Discussion in 'Investing Strategies' started by Simon Hampel, 22nd Sep, 2005.
Use this thread to discuss the article How to Save Effectively
Set it up so that it is more bother NOT to save than to save.
This meathod is basically based on the theory that most people are going to chose the path of least effort if given a choice... so make it easier to save than not!!
To do this you can:
1) set up an arrangement with your paymaster to deduct a set amount from your pay each week (say 10% of your net wage) to be directly deposited into a seperate savings or offsett account, you will be surprised how fast this amount builds up.. you basically forget about it and it grows.
2) set up an auto deduction from your main bank account to divert funds into a seperate savings/offsett account, works as above but you don't need your paymaster to be involved, it may involve fees though..
3) pay extra into your mortgage account, we did this after the 18% interest rates were reduced. We found that we could live on the amount left over from out ralaries and decided not to reduce the paymnets. This will pay off the bad debt on your PPOR faster, however it may lock your extra payments into the mortgage if there is no redraw facility. Also pay it off the CAPITAL not as extra payments, this should reduce your mortgage faster than extra payments.
We have done all three at some stage or other and they suited us well, if you don't see the money in your everyday banking account you are not tempted to spend it. Your special savings account should NOT have EFPOS, internet or autobank withdrawall facilities, as this will make sure that you really want to withdraw the money before you actually do it.... a bit like those folks who freeze thier credit card in the freezer so that they have to thaw it out to use it (good for those who impulse buy too often)
Just some thoughts on the subject...
I am not a big fan of debt consolidation in any but the most disciplined of clients. It is my experience that the consumer debt is then paid out over 20+ years and what is worse than that is the credit cards, charge cards etc soon get maxed out again. This 20 year debt is usually for such items as plasma TV's, computers etc all with a much smaller life expectancy and high depreciation.
The strategy I often propose to people looking to improve their lot re overwhelming consumer debt is as follows.
Detail all the debts, destroy the cards and then pay the minimum on each.
Focus on the smallest and direct everything spare into it until gone.
Then direct surplus cash into the next smallest along with the minimum payment from the now paid out loan. Keep going until they are under control.
I find this method has the psycholigical advantage of showing some early progress - it is certainly a good feeling to see a loan paid out and this helps to maintain the discipline and momentum.
The only downside is that if they wish to buy property we are in a quandary as to whether to lower the consumer debt and increase serviceability or whether to save for a deposit and establish a savings history. Examination of their situation usually helps to decide on the right mix.
I have had housing commission clients not be able to buy into their HC home at about $90K (val $120K) because they had consumer debt worth $80K+. This particular lady had a $50K car bought new which she really believed was a better investment. She was horrified when I asked her to ring the dealer to check it's value and she found it was worth about half of what she owed. Even though it made her think long and hard she couldn't sell the vehicle and pay out half the debt as she could not face crystalising her loss. I get the feeling her mindset will keep her where she is.
Steve, what do you mean pay the extra money off the CAPITAL, not as extra repayments? How do you do that?
If you pay off an extra payment you are paying interest as well as capital(principal) so you pay it off the captial(principal) amount instead.
extra $2000 to use for debt reduction, paymnet per month are $1800:
1) pay 2 regular payments instead of one - depending on where you are in the repayments shedule your monthly payments could be reducing the principal amount of the loan by a very small propotion of the payment, say 5 or 10%. So maybe only $90 to $180 is actually reducing the principal debt amount (e.g. taking the debt from say $360,000 to $359,820) this reduces the time it takes to repay the debt by one month
2) pay the amount off the principal debt takng the debt from $360,000 to $358,000 and reducing the ongoing interest as well. This reduces the time to repay the debt by 2000/180 months - nearly a year.
How do you do it?? Well when you make the extra payment you tell the bank staff "Oh Hey, take this off the principal please!" and they do, neat eh??
You may need to check with your bank in reguards to any fees for early payouts/ extra payments etc.. some do hav fees.
My gosh, poor woman. I feel bad for her. I would ordinarily think she's an idiot for buying a $50k car, but I assume she is very misinformed and uneducated.
I felt bad for her too and spent far too long trying to show her a path out of her situation. Learnt some lessons myself there.
In actual fact she was quite happy in her situation. She knew all about the HC and social security and was as much an expert on her entitlements as I was on a mortgage
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