Are We Still in a Recession?

On my way to work this morning, I was thinking how can I make more money? A lot of ideas popped into my head while I was waiting in traffic. Then just randomly I saw a luxury sedan that I wished I could own and wondered how I could afford that. I then started to take more notice of the cars on the road today.

I love cars and if I was rich enough that would be my indulgence. I stopped thinking of my ways to make money so I could concentrate on other people’s wheels. In the short distance from my wife’s office to mine, approximately 20 minutes drive. I counted 3 German saloons that I know are quite new on the market and their price is similar to that of a townhouse. I lost count of the SUVs that drove by, one particular model even the basic baseline model is probably worth 3-4 times my annual salary. I noticed 2 Porsches and various other sports cars that are not that old on the car market.

This made me think, either there are a lot more “Rich” people in our area or they have purchased these vehicles on a credit plan that involves them to almost sell a kidney (maybe they did). The vehicle dealers are now able to market the un-reachable cars to the general public. They use the buy now pay later methods or attach a residual value to the finance agreement, or finance the vehicle over a ridiculously long period.

I never really took notice of the car ads on the radio or TV, but I now know why they promote the new models as if we cannot live without them. And I also know now that at the end of the ad when they disclose the finance terms, they say them so fast you cannot really understand them. So the unsuspecting or excited consumer goes to that dealership to enquire about the deal. The salesman doing their job, would tell the consumer about all the benefits and paint a pretty picture convincing the buyer this is all he or she needs to be current with all the cool kids.

When the finance part of the deal is to be dealt with, that is done so quickly because the prospective buyer is so hyped they will sign almost anything at that stage. They will probably finance the deal so that the vehicle becomes affordable each month, and then worry about the balloon or residual payment at the end of the term at a later time. For example most residuals are 30% of the vehicles value (NEW). At the end of the term X years the consumer must pay that back, as a single lump sum payment or re-finance the owing 30% for another X years. Some people have said I will save up the 30% over the term in the bank and pay it when the time comes. Honestly how many people actually stick to that? Or sell the vehicle when the final payment is due and then do the same deal for the next car. That could work for business use and a tax write off, but for the individual they will always be in debt.

If I were to buy another vehicle I would save the biggest deposit I could, negotiate for the best deal I can on a sensible car and then make all efforts to pay it down as soon as possible. Or keep my current vehicle if it is paid off and start saving each month for the next car that I could purchase cash in a few years time.

Remember the vehicles you buy do not appreciate in value, unless you own the original Gull wing Mercedes or a particular car a movie star owned.

Tomorrow morning when I drive to work, I will notice those vehicles again and the people driving them. I will be grateful that I am not paying a third of my salary on a car that uses so much fuel and costs so much to maintain. People will argue with me saying but if they can afford the car why try cause a fight about it. My response will be: If you had to manipulate the finance terms so it became affordable to you then you cannot afford it.

Granted some people may well have bought those cars cash, some of them may have no debt whatsoever or they may actually be rich enough to buy whatever they want. I did say some people because the majority of the population are not rich and cannot afford those vehicles / houses / clothes etc.

I hope you enjoyed this article, please feel free to comment or submit your own experiences.

Debt Snowball Principle

Imagine yourself playing in the snow on the side of a hill. You make a small ball the size of a tennis ball and roll it down the hill. By the time the ball gets to the bottom it should of grown bigger because it collects more layers of snow just like on Tom and Jerry.

Dave Ramsey made this term popular and so far it’s worked for me.

This principal can be applied to you personal finances too. By this I mean you start small, you take that extra 50 bucks and pay it into your credit card or store account that’s getting larger due to interest charges. How will the 50 bucks make a difference to an amount that looks like it will never come down?

Imagine you have 3 accounts that are various amounts and different interest rates.

1.       Susan’s Shoe Mecca – Outstanding balance: 1000 Interest rate 10% (minimum payment: 80)

2.       Mikes Hardware –        Outstanding balance: 2600 Interest rate 8%   (minimum payment: 60)

3.       Your credit card –        Outstanding balance: 4000 interest rate 13% (minimum payment: 110)

Looking at the list which would you pay off first?

