Monday, November 16, 2009

Poor health can send you broke

Everyone knows someone who has been or is currently sick. If it's just a passing flu or virus, that's not a huge problem. However, if it's something terminal or something that will affect you for the rest of your life, such as cancer or disabilities, then it will drain your finance and could send you broke.

Personally, I've been blessed and fortunate that I have been born with relatively good health. A recent injury whilst snowboarding and over a year worth of stomach pains gave me a taste of what I was missing out on medically and financially.

First health problem of the year:
The snowboarding injury to the shoulder (compacted/compressed shoulder joint) required a visit to the Physiotherapist and several weekly visits thereafter.
Initial consultation $69
Each visit thereafter $57
Total cost of physio $ 426
Total cost out of pocket $228.50

I finally had the opportunity to use my private health insurance (besides the obligatory trip to the dentist for a checkup), so that meant I was out of pocket for $228.50
Bearing in mind that private health insurance fees are now about $1100 per annum and rising.

Second health problem of the year and still ongoing:
Stomach pains and aches. This health problem is a pain in the arse and ongoing. It's random...meaning the pain onsets at random moments...after I eat and not necessarily all the time. It's irregular and can happen whenever which is highly annoying because it's hard to pinpoint whether it's a gastro, allergy or organ problem.

So a trip to the doctor for blood tests - covered by Medicare
A trip for an ultrasound $50
Out of pocket $25

Unfortunately the stomach problems are still ongoing and still need additional tests with specialist doctors to find out what the problem is.

So far, medical bills out of pocket are $1353.50 and that's not counting the cost of travelling, time wasted in medical waiting rooms, and the actual cost itself in lost working days or hours.

Colds, Flu and Viruses
A trip to the doctor is typically covered by Medicare. A box of prescription medicine is typically $30-$38 for a packet. If you don't get paid for sick days that you take off, then the total cost of being sick each day may range from $100-$200 for each day and more. I find that if I'm stuck out and about somewhere, and it starts raining - it's much cheaper to just buy an umbrella for $7 or $30 rather than rushing around in the rain and increasing the probability of getting sick.

Broken Bones and Terminal Illnesses
Now we're talking big bucks. Huge bills. Specialist and hospital bills. Out of pocket costs are typically a few thousand dollars and I've heard of bills up to $35,000 for injuries involving ambulances, hospitals and no private health insurance. Even worse, having no travel insurance and injuring yourself badly overseas. Repatriation costs are several thousands of dollars and you could be left stuck, in that country that you've injured yourself in, with no way home.

Getting sick isn't cheap. Being continuously sick will end up costing you a lot. That's why it's important to eat healthy and exercise regularly. Something that we have to try to do more often.

Sunday, November 15, 2009

Managing Cash Flow for Yourself, Business or Company

Cashflow is one of the most important concept for individuals and for businesses. If you're asset rich, but liquidity poor, then being unable to pay your bills or invoices could lead to a creditor taking you to court and this may force you declare bankruptcy if you haven't got the money to pay the creditor.

An interesting excerpt from Dun & Bradstreet Australia outlines how you can improve your cash position:
* Develop a cash flow projection and ensure you monitor and update it regularly
* Minimise bad debts through an established credit-assessment procedure
* Establish an accounts-payable policyat the outset of every credit
* Establish a deposit policy for work in progress
* Monitor
your customers' use of credit and adjust their credit limits accordingly
Closely manage your invoice process and collections practices
* Re-arrange
annual payments such as insurance so you pay small instalments frequently. This
will help smooth out lumps in your cash flow cycle
* Select an appropriate
source of funding for your requirements and pay the debt before the interest
kicks in
* Use short-term cash surpluses wisely. Don't keep them in accounts
that don't pay interest

I agree with all of the above, having utilised them in practice. The point about re-arranging your annual payments to pay by small regular, frequent instalments...that one I'm not quite a proponent of. If you can get discounts for paying the entire sum upfront annually, then this may be a more attractive option if your cash flow is reasonably liquid.

If you are struggling in terms of your own personal cash flow, then you need to review your budget and cut back unecessary expenses where possible. Contact creditors straight away to see what options they provide for clients experiencing hardships. Firstly by pre-empting the difficulty ahead, some creditors will be more lenient and offer you different payment terms, some will be informed and thus, not bill you for late fees and debt chasing fees.

For businesses, it's important to delay making early payment on accounts payable. For accounts receivable, it's important to follow up as soon as clients miss the payment date. The older the account, the less collectable it becomes.

Resourceful Websites for Business, Money, Finance and Random Things.

