Debt dilemma

Hi Everyone

We've talked to Martin Hawes about our budget, our debt and our current dilemma. He said:

Steph

The answer to your credit card question is fairly straight forward, but first, there is another option. You could as I suggested have a revolving credit facility, pay your emergency funds into it and then pay your bills from it (including that credit card bill). This way your savings and any other money that you have will be working as hard as it can by reducing interest on a daily basis (instead of gaining that little bit of after tax interest your savings are currently earning).

You’ve decided not to go ahead with that because you say you lack the discipline to resist the temptation of credit facilities (you told me that Matt is a tiger with the credit card –what is his version of this?).

Anyway – no revolving credit – fair enough, a good call in the circumstances.

So I do think you should pay the credit card bill with your emergency savings as soon as you can. You will be paying a horrendous interest rate on the credit card (my latest statement says 19.75%) – whatever it is, it will be much higher than the after tax interest earned on your savings at the bank.

I’d also really love you to cut up that credit card, but unfortunately I think that you had better keep it (but not in Matt’s wallet!). When you have paid off the credit card you will have only $700 of emergency money left (not a lot to cover illness, redundancy, leaking roof etc). If something bad happens you may need to draw out cash on the credit card. I really hope this does not happen but an unused credit card left in the bottom drawer could be a life saver. Just make sure that you do not open that bottom drawer unless you really, really need to.

Martin

Revolving credit? My head's spinning enough as it is! haha.

So pay off the credit card? Comments below seem to agree, but 1/3 of the votes so far say keep the emergency fund. I hate to see that cash cushion go, especially since with our budget we're not going to get it back in a hurry. But we'll go with whatever the voting says over the next wee while.

Thoughts anyone? Steph.

Week 1, Question 2

Well, now we’ve got a budget together we can see that debt is sucking up a lot of our income.

We’re going to follow up the ‘biggie’ (our mortgage) soon, but in the meantime there’s the small matter of Matt’s credit card. It’s currently got $1800 owing on it and we’re only paying just over the minimum each month.

We might have an easy solution to this one, though. Our budget doesn’t show it, ‘cos we’re no longer putting any money into it, but we do have a $2500 savings fund for emergencies (in case the roof needs fixing, that sort of thing).

So what do you reckon? Should we pay off Matt’s credit card with our savings - and have one less debt to worry about - or keep all of our emergency fund for a rainy day?

Thx, Steph

Budget blow out!

Hi Everyone

There have been a lot of comments from people who can't believe we'd 'struggle' on $68k. Well, I didn't think we'd be struggling either - but what I really can't believe is just how much we're over budget!!!.

We've put in our actual spending, or made reasonable guesses for some things, and loaded it into the Sorted Budget Calculator.

So anyway, here's the link to a screenshot of our results page.

Thx, Steph.

Comments feedback

Hi Everyone

I've given Matt a hurry up on helping me with the budget. Its a bit scary!!! I know everyone thinks $68k is heaps but... well, you'll see and then tell me where we're going wrong.

There's been some great stuff posted in the comments. I thought I'd bring out the stuff that struck a nerve with me and respond directly here. Thanks to those people that took the time to think about it and post something really smart. If I've missed something let me know, its not because I haven't read it, its because I haven't had time to respond.

Is the problem really debt repayment? Or is the problem that they don't know how to make their money work for them? I still think going to see a financial planner would be best.

It looks like mortgage and food are our biggest ticket items. Well, we bought in Grey Lynn a while ago, and we did it to be close to work. Now we want to stay here to be close to family, both our parents are in Auckland and with living right here we can get my Mum around to help with babysitting anytime - it's hard to keep her away sometimes! So we want to keep the house, I think.

At Saturday, April 01, 2006 10:01:09 PM, JB said...
In this fictitious situation...

Fix your mortgage
(which is a relatively small mortgage for Auckland) of $211,000 for 5 years at approx 8%pa, with monthly repayments of $1549pm (assuming a 30 year term).

Wow, okay, thanks for thinking that one through! Click the title link above or here to read the full comment on that. That is/was a great post. Quite a few other commenters (?) said things along those lines. I can't believe how much we spend on food when I added it up. As well as the mortgage we're going to tackle our grocery bill big time! But it looks like rather than one big problem to solve, it might be bunch of little things working together that make a difference?

Living in a big city such as Auckland means that cost of living is greater. Of course comparibly, incomes are greater. So while $68k may sound a lot to some of our rural dwellers, it is actually very easily spent in Auckland.

