Australians have an extraordinarily high level of consumer debt, and we don’t like reducing it. For example, the number of credit card transactions in just the month of June 2014 was over 170,000,000 compared with only 24,484,000 repayments – that’s 145,500,000 more transactions than repayments (yes, that’s in millions)! Of course this means interest is accruing on unpaid credit cards literally by the second– at the time of writing it is almost $6,000,000,000 per annum (yes, that’s in billions)! You can see why banks LOVE credit cards!

Please don’t misunderstand; properly managed debt can be a great tool. Most people need it to help them purchase their first house and other necessities in life.

It is also very important in investment planning, enabling you to purchase income-producing growth assets, such as shares or property, to boost your long-term wealth. In this case the interest may also be a tax deduction.

The problem arises when debt is used for basic living costs or purchasing depreciating assets. This is further aggravated when the interest rate applied is too high and there is no planned debt reduction program in place. When interest rates increase most people focus on their mortgage rate and forget that the interest on their credit cards sneaks up too. Most major cards are charging around 18-20%pa with many customers paying little more than the minimum amount and sinking further into debt.

If you are not paying off your credit cards in full every month, have other high interest loans, or your current level of debt is keeping you awake at night, you need to seriously consider your financial direction. Follow this simple plan and take control of your debt before it takes control of you…

1. Restructure your debt by consolidating what you owe at the lowest available interest rate. Keep ONE credit card and cut up the rest!
2. Seek professional help from a financial adviser to plan your financial goals and how to achieve them.
3. Prepare and keep to a budget to ensure your cost of living is within your means and put a debt reduction program in place.
4. Beware of “interest free” offers and make sure you can afford to pay off the entire balance by the end of the contract. A lot can happen in 50 months so don’t get behind on your payments.
5. Ensure new loans are only for a productive purpose, such as investing, and can be justified by potential future profit.
6. Avoid the mental attitude of “keeping up with the Joneses” – the laugh will be on them when the debt collector turns up at their door!

All of the above steps will make for a much easier life in future years … not to mention sleeping better every night.

Note:
Current credit card figures from go  www.rba.gov.au/statistics/tables go to Payments System and download the C1 Credit & Charge Card statistics spreadsheet.
Total interest figure from: https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards/credit-card-debt-clock.

Sources:
www.rba.gov.au Credit and charge card statistics as at September 2013.
https://www.moneysmart.gov.au/borrowing-and-credit/credit-cards/credit-card-debt-clock
http://www.canstar.com.au/credit-cards/compare-everyday-spender/

Disclaimer

Our financial advisors are available to help with any questions you may have as to how you can control your debt and better manage your finances.
Call (02) 4926 2300 or email us.

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Many of us have an ongoing love affair with our credit cards – they are simple to use, accepted everywhere and there are no hassles with buying what you want when you want it. Living close to the credit card limit has become the norm for many people. To make your credit card work in your best interests, it’s important to fully understand the functions of credit cards.

Cash advances cost more

When money is tight, people are forced to use their cards for cash advances (withdrawing cash) instead of just purchasing goods and services… and in doing so, are paying a high price for the privilege. Interest is charged immediately on a cash advance and at a higher rate than on purchases. Even if you have an interest-free card, you will immediately start paying interest as soon as you withdraw cash using your card. If you must take cash off your card, repay it as quickly as possible.

Annual fees

Credit cards with a “rewards program” usually come with an annual fee. This charge can be $100 or more per year, plus extra for any additional cards on your account. If you are not going to use the features offered by these programs, it’s best to exchange your card for one without all the bells and whistles and no annual fee.

Merchant fees

If you own a business, offering payment by credit card means you get paid straight away without the risk of holding large amounts of cash. Of course, banks charge a fee for card services and this is typically between 1% and 4% of the transaction cost but can go higher.

Businesses can charge the same price to customers whether they bought their goods with cash or credit cards and they can also apply a surcharge. The surcharge is not compulsory however businesses must tell you that it applies before you make your purchase and publicise the surcharges that apply to different credit cards. Watch out for this extra cost, particularly on internet, phone and mail order purchases. An example of these fees is the credit card charge applied to airfares bought online.

Are you getting the best deal?

When reviewing your credit card ownership, the moral is “be aware” – like any other service, you are paying for the convenience. As long as the benefits outweigh the cost, stick with what you’ve got. But with banks offering more attractive deals, it pays to check other options to see if you can get a better deal.

