Managing Money

 Read more Oily Rag articles  By Frank and Muriel Newman

Hardly a week goes by that we don't hear of another hard-luck story from someone who has ended up in a financial mud pool because they did not follow some pretty basic rules about money.

No matter how frequently people are advised how to manage their money better, it seems it is never frequently enough so here are some common sense tips on how to manage money better.

Put all of whatever spare money you have into debt repayment. Even small increases in mortgage repayments will add up to savings of many thousands of dollars in interest in the long run. Interest rates are low at present, but they won't always stay this low. Invest the interest rate savings back into your mortgage so you will be in a better position to deal with the interest rate rise when it happens.

If you are locked into a fixed rate loan that you would like to repay but don't want to pay break fees (early repayment fees), all is not lost. Most banks allow part repayment of a loan without penalty. On reader from Whangarei had two fixed rate mortgages that had some time to go before coming off the fixed rate. Repaying the loan early would have cost many thousand of dollars on early repayment fees, but the bank did allow them to increase their monthly principal repayments by $1,000 on each mortgage without incurring any penalties at all. Most banks offer this sort of arrangement and it's a good way to make use of savings.

If you are refinancing or entering into a new mortgage, shop around for the best deal. Banks have access to lots of low cost money (from overseas) at present which they want to lend. Typically, trading banks add a margin of about 2% to the cost of their money and in today's competitive market most will shave 0.25% off their black board rate to get your business.

In terms of a debt strategy, the general opinion of experts appears to be to lock-in short-term fixed rates (e.g. 12 months) because the short-term fixed rates are lower than the variable or floating rate. Interest rates are likely to remain low for another year or so which still leaves the opportunity to lock in an attractive long-term fixed rate when the loan comes off fixed rate next year.

Most cities have a free budget advisory service. They will give an unbiased opinion about financial contracts. If in doubt, give them a call – they are there to help.

If you have debt like hire purchase finance or credit card debts and a mortgage, look at the possibility of consolidating all of the debt into a single mortgage. Mortgage debt is cheaper because it offers more security for the lender.

Avoid hire purchase. The Retirement Commission refers to this as dumb-debt, and it is. Do not be fooled by the temptations of easy consumer credit. It is a ridiculously expensive way to buy stuff like motor vehicles, furniture, clothes, and holidays. It is bad enough that these things lose value. Do not add to your problems by paying interest as well.

If you are repaying consumer debt by monthly instalments, compare the total payments to be made over the instalment term, against the cost of paying up-front. The difference is interest charges. We did a calculation for some office equipment recently which showed the annual finance cost was a staggering 17.5%.

If you use a credit card, and many people are nowadays to collect reward points, make sure you make pre-payments in full and on time.

Don't guarantee other people's debts. We continually hear about people who are losing their homes because they have guaranteed someone else's loan. Often the guarantor is a parent thinking they are doing the right thing for a son or daughter. It's not the right thing to do.

Do you have a money-saving tips to share? If so, please send your ideas to us at www.oilyrag.co.nz or write to Living off the Smell of an Oily Rag, PO Box 984, Whangarei.

* Frank and Muriel Newman are the authors of Living Off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips on-line at www.oilyrag.co.nz. The book is available from bookstores and online at www.oilyrag.co.nz.