Another rate hike of 50 basis points and the probability of more on the way call for us to become more savvy with our money. We need to find ways to use money more efficiently and then divert the savings towards paying off debt sooner than later.
There are two debt instruments which can work in your favour if you take the time to really understand how they work and then use them together.
Using your access bond to consolidate and warehouse your cash makes it a great a great piggy bank. A mortgage bond charges interest on the average daily balance throughout the month. The bank allocates a portion of the monthly instalment to interest and the remainder to the capital. The higher your average monthly balance in your bond the less interest is allocated and therefore more of the monthly repayment goes to paying off your capital. Effectively, you save interest at the rate of the loan which has now gone up by 0,5%.
Credit cards charge interest on the balance outstanding on the card at the billing date at the end of the month. If you pay up you card in full or as much as possible before the billing date then you save the interest (around 22%) for that billing cycle.
Use the two to your advantage
So why not leave as much cash in your access bond during the month and use your credit card wherever possible and then just before the billing date transfer as much cash as you can into your credit card? You would have then saved interest on your bond and then used free money from your credit card during the month. Credit cards also have an additional money saving benefit as opposed to debit cards. They do not charge transaction fees so can be very efficient payment instruments throughout the month.
Discipline is required
Avoid the pitfalls of spending impulsively on the credit card. You need to be very disciplined to always have enough in your bond to cover your credit card balance. You should aim to spend less on the card over time leaving more in the bond on a monthly basis. This is a clear measurement that you are making progress with the management of your monthly income.
From the 1st March 2016 the options for retirement have changed. Legislation comes into play which aims to standardise the various types of retirement funds which are available to us. Namely, provident, funds, pension funds and retirement annuities. The changes will make things a lot easier to understand and apply in the future as the current variations are complex.
The main changes point to provident funds which were not restricted, as the full lump sum could be taken at retirement. Retirement annuities were always treated like pension funds in that at retirement you could only take a third in cash and the remaining two thirds had to be invested in a pension. Provident funds effectively become pension funds from the 1st March.The new regulations bring all options into line levelling the playing fields at retirement.
Currently there are varying deductions applied to provident, pension and retirement annuity funds.
The good news is that the overall deductibility of contributions to retirement funding increases to 27,5% to a maximum amount of R350 000 per annum. Any amounts over this capping can be rolled over into the next tax year and deducted.
Deductions are only allowed in the hands of the employee so you will need to clarify things with your employer to ensure that the correct tax is applied. Any contributions made by your employer will need to be neutralised by a fringe benefit tax on your payslip.
These changes are an ideal opportunity for you to sit down with your financial planner and revisit your retirement planning. There are benefits to be found in optimising your contributions towards your future funding taking full advantage of the new level of tax deductibility.
Debt is so easy to get into and so very difficult to get out of. Prevention is always better than cure but the reality is that we get enticed into debt over time and soon find ourselves in it way too deep. The cost of debt climbs quickly and robs us of the potential to create wealth.
Institutions make their money by lending money to you at a rate over the time.
You can benefit by reversing the formula.
Interest + time = profit
You cannot reduce the interest rate but can reduce the time = less profit for institution
Less interest for institution means more savings for you
More savings for you compounded over time = more wealth for you
Here are 3 steps to getting ahead of your debt in 2016.
A debt trap can be likened to trying to fill up a bath with the tap on but leaving the plug out.
Put the plug in by making a conscious decision to get out of debt. The culprits need to be identified and cannot be allowed to increase anymore.
Credit cards, overdraft, personal loans, store accounts, outstanding taxes. All have to stop.
Open up the tap with your disposable income. This is the money that is left over after your cost of living during the month. You will have to draw up a budget on a sheet of paper detailing your expenses throughout the month. Focussing on living expenses, split them into ‘nice to haves’ and ‘must haves’. This is the hard work as you have to be brutally honest with yourself in identifying what you need and what you can do without.
Keep a close eye on the water level. Divert the new found savings back into paying off your debts. Targeting the highest interest bearing ones first and then working through the next. Patiently keeping your living expenses well under control. A new year brings on a wave of price hikes. So your cost of living will is going to increase anyway. Expect 2016 to be really tough. The cost of debt will probably increase as interest rates are on the rise. Debt is the enemy so you need will have to squeeze those living expenses even more now than ever before.
Reducing debt saves you fortunes and only saving for yourself instead of paying the bank will put you on the road to financial freedom.
The beginning of a new year is a great time to update your personal balance sheet.
The exercise is invaluable in your personal financial planning as it creates a snapshot of your actual worth in relation to what you own and what you owe. Your so called “Net Worth”.
OWN – OWE = NET WORTH
All it takes is a sheet of paper with two columns listing the current value of all your assets on one side and your liabilities (the outstanding loans) on the other side. Subtracting the total liabilities from your total assets leaves you with a current value of what you are actually worth. This net worth provides you with a realistic view of how well to you are doing with your financial planning. If the figure is growing year on year then you are on the way to improving your wealth. If it is not growing you are effectively getting poorer.
Bear in mind that your net worth needs to improve above the inflation rate to keep its real value. So if inflation is running at 6% then your net worth should being improving above this rate year on year to keep your net worth value real.
Ways to improve your net worth are found in:
Reducing your liabilities
Targeting your loans and getting rid of them sooner. Interest on debt is often higher than the returns found on investments. Especially, when one considers the risk needed to achieve the return. Paying off debt not only improves your net worth but also frees up more disposable income from the interest charged for you to invest more.
Acquiring growth assets
Investments that grow consistently over time should be targeted. Especially, those which compound your growth. In other words, investments which produce returns which you reinvest, effectively buying up more. Compound interest is a magical phenomenon in the financial world and needs consistent positive returns over the longest possible time to make its magic.
Keep a close eye on your personal balance sheet. It is the starting block in towards financial freedom.
Damage control for the January Blues…..
It’s that time of year when we have turned the corner into the new year and need to get our finances back in order as soon as possible.
Here are 3 “Don’ts” which will help you to get you off to a quick and effective start mindful that its always better to put up your sails before a storm than during one.
1 – Don’t ignore the damage
Get down to the details quickly and formulate an action plan for the new year.
Work out the damage before the statements arrive at the end of the month. The earlier you start the more prepared you will be before your next salary.
You are going to need to sacrifice somewhere to make up for the over indulgences of the festive season. You will find them by creating a detailed budget and splitting your expenses into “must haves” and “nice to haves”. The area of “nice to haves” will need to be scrutinised ruthlessly and there you will find the extra cash to pay off the debt. Target the credit card first as this is probably the most expensive debt.
You need to allocate towards interest and the amount owing. You should try to payoff as much of the principal debt as possible.
2 – Don’t borrow any more
Don’t borrow more to get out of debt. It’s like trying to fill up a bath with the plug out.
Put the plug in by shelving your credit card for a while and turn up the taps by squeezing out extra cash from your expenses.
Obviously this will also mean that no more “nice to have” spending for a while. You can review this only once you are back one your feet.
3 – Don’t dip into your savings and investments as a quick fix
Work out how much you can allocate over time to getting rid of your debt. Stick with the program until you are out of the water. Set a realistic time frame realising that debt robs you of potential savings. The sooner its behind you the more you will have to compound and create wealth for your financial freedom into the future.
Ideally, you should save towards a contingency fund during this year to ensure that you don’t fall into the same trap of “catch up” in 2017. A great challenge for the new year…whereby you will have cash for the next festive season and avoid the stresses of the next years January Blues…..