Logic tells you that number 3 is the most expensive and that will need to be paid off first. That’s a wise move and probably the most correct one. But after 3 months of paying the min payment along with the extra 50, you become despondent because it looks like it will never end. You might even stop paying in the extra money all together.

My advice (This is what I have done personally) eliminate account 1 first. You will be able to pay it off quicker and stay motivated to pay down the rest of the accounts. Then tackle number 2 then number 3. So how does the snowball effect work for the above?

You still the minimum on all the accounts as per normal but you select an account you going to pay in extra. So for me it was account 1, I pay the minimum of (80) +50=130. I continue paying this amount until the account is paid up. Then for account 2, I pay the minimum (60) plus the extra 50 plus the minimum payment of 80 from account 1. So it will be (60) +130=190 that gets paid every month. Then when account 2 is settled and all that is left is account 3 you do the same, (110) +190=300.

By doing it this way you save extra charges on the interest because you pay more than the minimum. After each account is settled don’t make the mistake of spending that extra cash, all that this exercise is really costing you is the extra 50 each month. Pretend you still have to pay the minimum even after the account is closed, and sooner than you think you would have eliminated all 3 accounts.

I have put this into practice and eliminated 2 credit cards and 2 store accounts this way. It does take patience, time and perseverance. If you have done this before or have a different approach, please feel free to leave a comment below.

Retirement Planning is boring I know...

Like all things in life, good things come to those who wait. Financial readiness for retirement is no different. It may seem pointless contributing funds each month to a finance house and not see any real gain for years. But the earlier you start the better the return in 20 or 30 years time.

In my opinion, it’s foolish to rely on government pension schemes or the group scheme you may have at work for your financial security when you do retire. Chances are most of these are controlled by investment firms that may turn a profit each year if the markets are good to them. Returns are normally estimated and not guaranteed. But on top of this there are fees to be paid for their services and related taxes on payouts. Did the fund beat the inflation mark consistently? I am not knocking Retirement Annuities at all; I contribute to 1 each month at work and privately. And am sure the funds that have accumulated may be of use in the future.

My idea of a secure retirement does not only rely on my work scheme benefits or my annuity fund alone. Having all your eggs in 1 basket may set you up for disappointment when it’s too late. The tax benefits on an annuity are great and that’s my main reason for having one, but having income generated for life is by far the best security you could obtain.

Most people talk about passive income e.g. affiliate programs etc, but I still maintain the ultimate passive income comes in the form of dividends or rental income from fixed property. I do agree that investing in property is out of reach for most people (it still is for me apart from our primary residence) but with perseverance and drive, you can get your hands on an investment property to help boost your net worth and income. Consider investing in listed property if fixed property isn’t to your liking. As time goes on your property’s capital value will escalate and so does your rental income each year depending on your agreement with your tenant. If you find that after a while the property game is not one you interested in, you can sell it for a profit a few years down the line. Everyone needs a place to live, and there isn’t a factory creating more land. The profits can be invested whichever way you deem fit.

The closer you get towards retirement the less risk most people are willing to take. If you are younger and have a longer investment horizon, you can take advantage of more aggressive and risky investment vehicles. As time goes on these choices then change to more moderate, then conservative investment choices. There is a large debate as to whether your primary residence is an asset or liability. Most see it as an asset because it increases in value over time; some see it as a liability because it doesn’t make you money each month but costs you money. Is it better to rent or buy? That’s up to you and your budget and financial plan.

This is how I have currently broken up my retirement contributions:

·         I have unit trusts that are starting to perform consistently

·         I recently setup an automated payment to buy low risk stocks with good dividend ratios

·         I contribute monthly to a private retirement scheme

·         I contribute towards an Emergency salary fund that I set up

·         Also we paying down debt as fast as possible to start saving for a cash deposit on a small flat we will rent out.

