a financial counsellor on the phone you can call 1800 007 007 (9.30 am – 4.30 pm Monday to Friday).

(2)    Ombudsmen

If you are having trouble with your electricity provider or telecom company, then maybe you should give the relevant Ombudsman a call.  Their service is completely free and Ombudsmen cover areas such as electricity/gas/water, telecoms, superannuation, credit and financial services including the banks.  Sometimes just mentioning the word ombudsman can make things happen – so mention it next time you are on the phone when you are dealing with an unhelpful employee of your bank, telecom or electricity company.  You might be surprised how their attitude changes.

(3)    A Financial Planner If You Are The Member of An Industry Superannuation Fund

Most Industry funds offer their superannuation members access to a free financial planner.  Obviously, the planner is paid for by your superannuation fund so keep that in mind when you are talking to them.  But certainly they will be able to help you sort out your superannuation, explain their fees and make sure you are accessing the right option for you.  Contact your industry fund and see if they offer this service and find out how you access it.

(4)    Credit and Debt Services

There are many free debt and credit services out there that can help you.  Some of them include:

o    Victoria – MoneyHelp 1800 149 689 and Consumer Action Law Centre 03 9629 6300

o    New South Wales – Consumer Credit Legal Centre 1800 808 488

o    Western Australia – Consumer Credit Legal Service 08 9221 7066

 (5)    MoneyMinded Online*

MoneyMinded Online is a free online financial education program which can improve your financial skills in areas such as budgeting, saving, debt and credit.  Whatever your level of financial skills you will definitely improve them through doing the 8 units of interactive activities.  It’s fun and free!!!  Nothing better!!!  So to sign up for your free financial skills course click here.

So if you are in the market for some financial help you could see if some of these sources could be of assistance first before parting with your hard earned cash.

*I just wanted to let you know, in my life outside bloggy land I am a part of the MoneyMinded program.  I train social workers in the MoneyMinded program, so they can help their clients work through their financial issues.  It is a fantastic program and something I am super passionate about.  This post was not sponsored by MoneyMinded and all views are my own.

If you liked this, try:

How To Create A Household Budget

5 Websites That Will Make or Save You Money

How I Saved On My Electricity Bill

 

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.

11/08/2014 15 comments
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Line of Credit

Quite often people are offered a line of credit when they go to take out their mortgage.  But what is it?  A line of credit or home equity loan is a loan against the value of your house but unlike a mortgage which must be used to purchase your home, a line of credit can be spent on anything.  A line of credit can be spent in one hit or a little bit at a time.  Interest is calculated on the outstanding balance and you only have to pay the interest every month, that is it is an interest only loan.  Having a line of credit is a bit like having a blank cheque book against the value of your home.

Yippeee I hear you say, it sounds like fun but be cautious.  As the saying goes ‘with great freedom comes great responsibility’ and the same is definitely true of a line of credit.  You see when using a line of credit you are adding to your overall debt levels and extending out the time it will take you to pay off your mortgage and own your own home.  The freedom that a line of credit gives you to spend it on whatever you want is a double edged sword.  We have a line of credit against our house, but my personal philosophy is to use it only on things that will make us money and cover the cost of the interest we are paying on the loan.  So our case, we use our line of credit to invest in the stock market.  Now I am in no way recommending this is as a strategy for everyone and the risks involved in borrowing to invest is a whole other blog post.  However, using our philosophy, other things that I could see us using a line of credit for include things like renovating our house (where the renovation adds more to the value of our house than the interest costs) or using it to buy an investment property (not that I like property right now).  These things all represent investments where, if we were forced to sell to repay the loan, the line of credit loan amount should be covered.

Things that I wouldn’t use our line of credit for include things like holidays, clothes, bills or buying a car.  The problem with these things is if you need to sell them to repay the loan they are either unsellable or worth a lot less than what you brought them for.  Some people use a line of credit for debt consolidation, which depending on your circumstances can be a valid strategy.  In this case you need to be committed to paying it off as fast as possible, then closing the loan to avoid the temptation to rack up more debt.