Excellent resource links for entrepreneurs and business people:

Australian Retailers Association (
Business Enterprise Centres (
Business Entry Point (
Department of Innovation (
E-business (
NSW Small Business (
SMExcellence (
NSW Department of State and Regional Development: offering inventors and small business innovators support to plan and commercialise their innovations. Original concepts, new or improved device, product, material, business process or service falls witin the definition of innovation may be eligible for assistance at NSW Innovation Advisory Centres.
Hunter Innovation Advisory Centre at Newcastle

Law Society of NSW (
Legal Issues Guide for Small Business (

Australian Business Register (
Business Licence Information Service (
GovForms (

Austrade (
Australian Competition and Consumer Commission (
Australian Copyright Council (
Australian Government Workplace Ombudsman (
Australian Securities and Investment Commission (
Australian Taxation Office (
Australian Workplace (
Department of Employment and Workplace Relations (
Department of Immigration and Citizenship (
Human Rights And Equal Opportunity Commission (
IP Australia (
NSW Office of Fair Trading (
NSW Office of Industrial Relations ( (
Office of the Privacy Commissioner (
WorkCover (
Workplace Authority (
Workplace Ombudsman (
Importing websites:


National Mentoring Association of Australia (

Australian Mentoring Institute (
Government grants (
Investing/Buying Gold (
A news gathering website (
Property Investing (
Property Management for Apartments (
Property Finance & Advanced Calculators (
Property Newsletters (
Mortgage Site (
Business News (
Business Articles (
Business Articles (
Forums and money articles from one of the largest US site (
Sales Articles (
Personal Finance Blog (
Small Business Articles (
#1 Internet Marketing Forum (
Affiliate Marketing Forum (

CASH BACK HOME LOANS (get rebates on upfront/annual/trailing mortgage commissions)
Peach Home Loans & YourShare. Average upfront commissions are typically 0.6% and average trail commissions are 0.2%

Design Sponge Online (
Apartment Therapy (
Remodelista (
James Merrell (
Design Squish (
Decorno (
Fine Little Day (
Ikeahacker (
Loving Living Small (
The Design Files (
Unhappy Hipsters (
This Is Naive (

Monday, October 26, 2009

Picking low hanging fruits first

A fruit tree or a tomato plant will ripen at the bottom first before the fruits at the top starts to ripen later. If you waited till the fruit at the top ripened, the lower ones will be picked by others to be enjoyed now and you've missed out.

This is just like investing. If you wait and wait for the right moment to invest or the right thing to invest in, you'll have missed the low hanging fruit in the wait for the fruits up high. Other investors will have pounced on the opportunity while you dither over your decision.

Sometimes, the waiting game pays off. That is, the fruit ripens, is perfect, clean and beautiful. Sometimes, the waiting game is a loss because that fruit that you were waiting for... the birds and the worms got to it first, or the weather wasn't ideal and the fruit rotted and fell off.

What's the solution?

You pick that low hanging fruit. And then you pick the fruit up the top when it ripens.

That's an analogy for investing.

You invest in those blue chip stocks with your funds, and when you learn and save up additional funds for investing further, you can dabble your extra funds with investments that are pie-in-the-sky type if you desire. Or you can plonk some funds into exploration firms or small capitalised firms. Those deemed to be riskier prospects.

The low hanging fruit, that is, the blue chips such as Coca Cola, Caterpillar, the banks (CBA, WBC, NAB), the mining royalties (BHP, RIO) and the retailers (David Jones, Woolworths, Wesfarmers) are examples of low hanging fruit. They're already ripe for the picking. They will provide you with a meal via their juicy dividends year after year unless they collapse.

The high hanging fruit such as the small capitalised firms and the exploration firms... they may eventually one day, ripen and provide you with something tasty such as dividends and massive capital gains, or on the other hand, there is also the possibility that they could rot before they ripen, becoming as sour as a lemon and cause you to cringe about how you could be so gullible, so naive, so silly and so crazy as to buy into a sucker stock.

Those elusively high hanging fruits are just that...a gamble. Leaving you hoping that with the perfect weather, they will all ripen up successfully. It's akin to you hoping, that with the right economic and trading conditions, those small caps and those explorations stocks, will also deliver something worthwhile.

If you pursue those high hanging fruits, don't forget to cover your bases so that you won't ever starve - pick some of those low hanging fruits first. Then you can make your move, buy some promising stocks that may or may not deliver.

Friday, October 23, 2009

Extreme Frugality Sucks

Being too frugal will make you miserable.

I've been reading hundreds of blogs lately. It's like my new addiction. I've noticed a few recurring themes now when it concerns financial blogs. The blogs with massive subscribers are either a) Informative, interesting and useful or b) Not so informative, but the blogger's story and background is dramatic and harrowing ... such as "This blog is about my journey in paying off my $159,000 debt."

The blogs that I choose to subscribe to would be the informative and interesting one. Is it really beneficial to read about someone who racked up over $100,000 in stupid credit card debt and heavy bouts of consumption binge? Sure, it's gripping and interesting, but you are really wasting your time unless you're in the same situation and trying to pay off the same silly consumption debt.

I have never had any consumption debt. Have never wanted to follow the crowd and buy a gazillion number of shoes and Louis Vuitton handbags. The sheer crowd of females in the city carrying LV bags proudly... there are so many of them that it's almost like an Louis Vuitton Brown Bag Army Brigade. I love good quality bags or shoes and pretty things just like any typical female but I just will not buy an LV Bag that will lump me into that category.

I have one credit card. If I need larger credit, I contact the bank to have the limit increased. It's so pointless to parade around with 5 or 15 credit cards. I have some investment debt. A positive net worth. A bit of student debt left to pay off which I don't choose to pay off with a lump sum payment because it's indexed to inflation and I can earn a better return elsewhere.

I hesitate at taking or reading financial advice from anyone and any blogger who has racked up consumption debt.

Would you consult an acoholic about how to quit drinking when they are still drinking heavily?

In order to progress and develop your skills in finance and investing, you need to take a good look inside yourself. You need to focus more on earning passive income than trying to learn how to be super frugal.

