The new year is upon us and holiday blues are well and truly kicking in. To be sure that we’re on track financially for the year ahead, here are a few tips to get you started. If you get your finances in order, you can focus on what’s more important, like your dream handbag!
If you are in credit card debt, as can happen over the Christmas period, then you need to work a plan to reduce the debt as soon as possible. Some of the balance transfer offers out there where you pay no or low interest for a period of time can look very attractive. They can work well provided that you pay down your debt as fast as you possibly can, at a minimum at not less than you would otherwise have had to pay with your existing card.
Unless you make your repayments count in this way, then you are just adding to your debt burden.
If you can’t see a way out, then think about consolidating your loans where you may be able to pay a lower overall interest rate and pay down your debt faster.
It’s all about having a plan that fits with your financial circumstances. Using a licensed financial planner is so important here as it is very easy to keep stumbling along without taking the necessary fast action to turn things around.
The main thing about credit card debt if you are in it is to not add to it. Draw a line in the sand and only pay for those things that you can afford from your available cash, not by getting further into debt.
When you have paid off the card, then have the mindset that you will only use the card for convenience and only when you know you can pay the balance off in full when it is due. Otherwise, simply tear up the card.
Whatever you do, don’t get caught up in chasing frequent flyer points or other loyalty programs.
If you want to start saving again, then the best approach has not changed over the years; if you don’t see it you will be less likely to spend it. Set your saving amount and then have it come out of your everyday account into a separate account.
This definitely only applies if you are paying your credit card in full each month. If not, then whatever you can scrimp and save together should be applied to your credit card debt which will usually have a very high rate of interest being charged, certainly well above anything you are likely to achieve by way of a low risk style of investment such as a savings account or term deposit.
If you have a home loan, then often the best way to go is to have this amount go into your interest offset account to reduce your interest cost that you normally can’t claim as a tax deduction on your home loan. If this is you, there really is little point earning interest and paying tax on that income when you are incurring home loan interest that you can reduce by applying your savings against your home loan.
Again though, every person’s circumstances are different, so professional financial advice is so important to set you on the correct path.
I have spoken may times in RESCU articles about the need for a personal budget and about how the mere fact of going through the process of preparing one is a discipline in itself that will help you save. How can you plan to save if you don’t actually have a plan and can track your progress against it?
Finally, let’s say you came into a modest next egg at Christmas. Firstly congratulations! Your personal financial circumstances and the amount you have received will of course have a bearing on what you should do with the windfall. Generally, this will mean paying down any debts you have that you can’t claim a tax deduction on the interest you have to pay. Credit card debt is usually the first place to look given the very high interest rates charged. You should then look at any personal loans (not related to investments) and finally your home loan.
You do need to be careful with loans to be sure that there are no early repayment penalties that might apply. If you have no non tax deductible debt at all then the amount of your windfall and your capacity to add to it over time will impact your decision as to how to invest it.
Do you have school fees coming up or other major expenses that you need to consider which might mean a more short term investment horizon? Superannuation could be an option for you where the income or capital gain you earn in that environment will be taxed as a lower rate (15% on income and 10% on capital gain on assets held for more than 12 months), which can if structured correctly ultimately reduce to nil.
This is where you really must seek professional advice to be sure that a plan is prepared that is right for you and your specific needs.
For professional assistance: www.bellpartners.com
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