A line of credit can add some complexity to your mortgage and like most things in the finance world, whether a line of credit is right for you is a very personal thing.  Used wisely they can be a great tool to help build your wealth but used poorly they can land you in more debt.  To use a line of credit wisely you need strong financial discipline and good budgeting skills.  If you are tempted by spur of the minute purchases then it is likely that a line of credit is not for you.  Be careful and seek good financial advice before taking the plunge.

If you liked this post you might also like:

How To Pay Off Your Mortgage Faster

Should I Fix My Mortgage Rate?

How To Use An Offset Account To Pay Off Your Mortgage Faster

10 Easy Ways To Save Money

 

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.

07/11/2013 16 comments
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How interest rates impact families

Interest rate talk is everywhere, especially with last week’s decision by the Reserve Bank of Australia (RBA) to cut the official interest rate to 2.5%.  Many people think that changes in interest rates impact only those who have a mortgage but this is simply not true.  Changes in interest rates impact everybody.  They influence whether individuals like you and I decide to save or spend or borrow.  Or whether businesses, large and small will expand or contract.  In this way interest rates impact the direction of the whole economy, impacting the daily lives of you and me.

So let’s start at the start – what is an interest rate?  An interest rate is simply the price of money.  The lower interest rates are the cheaper it is to borrow money and spend it and the less attractive it is to save money (because you don’t get much return on your savings).  The converse is true of high interest rates which make it more attractive to save and less attractive to borrow and spend.  Think about it, if interest rates were 15% it is very unlikely that you would want to take out a loan and buy a new house.  However, putting your money in the bank where you would get 15% interest would look pretty attractive.  In this way the RBA uses the level of interest rates to increase the level of spending or saving to make the economy go faster or slower as required.  If the RBA thinks the economy is growing too fast they will raise rates to make it more attractive to save and slow borrowing.  If growth in the economy is slowing then the RBA will cut rates to increase the attractiveness of borrowing and to cut savings.  At the moment the RBA are cutting rates as they are concerned about the economy slowing and so are trying to get us all to save less and spend more.

Things to watch out for in a low interest rate environment:

  1. If you are looking to borrow you must always remember what goes down must go up!  Yes interest rates have gone down recently but when low interest rates do their job and the economy picks up, interest rates will inevitably start to rise.  Don’t be tempted by the current low rates to borrow to the max.  Yes, take advantage of low rates but always stress-test your repayments to make sure that you can still make them at higher levels of interest rates.  For example, when we bought our house back in 2008 (just before the Global Financial Crisis hit), we were paying around 9.5% on our mortgage.  That meant an extra $1,500 on our repayments per month compared to what we are paying now.  A decent chunk of change!!!  Mortgage rates could easily get up to these levels again, so be prepared.  Click here to check out a mortgage calculator to make sure you will be ok when rates start to rise.
  2. Low interest rates are a gift to borrowers – so use it wisely!  The RBA would like you to take the money you save on your mortgage repayments and spend it.  A wiser idea might be to keep your repayments the same so you pay off your mortgage faster (provided you are comfortably making your repayments at current rates).  The latest rate cut reduces repayments by about $50 per month on a $300,000 mortgage.  This seems only small but it can cut years off your mortgage.  Click here to check out a calculator which shows what a difference a small increase in repayments can make over the life of your loan.
  3. Maybe it is time to consider fixing part or all of your home loan.  See my post next week on the pros and cons of such a strategy.
  4. Savers need to make their savings work harder.  If you are a saver, good returns are becoming harder to come by and it becomes more crucial to assess all your options and make sure you are getting the best possible rate for your savings.  Click here to check out my post on what to look out for when choosing an account.
  5. Savers don’t chase returns.  In a low interest rate environment, returns on savings are generally lower and the temptation to take on higher risk investments for greater return grows.  Be very sure you know what you are doing and that you are very comfortable with the increase in risk that comes from higher return investments.  For example, taking money out of cash (low risk) and putting it in shares (higher risk) is a big move up the investment risk spectrum.  Make sure you understand this is what you are doing and you are comfortable.   (Click here to see my post on understanding risk.)