The bloggers with massive consumer debt, they will blog about selling things on ebay, craigslist, how to save money here and there and how to be so frugal that you live your life miserably. If you have debt, then yes, it's probably a good guidance for you.

But if you have savings and a positive net worth, your time is better spent reading websites and blogs where the bloggers have a positive net worth as well. That way you can learn more about how to invest, the type of assets you can invest in, how to calculate returns, the terminology and the financial geek speak etc.

But things like, never eating out, always cooking your own food from scratch, spending all your weekends cutting out coupons to save $3 or $5, growing your own vegetables, driving all over town to find discounts and bargains, signing up for 15 credit cards that have 0% introductory interest just so you can arbitrage and place it into a bank account and earn 3-4% interest and all those time consuming activities.

Is your time more valuable if you used it on productive matters such as starting your own business, improving your professional skills and working on increasing your income via a better paying job or improving your investing skills so that you can grow your passive income?

Extreme frugality is not the road to riches. It's the road to feeling miserable and cantankerous. Spend in moderation and focus on reading materials that will improve your business, professional or investment skills and you will discover what I've discovered... the bliss of earning income passively from investments and multiple income streams.

Thursday, October 22, 2009

Understanding loans and their features

Loans can have a fixed or variable rate of interest, be secured or unsecured, negotiable interest rates and payment terms. There are many different types of loan available.

Fixed or Variable Interest
1) Fixed Interest – Interest is fixed for the duration of the loan, from the time it’s taken out to the day you pay it off.

2) Variable Interest- The rate changes either up or down depending on the market rate (which varies depending on the loan type eg: LIBOR, Bond, Central Bank rates).

Secured or Unsecured
1) Secured – Then lender can sell whatever asset you’ve secured the loan against if you default and can’t pay the loan. Assets typically used as security are houses, cars, stock portfolios and personal possessions. Loans that are usually secured are car loans, mortgages, mortgage line of credit accounts

2) Unsecured- The lender has no recourse. You’ve got not asset with the lender as a collateral. If you default on the loan, the lender considers you a bad debt and will most likely pass you along to the debt collection agency as a last resort. This loan is riskier for lenders so they usually charge a higher interest rate because of this increased risk. Examples of unsecured loans are credit cards, store cards, personal loans and personal lines of credit

The different type of loans available are:

Car Loans
Car loans are usually secured against your vehicle. They may insist on car insurance as well. You should shop around for the best financing deal first before going shopping for a car because car yards will always have their own financing but this may not be the best deal around.

Car loans are usually for a fixed amount of money, organised upfront with a fixed interest rate, repayment amount and period. Example: $10,000 car loan at 10% interest, repayable by monthly instalments for the duration of 4 years.

Credit Cards
If you can’t pay off a credit card every month before the interest free period ends, then don’t use a credit card. If you don’t listen to this wise and sagacious advice, then it will ultimately be your downfall. You only need one or at the most two credit cards ever at any period of time.

These beasts come in various structures with interest free period ranging from 0 days or 55 days to 6 months typically. Read the fine print! Understand what you are signing up for. Don’t be fooled into thinking that it’s worth spending on the credit card because you get reward points or frequent flyer points. Wow, you’ve gone and spent $3,500 so that you can collect 3500 points, the equivalent of $25-$30 in rewards – if you can't pay that $3,500 off before incurring interest charges then it's a bargain with the devil.

If you can’t pay them off by the interest free period, you will be paying through the roof with rates ranging from 11% to a more typical rate such as 18% and 28% per annum interest. Usually the banks will have a 'minimum payment' amount of around $25 or $30. The problem with paying only the minimum amount is that you will end up paying interest on the balance owing and it will take you 25-40 years to pay off the credit card at the minimum amount that they request you to pay.

I will re-iterate myself because credit cards have been at the root of marital breakdowns, stress, tears and bankruptcies – if you can’t pay them off by the interest free period, don’t use them. Otherwise, you are best off looking at other financing options such as lines of credits or personal loans which charge lower rates of interest.

Debt Consolidation Loans

Debt consolidation is a process whereby you take out a new loan (or increase an existing loan) in order to close off several smaller, separate loans. This can be done by organising a new personal loan, refinancing your mortgage and rolling those debts into your mortgage or withdrawing equity out to pay off your multiple loans.

Why do people consolidate their debts? They consolidate in order to close off the loans with a higher interest rates onto a new loan with a lower interest rate. Credit card debts may be incurring interest at anything between 9% - 38% and by consolidating and refinancing, you replace the debt with a new debt with a lower rate such as 9%. It's also sometimes done to simplify repayments, instead of multiple payments to multiple loans, you make just one single payment for that new consolidated loan.

Margin Loans
Loans that are taken out usually to buy stocks and invest in portfolios. It can also be utilised when trading CFDs. The margin loan is usually secured by your stock portfolio and they will have different loan to valuation ratios (LVR) depending on what stock you buy. The average LVR could be up to a maximum of 70-80%, this varies depending on the lending institution but the higher the LVR, the more you expose yourself to margin calls.

I'll be writing a separate article regarding margin loans due to it's complexity and how it operates.

Mortgage Loans
Mortgage loans are used to buy residential and commercial properties. It's usually for an established amount (eg $380,000) with either a variable or fixed interest rate. Your loan contract will determine the period of the loan (eg: 25 years, 30 years or 40 years) and the monthly repayment amount, which may vary depending on the interest rate charged.

