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.

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.