Interest rates are one of the important levers that are used to steer our economy.  Everybody should pay attention to changes in rates as they impact the daily lives of every single one of us.  Interest rates affect whether we borrow, spend or save.  It impacts how easily we find it to get jobs, take holidays or sell our house.  It affects individuals and businesses and nearly every financial decision you make.  Where are rates going from here?  Only time will tell, but I suspect we have seen the last cut for the next few months.  How the economy performs from here will determine which way rates go next.

If you liked this post, you might also like:

How To Pay Off Your Mortgage Faster

10 Easy Ways To Save Money

How To Boost Your Superannuation Balance For Free!

Is Costco Membership Worth It?

* 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.

13/08/2013 3 comments
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Yesterday I posted an article which showed that women are better than investors than men, but knowing you have the potential to be a good investor is of no use, unless you know where to start.  So welcome to the Money Mummy school of investing!  Every Thursday I am going to publish a post which guides you through the key principles that you need to know when making your first investment decision.  Successful investing is not difficult and has nothing to do with luck.  There are a few fundamental ideas that you need to know which will greatly increase your chances of success and help you avoid disasters.  So let’s get started.

Before you invest a cent, there is one very important thing you must do and that is make sure your “financial house” is in order.  You must be very clear about how much debt you owe and what type of debt it is.  Generally speaking there are two types of debt, good and bad.  Good debt is debt used to purchase things that increase in value such as a home loan, investment property loan or a loan to purchase shares (more on this later).  These types of debt are classified as good because while you are paying interest on the loan, hopefully, the value of the asset purchased is increasing at a faster rate and you are financially better off.

Borrowing money to purchase things that fall in value is known as bad debt.  Borrowing to buy a car is a classic example of this.  It is widely reported that most new cars loose 30% of their value in the first year, so the asset is worth less than the value of the loan at the end of year one.  Credit card debt and personal loans for holidays are also generally considered bad debt.  Bad debts, particularly credit card debt, must be dealt with before beginning to invest as the interest charged on these cards of around 20%, far greater than the 10% average return for Australian share market (1983-2012).  In this case, the best use of your money is to pay off the cards using the strategies outlined in my post “Top Tips For Getting Rid of Your Credit Card Debt”.  This will give you nearly a 20% return on your money, risk free, it is difficult to get an investment return to beat that!

The next thing you need to do is make sure you have an emergency fund saved in cash.  Six months of after tax income should be saved to ensure that you have the confidence to deal with any bumps in the road that life might bring, a new baby, losing your job, those little things that life throws at all of us that would otherwise knock you off balance.  Yes, agreed with current low interest rates savings accounts are not sexy investments, but your money is safe and easy to access should you need it, which is the whole point of having an emergency fund.  For me the best way to save is to use direct debit.  This ensures the money is whisked away to a separate emergency fund account, before I have the chance to get my hands on it.  Shop around for the best rate you can and don’t be afraid to move should a better deal come along.  To help you compare the myriad of products out there some of my favourite comparison sites include:

http://www.canstar.com.au/savings-accounts/compare-online-saver/

http://mozo.com.au/savings-accounts

Once your financial house is in order, credit cards paid off and your emergency fund well under control, you are ready to move to the next step, understanding the crucial principles of risk and return, and figuring out where your own risk tolerance lies.  Understanding these principles will guide your investment strategy.  Many people forgot these basic principles during the financial crisis and paid a hefty price for it, next week I will explain why.  Stay tuned!

If you liked this post check out the rest of the series by clicking on the links below:

What Is My Risk Tolerance?

Risk and Return

What Are My Investment Choices?

Fixed Interest Investments

Property Investments

18/04/2013 2 comments
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