I will be writing articles about how to pay your mortgage off faster, amortisation schedules and techniques to pay your mortgage off faster.

Mortgage offset and redraw facilities

A mortgage offset account works by offsetting your mortgage balance by the amount in your offset account. The interest that is charged is on the net balance amount between these two accounts. To illustrate, assume Sally's mortgage on the 1st of March is $380,000. If Sally has $100,000 in her offset account, then the bank will charge Sally interest on only $280,000.

Lending institutions will usually not approve your loan without a deposit however, they may lend anything from a maximum of 80% to 105% of the property's value depending on your income and repayment abilities. The smaller your deposit and the greater your LVR, you may have to pay lenders mortgage insurance on your loan.

A redraw facility may be a component of your mortgage, depending on whether your mortgage loan has this facility or not (check your mortgage contract). With a redraw facility, if you make any extra repayments then you can withdraw the extra repayment anytime you wish.

Again, this is a complex area and I will write a full article dedicated to mortgage loans. If you don't understand the complexity of a mortgage loan then you will not know what features of the mortgage that you will need. Also, do you really want to be spending the next 30 years of your life paying off your mortgage? Understanding the finer points will allow you to establish the appropriate loan for your circumstance and be flexible enough to cater for your repayment ability.


An overdraft is usually an extension of your normal account, allowing you to have a negative balance. Businesses commonly have overdraft enabled on their account to cater for cash flow imbalances throughout the year. Some individual accounts has overdraft facilities enabled, but be sure to check if you are being penalised for the usage of this facility everytime your account drops below a $0 balance.

Payday Loans
Payday loans are the biggest rort ever. This has got to be the very last resort! The moment you start using payday loans, you are probably closer to insolvency and bankruptcy than you realise. If I could say which loan to avoid at all cost, it would be this one.

Personal Loans
These loans are either secured or unsecured. If the loan is secured, the rate will usually be lower than credit card rates and loans that are unsecured. They usually have a fixed interest rate and a set amount established at the beginning of the loan. The loan will have a payment schedule with fixed repayments, normally monthly, until the loan is paid off. You cannot vary a personal loan without creating a brand new personal loan.

Commonly used for buying cars, consolidating various loans, purchasing white goods, renovation, holidays and multitude of things. Normally classified as a bad debt and not used for investing but for aiding personal spending.

Revolving Line of Credit / Line of Credit Accounts
Similar to an oversized credit card, except they are usually secured. There is an established limit such as $100,000 and you can spend from the line of credit as much and as often as you wish until you have spent your limit – which is $100,000 in this example.

Monthly payments are based only on the component that you’ve used and may vary from a certain percentage to interest only. So if you have a $100,000 line of credit (LOC) and you’ve spent $50,000 on renovation, then you will usually have to pay the interest or minimum percentage on only that $50,000 that you’ve spent. Don’t fool yourself though. You will have to pay that $50,000 principal debt eventually, so be wise and spend only what you can afford.

Store card loans and credit

This basically covers vendor financing. It's where a retail store will offer you their store credit card (eg David Jones or Macy etc). Depending on the terms and conditions, these credit varies markedly. Some whitegood stores selling furniture, for example, may offer a 'buy now, interest free for 2 years' type of deal. If you don't pay the balance off before the interest becomes applicable then they commonly back date the interest charge to the very first date that you bought the goods.

It can be a very expensive lesson to learn. Be wise and if you can't afford to pay for it today, then don't buy it.

Student Loans
These differ from country to country. I’ll only be covering Australian student loans. In Australia they’re called HELP or FSS debts. Which is Higher Education Loan Programme debts.

I'll be writing about HELP debts in depth in a separate article due to it's complexity regarding the discounts that are applicable depending on how you pay the HELP debt.

There are so many type of loans out there. Basically everything and anything could be financed nowadays by the stores or by the shops. The terms and conditions of each loan differs and repayment structures also differ. If you don't understand the loan, don't borrow until you've done your due diligence and understand what you are signing up for.

Tuesday, October 13, 2009

"Get a life...get out and pay rent."

X: "She's living at home, with her parents."
Y: "Geez, she needs to go get a life! Get out and pay rent. I mean, we pay rent and bills..."
X: "She's got a life. She doesn't need to pay rent in order to get a life."


Z (subject of X & Y's conversation): Three properties, share portfolio, well travelled, goes out a lot, plays sport and yes...has not found her Prince Charming and is still living at home, helping the parents with the family business on weekends
Y: Renting, mother of two, no assets

Y seems to think that if one hasn't got a boyfriend, girlfriend, husband, wife or babies and kids, then they haven't got a life. Y also thinks that if you still live at home with your parents, then you haven't got a life.

Not sure where she got her preconceived ideas from but it's rather narrow. Firstly, living at home does preclude person from having a life. Secondly, not all twenty or thirty somethings who live at home are irresponsible. I don't know where the concept of kids having to move out of home when they finish school was first derived but in some cultures (particularly Asian and European cultures), kids live at home until they find a partner to marry. And if they never find the partner, then they live at home and look after the parents when the parents get older.

They don't put their parents into nursing homes.