These are the steps I have taken; I have researched a lot of options and got advice from many. This is what made sense to me. I try to actively make the best financial choices possible, but I seek advice before I do. Read the fine print on everything, find out about hidden costs if any, look past the pictures of people jet skiing on glossy pages. Always make informed and educated investment choices. Anything that says we can double your investment overnight should be investigated with a fine tooth comb.

I hope this article was interesting for you to read and helpful.

What is Personal Finance?

This may seem pretty obvious to most, but there are so many different situations and everyone has a different set of circumstances. Here is a basic overview.

• Income and expenses

Gross Income, net income what’s the difference between the two? Gross income is money earned before any taxable deductions are taken off. This is normally your package deal that you earn from your employer each month. It’s higher than your net income, and if we didn’t have to pay taxes we would all be better off earning higher salaries.

Earned income or net income is the amount you left with after all taxes and any company benefits are deducted, for example pension contributions or medical contributions. This is the amount you receive in your bank account.

Disposable income is what you have left after paying off your monthly contributions, for example pay off debt, groceries, utilities, auto financing etc. If you are in debt then usually this amount seems quite small, and also demotivates you in paying off your debt faster.

• How to manage Personal Finances

No one likes the word budget, nor do we want to live frugally forever saving each penny. But a budget can help you in managing your finances better.

Take a piece of paper, draw a line down the centre and list all your expenses and all your income you received after tax (Net income in your bank account).Subtract your expenses from your income and you left with disposable income. You can call this budgeting or if you don’t like the word call it your Income statement or expense statement. Get into the habit of doing this once a month to monitor your progress through the year.

This can help you allocating funds towards paying off debt and saving a portion of the surplus funds.

Personal finance shouldn’t be a daunting task to manage, there are plenty finance software packages out there. Some you pay for and others are free, visit mint.com this site is free and has a lot of information as well as finance calculators you can use.

So essentially think of your personal finances as corporations finances. You have an income and some expenses. For a profitable company to exist, you need to make sure your income exceeds your expenditure. Bank the profits and live a comfortable life with money in the bank and completely debt free.

Emergency Fund - Have You Got One?

Have you ever been caught off guard and been surprised by an unexpected cash emergency? I have, and it took me a while to realise that phrase “It will never happen to me” is so false.

What is an emergency fund? Basically money saved for that moment when something goes boom and you need to pay for a repair or replacement ASAP, or a family member is sick and you need to buy an airline ticket. These funds should be easily accessible and ready to use.

You don’t need to only have 1 emergency fund; I have 2 at the moment. One is for in case I lose my job and need to cover expenses; I am trying to save up at least 3 months’ worth of expenses in my salary fund. I have put this money into a call account that requires a month’s notice to release all or part of my funds. My reasons are:

1.       I don’t want to be tempted to dip into these funds unless absolutely necessary e.g. job loss

2.       I can setup a “pay day” payment that pays a portion out each month, like if I still received a salary.

3.       The interest earned is compounded monthly to help raise the balance.

I do however have another account that I use for immediate access if need be. This could cover insurance excess payments, or a burst water heater/geyser. These funds are not for holidays or X-Box games.

My ideas that an emergency fund could be used for are:

Job loss, expensive car repairs, medical emergencies (if you got no health benefits), funerals, plane ticket if a family member needs your assistance and lives far away etc.

But as the balance of your fund grows don’t be tempted to dip into it for something you think might be an emergency but actually isn’t.

If you already have an emergency fund that’s brilliant, the vast majority of people always say. We`ll be ok, I’ll start it next month. Or we can use the credit card for anything that crops up. My personal goal of becoming a Wealth Titan is to avoid using credit cards and always having the cash to pay for items that I want or need. I still got debt to pay off and we getting there slowly but surely, but I am relieved that I started my emergency fund a little sooner than later.

Also remember that if you have no or little debt, your emergency salary funds don’t need to be as high or you could stretch it out for longer periods while looking for new employment. Also with little or no debt you would probably have additional money each month to spend / save / invest as you deem necessary.

Please comment if you have a different method of dealing with unexpected expenses.