That might be it. There is quite a good cost comparison of Auckland versus elsewhere there. Can anyone tell me if it is really like that? Okay, so I knew it was expensive here (I didn't grow up in Auckland so I *do know* what the rest of the country is like btw!) but didn't think through how much it affects us day to day. Matt and my Mum would kill me if I even suggested moving though!

Anyway, thats it for now. Thx, Stph.

Advice about advice!

Hi Everyone

Okay, so talking to my brother seemed like a good idea at the time. I'll take it from you guys that its not.

Some of the comments below reckon that a financial planner is a good idea, some say a waste of money, and that we should check out the free budgeting services. I guess there are more than just the two options (brother or planner) to consider on this one. Everyone does seem to agree that doing a proper budget and a getting control of the mortgage are our two biggest/best things to do.

Anyway, I mentioned we had Martin Hawes looking at what we're doing - not as our financial planner, but as a financial expert who can help explain some of the issues. This is what he's said so far:

Steph,

Brothers-in-law (along with cousins, kindly uncles and the likes) have cost more people more money than just about anything that I know. You need advice – good advice.

Your main issue is your $211,000 mortgage. If it is a standard mortgage repaid fortnightly over 25 years at 9.5%, you will end up paying $435,810.25 for your house. That’s the same again in interest payments!

There is a great deal that you can do to make the mortgage more efficient and so reduce that interest cost. You need to start up “Project Mortgage” – open a file and set out to save as much as you can of that cost.

The first thing that you should do is learn all about mortgages – how they work, the products that are available and the different interest rates from different providers. Go to the library or search the web (I know www.sorted.org.nz has plenty of information) and play with some online calculators to see the difference that even an apparently small interest rate reduction can make.

Concentrate on two things: first getting the lowest interest rate possible. You can do this by using fixed rate mortgages which have mostly been much cheaper than the variable rate ones. The bulk of your mortgage should be on a fixed rate. You may also have a revolving credit facility (you will need to be disciplined!) which Matt’s salary is paid into (along with any other money that you have – savings or work bonuses), and which you pay the bills out of. The idea of this is to keep total indebtedness as low as possible. Consider also switching to a lower cost provider although be sure that they offer the products and services that you need – e.g. a full range of fixed rates and revolving credit facilities.

Second, make sure that you are putting as much into the mortgage as you possibly can. Lenders calculate interest daily and every day that you have their money, you pay.

While you are up-skilling yourself on mortgages you should also see some professional advisers:

1. Financial planners can help. Go and see a selection on a no obligation basis and see if you can spend an hour or two with one to help with the mortgage. It might cost you a few hundred dollars – but the savings will be far greater than this.

2. Mortgages brokers can help. They will want you to switch to a different lender, but if they can show you how that will save you money the hassle will be worth it.

3. Your bank might be able to help – especially if it knows you are considering switching.

Steph, you and Matt have a lot going for you with all that income. Get some proper advice – it does not have to cost much; it may not cost anything at all. And anyway as an old friend of mine once said: if you think that dealing with a professional is expensive, you wait till you deal with an amateur.

Regards, Martin

At this stage I'm not ready to commit the $$$ to going to a planner, we might, but some people have given us really detailed comments below, so we're going to run with those and see where it takes us.

Thx TM MB!

PS. Working on our budget now, there's a lot to go through but its well worth it. Link soon!

Week 1, Question 1

Parental leave's gone. :-(

We're down to one income. (Matt's getting $68,000 which is not to be sneezed at, but it's a lot less than we're used to!) Anyway, my brain feels like bursting when I look at our bank statement so I reckon we need some help.

Matt thinks we need to see a financial planner, but my brother Dave is a bit of a whiz with money so I wonder if I should talk to him. He's making a killing on the stock market, or so he reckons. What should I do?

Thanks for your comments!

Hi Everyone

Thanks for all the comments over the weekend, sorry I couldn't respond to them all faster. Rather than try answer each one, I hope this post will cover some of the important stuff for now.

There's a lot to think about, we're going to try and do what is suggested in the comments and work out a complete budget. Probably most of what we're worried about is not having a good grip on the money, and we've seen people earning more than us get into situations where, like one of the comments says, the mortgage/house owns them not the other way around!

A lot of the comments have been that what Matt earns ($68k) is pretty good and we shouldn’t have any worries. Well, we know that should be enough, which is sort of why we’re doing this. We want to have our finances sorted, and make the most of where we’re at.

We’re not asking for any hand-outs, and we’re not looking for people to feel sorry for us. That’s not the point - this blog is called “Sort Me” not “Poor Me”!

Keep an eye out for my Budget, and this week I’ll ask you to vote on a couple of big decisions we need to make to kick this process off!

Thx, Steph.