You could argue that twenty and thirty somethings who still live at home are pathetic, consuming their parents retirement funds and worse, but let's not lump everyone into the same category. Is there any point in forcing kids out of the family home, into renting some crappy place, spending all their income on rent and bills? If they can stay in the family home, help do chores around the house, save up for buying their own place or to invest... is that being irresponsible or having no life?

I can understand that living with your parents could mean playing havoc with your sex life but if that's what's important to you, then move out.

Economy of scales - it works with households too. It's cheaper to live as a family or with flat mates rather than by yourself. Even better for the environment. Simply because when you have dinner, instead of just you, one light and your this to a family having dinner under one light... electricity bill can really be effectively split between multiple heads.

A family of four watching one TV versus a family of 4 with two kids who moved out with 3 TVs switched on between the three homes. Conserving both money and energy. Better for your pocket and better for the environment. Actually, I really don't care if anyone lives at home with their parents or move out, I just personally prefer it if people lived in some type of shared or communal households so that there's less drain on our environment.

Pros of living at home with parents:
* Split bills, no bills or less bills to pay
* No rent (no 'dead money'), or if you pay board, the boarding cost is cheaper than rent
* Better for the environment
* Develop closer relationship to family
* Can save money on sharing and splitting utility bills (landline, internet, electricity, gas)
* Can build a house deposit or savings a lot quicker due to lower expenses

Cons of living at home with parents:
* Can't have partners and friends staying overnight or visiting too frequently
* No partying and wild drinking at home
* Possible lack of personal development and maturity (eg: if your parents do all your laundry, cooking and cleaning)
* Possible lack of financial skills (eg: budgeting for household bills, saving for expenses)

Pros of living alone:
* Freedom to do as one wishes with friends and partners visiting or staying over
* Er... I can't come up with any more pro's really...simply because I don't like living by myself

Cons of living alone:
* You pay all bills by yourself, whether that be mortgage (which is not too bad), rent (definitely bad), electricity, gas, water, phone line, internet, property insurance
* No-one to talk to when you get home
* Cook all your meals by yourself all the time

Anyway, it's a bit rash to presume that just because someone is living at home, then they haven't got a life, aren't mature or aren't responsible. I don't think a person is mature and has a 'life', simply because they've moved out, are paying rent and struggling financially.

Financial and personal maturity/success is achieved when you can support yourself independently in any situation without struggling from day to day and having to fall back on credit cards and debt. As for having a life...anyone can have a life, whether they live at home or not.

Sunday, October 11, 2009

America down the gurgler & how you can survive

The US is still struggling despite its massive government stimulus. A few statistics that I read today, totally stunned me. It's always important though, to take a step back and evaluate the fact that the US population is approximately 300 million and although the numbers are stunning, it's also relative to population size.

In September, a further 263,000 jobs were lost according to the official numbers from the US Department of Labour. This led to a 26 year high unemployment rate of 9.8%. Around 2.7 million people lost their jobs since this economic credit crunch 'crisis' began and a total of 15.1 million people in the US are looking for work.

Australia's population is approximately 20 million people. The mind boggles. If that unemployment statistic was in Australia, we would have 3 out of every 4 in our population looking for work. Not that 9.8% US unemployment rate isn't crazy. That's about 1 out of 10 people living in the US that is looking for work and either spending down their savings or racking up debt in order to survive, relying on unemployment benefits or food stamps (in the US only, Australia does not have a food stamp system).

It really is a bit too late to prepare for the crisis and start saving when we're in the midst of the crisis. The best time to prepare is obviously before the downturn and before the economy hit the skids but as usual, the savings ratio in the US and Australia were negative until the crisis hit. As people have found out the hard way, it's too late to build the house on stilts when the flood water rises... and it's too late to save when the economy heads downward.

If you find yourself in a perilous situation, a few pointers to consider are: evaluate all your debts versus your savings. How long can you survive if you lost your job today. How long can you keep paying your bills? How long before you can find a new job? If you expect it to take four months to find a replacement job, then your savings will have to sustain at least four months of living expenses. If you build your emergency fund on that basis, then you will need at least five months of living expenses saved up.

Preparing for redundancy -

1) C.V: Job search adverts, cover letters, networking, recruitment agencies, newspapers, websites of potential employers, some ex-employers may provide assistance with job search if there's been mass redundancies

2) Financials: Assets, liabilities, loans, savings, investments, redundancy packages, if you have any income protection insurances
3) Government support: Unemployment benefits, rebates, charity assistance, food, housing, utility programs etc (google Centrelink and visit them)

4) Support:From family & friends

If your employment status is shaky, it's best to start building your defenses now
than burying your head in the sand. Cut out any expenditure that is not a need, that is irrelevant to your daily existence, and earmark those funds to be your emergency fund (EF). Be as strict as you can with yourself so that you can build a cushion for future rental/mortgage/loan/utilities and other bills.

Update your C.V and get ready to look for a new position should the axe falls. Investigate opportunities where you can start your own business if that's a valid option for you. Check up on unemployment benefits that you may qualify for. Organise your loans and bills to see what you need to prioritise. Start selling anything that you don't need around the house on Craigslist or on ebay right now, don't wait until it's too late. Rent out that spare room now rather than later and use that to stockpile your EF.

Check your rent contract and see if you can downsize your rental expense now and not when you're suddenly unemployed.