Credit cards are an excellent way to safely carry money to pay for your everyday needs. The secret is to keep your spending under control and pay the full balance off every month; otherwise the only winners are the banks.

Disclaimer

Our team of expert accountants and financial planners are at hand for any questions you may have.

Give the team at Leenane Templeton a call today!
Call (02) 4926 2300 or email us.

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Credit cards are great in that they allow you to buy things you may not have the cash for. This becomes dangerous during the holiday season as we all get tempted to buy bigger and more expensive presents or splurge during a holiday. But with high interest rates and the difficulty to pay off balances, credit card debt can become a big problem.
 

Unfortunately there are no quick fixes, you need to look at your debts and find something which will motivate you to pay it down. Before embarking on a plan to repay your debt, it is important to determine why this has happened and implementing a budget is a great place to start. This articles looks at different methods of dealing with the credit card crunch.
 

Pay off the smallest debt first
 

One method of dealing with debt is to pay off the smallest debt and then move onto the next largest debt. This works if you have multiple credit cards and personal loans, this method of debt reduction is also called the “snowball” method. The order you pay off the debt should be irrespective of the interest rate, instead it works by giving you quick wins, keeping you motivated to do it again.
 

One thing to be aware of when paying off the smallest debt first is to make sure that there are no major legal downsides to not paying off one of the larger debts. For example, if you owe the Australian Tax Office money, it might be wisest to pay them off first and then start paying off the small debts.
 

Pay off the most damaging debt first
 

If you are motivated by numbers and shudder at the thought of high interest rates, then you should look to pay off the debt which is doing the most damage. Credit cards with high interest rates such as 15-20 per cent should be paid before personal loans where rates are lower at under 10 per cent.
 

Transfer your balance to a lower interest rate
 

There are a lot of credit cards and banks out there offering low interest products that are designed for balance transfers. This can be a great way to move from those damaging, high interest rate credit cards. But before you do anything, you need to get your calculator out and crunch the numbers.
 

The credit cards often offer a very low rate for a period of time, but then they jump up to a higher interest rate. You need to be sure you will be able to pay off the debt before the higher interest rates kick in.
 

To see if you can afford it, simply divide the total amount owing by the number of months that the low interest rate is offered for, this roughly becomes your monthly payment. Can you afford it?
 

Also you need to fight the temptation that the old credit card presents. Now that the balance is back to zero, cancel it before you start filling it up again.
 

Use your savings to reduce debt
 

You could dip into your savings to help pay off your debt. Savings often has a lower interest rate  than credit cards or personal loans, so it might be wise to move some of your money around so that you pay off some of your debt. But don’t bleed your savings dry, you need to have enough put aside in case of emergencies. You shouldn’t put yourself into a position where if something happens you need to rely on those credit cards again.
 

Start saving
 

After you have paid off your debt, you can start saving. Your first priority should be to build an emergency fund which can cover up to six months of expenses. You could also look at creating a holiday or fun fund. This means you can tap into it if you want to go on a holiday or buy big presents next Christmas.
 

Top tips for dealing with credit cards

• Shop around for a low interest rate – There are so many different cards and different rates, you should be able to find one with a low interest rate. Plus if you want to transfer the balance on your old card, you can find cards with very attractive transfer rates.
• Reduce your annual fees – By having more than one card, you may be paying more than one annual fee. Some annual fees are over $300, so you may want to consolidate to one card, or even consider finding a card with no annual fees.
• Try not to pay overdue or over limit fees – You can get charged up to $40 for overdue or over limit fees. The best practice is to pay your credit card off completely every month, but if you can’t do that, make sure you keep it under your limit and you pay your bill a few days before it is due.
• Watch out for overseas transaction fees – Some cards charge overseas fees up to $5 or three per cent for each transaction. Try to minimise the small overseas transactions you make on the card if the fee is a flat dollar amount. Consider changing cards to one that does not charge overseas fees if you travel a lot or do a lot of online purchases.
• Be wary of reward cards – Reward cards often have very high interest rates and annual fees. People get attracted by the travel offers or reward points but don’t realise they are paying higher than normal rates. So do your homework and make sure you understand the fine print.
 

Give Leenane Templeton a call and speak with our financial planner to get more helpful hints and strategies to manage your debt.
 

Source: Lonsdale Financial Group, December 2013.
 

Disclaimer.