Plan for any extreme pessimistic situations where you will have to sell your house or car if you can't pay the mortgage. Last thing you want to do is completely erode any equity you have built in your house and be forced to sell by the bank as a firesale foreclosure. The banks aren't looking after your best interest. Same with the car loan.

The last place you want to be is to start making decisions when you're in an irrational state of mind or in a panic. It's better to be pro-active than re-active.

If you're in Australia and your job is on shaky grounds. You need to consult an accountant or a financial planner about what to do and how to split your redundancy packet if you're eligible for one. You may be advised to contribute extra to super, to keep some on hand as an EF or to pay down some debts, depending on your own financial situation. Also, check with Centrelink to see if you are eligible for any government assistance and hand outs.

If you've made extra repayments on your mortgage, you need to check if your bank will let you take a 'repayment holiday', switch to 'interest only' or you may qualify for the hardship provisions. Checking up with your bank today is the best way to handle things. Don't wait until it's too late.

I've seen some very interesting threads on some forums where some people have bought dry goods and cans to stock up. They've bought up to five years worth of non perishable groceries, even bought guns and a cheap farm so that they're self

All this effort, in preparation for the super inflation that they believe will follow in the near future. None of us can see into the future. We can prepare for the future to the best of our abilities, but we really cannot predict the future with any extreme certainty. I don't recommend buying five years worth of non perishables because I can definitely predict that if you do that, you'll end up having to force yourself to eat 50 cans of beans, corn and tomatoes(not to mention all the other stuff that you've stocked your pantry with) before they all expire in one big batch.

Thursday, October 8, 2009

Stuck on a hamster wheel running round and round?

Life is bit like that. We are always so busy working and running around. But if you stop to take a look, did the world change and you haven’t changed with it?

You may find yourself thinking after a few years of working…have you really achieved anything? You’ve found your partner, had your kids, did the obligatory thing and sold your apartment to buy a house so that you could have children. Then when the house got crowded, you sold that one and upgraded to a bigger one with a bigger mortgage.

Now you find yourself working harder than ever and wondering what happened and how did you find yourself working like a dog 9-5 or even longer hours than that. And yet, your mortgage is bigger than ever, time is passing furiously and you’ve got stacks of bills to pay, a family to look after and the thought of retirement is scaring you because you know you need to start saving for retirement but how can you when there’s just nothing left at the end of the month?

This is probably one of the most common situation people find themselves in, because they’ve taken the common route in life. Go to school, go to university/college, study hard, get a job, get married, buy a place to stay, have some kids, sell the small place and upgrade to a bigger house, pay the mortgage for 25-30 years, retire and then die.

Sometimes it’s not perfect. That is, you can’t find a partner, you don’t have kids, you married but then you divorced, you divorced and remarried with stepchildren, you can’t afford to buy any property at all, you didn’t study etc

The problem with life is that it demands us to know what we want to do when we’re 18 years old and by the time we’re in our twenties or thirties, we have a ghastly suspicion that we may be working in the wrong job or not doing something that we really want to do such as philanthropic work, starting your own business or contributing more to society.

If you have not had kids yet, you should be saving as much as possible while you still can. When you have kids, you will find yourself with many more expenses than ever before and find saving anything a very difficult thing to do.

We’re all on the hamster wheel to some extent. When we were students, we earned very little, but our expenses were also low. As you get older, you typically (hopefully) earn more, but as the income increases, you will find your expenses grow to match the income. How? You end up spending more, buying more, eating out more, living more lavishly, renting a bigger apartment, buying a bigger house.

With expenses increasing as your income increases, there’s not really much left over to save and invest. So you can find yourself on a hamster wheel, running harder than ever, but going around in circles.

Once of the biggest problem I’ve noticed happening with a lot of couples, is that they have kids and then they buy a bigger house. Their mortgage is so big (we’re talking $400,000 to $800,000) that all they do is just barely scrape through with the monthly mortgage repayments. The problem with just barely making the mortgage payments means there is not much left over to make extra repayments. If you read my articles under the “All about mortgage loans” label, then you will see how devastating the effect is when you can’t make extra repayments.

If your mortgage loan is $300k, interest is 8%, the term is 30 years and you make the required monthly repayments of $2201…. You are slaving at work to pay the bank about $2000/month and only knock about $201 off the loan principle…you are in effect, building up your equity and net wealth by only a measly $201/ month. Of course, the ratio changes as you progress through the months and your property may rise in value(capital appreciation) but the amount that borrowers pay in mortgage interest is one of the secret destroyers of wealth. Particularly when it’s a loan on a home they live in and the interest is not tax deductible.

The best time for any of this self realization to occur is in our twenties, and if you’re past your twenties, then the best time is today. By starting today, we’ve got time to take note of how far we’ve come, where we would like to go, and then make plans on how we achieve that. You can be happier.

Whenever you feel that you’re on a hamster wheel going round and round, all you have to do is get off it. Take a step back, do a bit of meditation or contemplation, take a day off or find some ‘alone’ time with yourself to evaluate your life and the directions you would like to head towards. Write it all down so that you can take the weight off your mind.

It’s all about reconciling our inner dreams and desires with our practical reality. The reality of life is that things aren’t handed to us on a platter. If we want any dreams to come true, we have to figure out a way to achieve it. It’s just like when you were younger, you believed in the tooth fairy (which is the dream) and your parents made it come true (which is the reality). When you grow up though, you are now the adult or the parent and you will have to create your own reality.

Wednesday, October 7, 2009

Paying off your mortgage faster- the scenarios

This particular article of mine is very long and I hope, valuable to you as a reader. It will go into depths with the numbers, figures and examples. If you need to take a break in between, I suggest you do that. I would value a comment feedback if you found this helpful, and if you comment with an outline of your own mortgage structure, that would be interesting.

There are pros and cons of paying off the mortgage faster, however this particular article of mine is only concerned with how to pay off your mortgage faster and what the financial effects are if you pursue various repayment options.

Decades ago, housing was 2-3 times the average annual wage, in modern days, housing is now 5-6 times and more the average annual wage.

Because of this, it’s more important than ever to know how to organize your payments so that you can pay your mortgage off faster, rather than letting the repayments consume the next 25-30 years of your life. Why would the banks advise you how to pay off your mortgage faster? There would be less profit for them if they did that.

If you are using property as a wealth creation vehicle, then this article isn’t strictly appropriate for you. Using property as a vehicle to build wealth, would involve maximizing your investment loans (tax deductible), leverage (LVR) and the amount of properties under your control and it does not necessarily include the goal of paying off your mortgage loans faster.

Paying off any non-deductible debt such as the mortgage on your principal place of residence (PPOR), that is, the home that you live in right now, can be easy by understanding how a mortgage works. You can knock anything from 5-25 years off your mortgage. There are books out there that boast that they paid their mortgage off in 3years. This is possible and achievable if your mortgage isn’t more than 3 times your annual income! Most mortgages though, with the right payment structure setup, can be paid off within 3-10 years.

If you earn $60,000 per annum, and your mortgage is $300,000 then it will take more than 5 years to pay off. Why? $60,000 income, deduct taxes, living expenses, mortgage interest and you can already see that you can’t pay it off in 5 years unless something changes – either you earn more or you spend less. Your target could be to pay it off in 5-10 years. Set reasonable goals and targets.

The ability to pay off your mortgage quickly depends largely on your income but you can learn a few repayment techniques which can help you pay off your mortgage faster, regardless of your income. See my article about “15 Tips on paying off your mortgage faster” filed under the label “All about mortgage loans.”

Once you understand how the loan amortization schedule works, you will be in control of paying your mortgage off faster. I will illustrate a few scenarios and change a few criterias so that you can see the flow on effect of how altering your payments can save you from higher interest charges.

A few assumptions:
Interest rate is variable but will remain unchanged for 30 years for simplicity. I’ve rounded up or down to the nearest dollar. The average loan amount is $300k so I’ll use that for my calculations

Purchase price of house: $375k ($375,000)

20% deposit: $75k

80% mortgage loan amount also known as the principle: $300k
Variable interest rate: 8%
Loan period: 30 years = 360 months
Repayment: Principle + Interest loan
LVR: $300k/375k thus LVR is 80%

Monthly repayment is $2,201 composed of:

Principal: $201
Interest: $2,000


Scenario 1)

You make the same $2,201 payment each month for the next 30 years. No extra repayments. As you can see, your very first mortgage payment, $2,000 goes into the bank’s pocket, and only a measly $201 is applied to reduce your principal loan (the $300,000), leaving you with a loan balance of $299,799

After each month’s payment, you are knocking a further pitiful $1 to $2 or so amount off the principal amount. After one year of paying your mortgage, you feel like you’ve gotten no-where.

You’re absolutely right, you’ve gotten no-where because across that first year, you’ve diligently paid $2,201 each month but out of that - you have paid the bank a whopping $23,909 interest and you’ve knocked only $2,506 off your principle. Leaving your loan balance at $297,494

This is the amortization chart for the first year of your mortgage with this scenario:

Year Month Repayment Interest PrincipalBalance

1 1 2,201.29 2,000.00 201.29 299,798.71

1 2 2,201.29 1,998.66 202.63 299,596.08

1 3 2,201.29 1,997.31 203.98 299,392.10

1 4 2,201.29 1,995.95 205.34 299,186.76

1 5 2,201.29 1,994.58 206.71 298,980.05

1 6 2,201.29 1,993.20 208.09 298,771.96

1 7 2,201.29 1,991.81 209.48 298,562.48

1 8 2,201.29 1,990.42 210.87 298,351.61

1 9 2,201.29 1,989.01 212.28 298,139.33

1 10 2,201.29 1,987.60 213.69 297,925.64

1 11 2,201.29 1,986.17 215.12 297,710.52

1 12 2,201.29 1,984.74 216.55 297,493.97

23,909.45 2506.03

Holy cr@p, you didn’t know you paid that much interest right? You may be one of the few that do know, but there are many people out there, clueless about this breakdown, paying their mortgage, month after month, year after year, and getting frustrated about why they haven’t managed to pay off anything.

Ten years later, you’re still doing the same old monthly payment, month in, month out, blissfully unaware that by the end of the tenth year, you have paid the bank, interest totaling $227,330! And how much principal have you knocked off the loan? Only $36,825! And what’s the balance of your loan to pay? $263,175

The ball is in your court when you reach the 22nd year of your mortgage, after 257 months worth of $2,201/month payments, your interest component is $1,098 and principal component $1,103, leaving your mortgage loan balance at $163,647

Now after 22 years it’s in your favour. It had taken you 22 years to pay off $136,353and the next 8 years to pay off $163,647 in principal.