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One of the first things in controlling your money and your accumulation of wealth is to have a budget.  However, many of us do not have a budget, do not treat our money as if it was a business and wonder why we are not able to save satisfactorily.  Budgeting is a way or empowering yourself, to enable you to have control over your money. 

Many people draw up a budget that unfortunately has oversights and which can render the budget useless.  To ensure you create a realistic budget we hope the following points will assist you..

Run Your Life Like A Business

If you were a business you certainly wouldn't be happy to break-even or make a loss at the end of the year, and you shouldn't be happy doing this in life.  Aim to make a profit through proper budgeting, savings and investments.

Include Annual and Quarterly Expenses

Budget for your weekly and monthly expenses like rent or mortgage payments, food, fuel, telephone, electricity but don't forget to also include rates, house and other insurances, car registration that may be non-monthly expenses.

Unexpected and Irregular Costs

Many people forget to put money aside for unexpected costs such as car repairs or medical expenses and house repairs and maintenance.  These costs are more irregular than unexpected because we do know that our cars and houses require maintenance as do our bodies!  So put extra aside to cover irregular costs – earn interest on these savings until the money is needed.

Remember We Learn From The Past

History teaches us a lot, so ensure you look at past expenses.  Not only can you tell the costs of past car repairs and service costs, you can track when your electricity or water costs peaked perhaps with a hot summer and also medical expenses can be averaged out.

Positive Savings Plan

Rather than just saving what is left over, have a positive savings plan – decide how much you want to save and regularly put that amount aside and stick to it.  Then when you have the money you can buy what you need.  Some of our team at Leenane Templeton get the bank to take out 10% of their salary as it's deposited into their account and place this into an investment account, this accumulation of savings becomes unnoticed and if managed properly can become a significant investment through compounding.  Speak with a financial advisor in order to see what financial plan suits your particular circumstances.

Emergency Funds

Paying attention to your savings will help you build an emergency fund to see you through some unexpected times perhaps through job loss or severe illness.  Try and have at least three months worth of emergency savings.

Credit Card

Do pay your credit card off each month and not incur horrendous interest costs.  If you can't afford to pay it off you should not have purchased the goods.  Be careful with your spending and your saving and you will be amazed how much you can achieve.

It's Little Things That Add Up

That $4.00 coffee collected each morning on the way to work can cost you $80 a month, add any money you spent on take away lunch and the dollars really add up.  Consider having your own filter machine at work and bringing your lunch from home (even just for a few days a week) and you will be immediately benefitting from the savings for your budget.

Be Realistic

Be as accurate as you can be with what you know, but don't set unrealistic targets.  You will only become dissatisfied and then disillusioned with the whole process.  Having a budget is not to stop you spending, it is to ensure you have control, you can set your priorities and not feel guilty about spending.  It is to help you understand where your hard-earned money goes and when and how you spend or save.  Budgetting is about empowering you not about stopping you enjoying yourself.

Don't Overdo It

You don't have to account for every cent you spend every day.  Don't let your budgetting become a chore.  And don't be too hard on yourself, remember your earn money to enjoy yourself.  If you have not eaten out in a month and have that money set aside and would like to attend a concert with the money do so.  (As long as you aren't going to be cross with yourself!)

It's Not Set in Stone

Budgets are living documents and can be changed as circumstances change, your income may increase  and some new expenses come to light so amend your budget.  Be flexible and as accurate as possible.

Keep Written Records

Keeping numbers in our heads can lead to inaccuracy, so it is best to keep written records.  This adds discipline as well as accuracy.  This is your personal business.  Keeping a simple spreadsheet will assist.

Disclaimer

The information contained in this document is based on information believed to be accurate and reliable at the time of publication.  Any illustrations of past performance do not imply similar performance in the future.

To the extent permissible by law, neither we nor any of our related entities, employees, or directors gives any representation or warranty as to the reliability, accuracy or completeness of the information,  or accepts any responsibility for any person acting, or refraining from acting, on the basis of information contained in this communication.

This information is of a general nature only.  It is not intended as personal advice or as investment recommendation, and does not take into account the particular investment objectives, financial situation and needs of a particular investor.  Before making an investment decision you should read the product disclosure statement of any financial product referred to in this newsletter and speak with your financial planner to assess whether the advice is appropriate to your particular investment objectives. financial situation and needs.

For business advice go to www.newcastle-accountant.com.au

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