Why did you suddenly pay off 55% of the loan in the last 8 years and it took you 22 years to pay off 45%?

It’s because the principal component finally exceeded the interest component of your monthly repayments. Finally after 30 years of $2201/month repayments later, you finally paid off your mortgage and you’ve also paid the bank $492,471 in total interest. A total balance of $792,471!


Scenario 2)

Same amount borrowed (300k), same interest rate (8%) for the same period (30years)

Same repayment amount at $2,201/month

Except in this example, you earned a $2,000 bonus at work the second month into your mortgage and you decide to pay this lump sum into your mortgage to reduce the principal loan by $2000. I will now show you how much that $2000 saved you across the life of the loan.

•You will be mortgage free 9 months earlier

•You will end up paying a total interest of $473,360
•This saves you paying interest of $19,111 across the life of the loan…all this interest saved for just making a lump sum repayment into your mortgage at the beginning of the loan


Scenario 3)

Same amount borrowed (300k), same interest rate (8%) for the same period (30years)

Same repayment amount at $2,201/month

Except in this example, you earned a $2,000 bonus at work at the end of the third year (36 months) into your mortgage and you decide to pay this lump sum into your mortgage to reduce the principal loan by $2000. I will now show you how much that $2000 saved you across the life of the loan. It will be less of a saving than scenario 2 because the earlier you make the extra repayments, the more interest you save:

•You will be mortgage free 7 months earlier

•You will end up paying a total interest of $477,522
•This saves you paying interest of $14,949 across the life of the loan…all this interest saved for just making a lump sum repayment into your mortgage at the end of the third year of your loan


Scenario 4)

Same amount borrowed (300k), same interest rate (8%) for the same period (30years)

Same repayment amount at $2,201/month

Except in this example, you earned a $2,000 bonus at work the second month into your mortgage and you decide to pay this lump sum into your mortgage to reduce the principal loan by $2000. Not only that, you decide to give up buying coffee for three days of the week (latte effect) saving you $3 x 3 days x 4 weeks equals $36/month in savings. You can really sacrifice anything you like to come up with the savings. I’m just using a very simple, easy to achieve sacrifice as an example.

Your extra repayments are now $2000 in month two and $36/month until you pay the mortgage off:

•You will be mortgage free 2 years and 6 months earlier!!

•You will end up paying a total interest of $439,204
•This saves you paying interest of $53,267 across the life of the loan

All this interest saved for just making a lump sum repayment early on in our mortgage and the extra small amount of $36 that you were paying every month on top of your regular $2201/month payment.

It’s simple little things like what I’ve hypothesized for you above that makes a huge difference in how you can pay your mortgage off faster and how you can save thousands of dollars in interest. Making extra repayments means that you’ve utilized the power of compounding in your favour rather than letting the bank use compounding in their favour to charge you interest.

You can use mortgage calculators and amortization schedules to do your own scenarios. My intentions are just to demonstrate how a few simple extra payments and how you pay those payments against your home loan, can shorten your loan and also save you thousands of dollars in interest.

15 Tips on paying off your mortgage faster

1)Firstly, have a decent deposit.
20% deposit minimum will save you having to pay lender’s mortgage insurance which is also known as LMI. LMI protects the bank, and not you, if you default on your loan

2)Get a loan with only the features you need at the lowest rate.
It MUST be flexible enough to allow you to make extra repayments, allow redraw and 100% offsets without penalising you

Getting the right loan with the appropriate features in the first place may save you from having to refinance and pay penalties later on. Some loan features to consider are: ability to redraw, make extra repayments, switch between fixed or variable rates, take repayment holidays, offset accounts, line of credit accounts and your loan portability are just a few features.

3)Be wary of “introductory rates”, “honeymoon rates” and “low start” rates.
They typically have lower interest rate for 6-12 months but may not allow additional repayments, thus costing you more in the end.

4)Make your first repayment on settlement date.
Don’t wait for the first payment at the end of the month and this will save you thousands of dollars

5)Pay your purchasing fees upfront and do not capitalize them into your loan.
Fees such as establishment fees, stamp duty fees, legal fees and Lenders Mortgage Insurance fees (LMI). This will save thousands of dollars.

6) Don’t pay your mortgage monthly, but pay it fortnightly.
This ensures you make one extra payment per year which cuts 7 to 8 years off a 30 year mortgage term.

7)Have your salary deposited directly into your mortgage offset account.
That way, the salary is reducing the interest payable from day one.

8)Make extra repayments(consistent or ad-hoc) as often as you can, or make payments that are bigger than the amount required.
EG: if your fortnightly repayment amount is $500, try and pay $600 per fortnight or more if you can afford it.

9)Make sure your extra repayments are deducted from the principle owing, and not recorded as a prepayment of interest.
Check your statements! Contact the bank if this isn’t happening.

10)Interest is calculated daily
So extra repayments made in the early days will reduce your loan principal immediately, reaping a far greater benefit on saving you interest than extra repayments made in the later years

11)Sign up for the professional package.
See your bank to see what they have available. Professional packages can be free or cost up to $400-500 in fees per annum but save you thousands of dollars of interest per annum. It may have features such as a discount on your loan rate, no annual fee credit card, no account or transaction management fees on your account(Eg: CBA Wealth Package)

12)Be careful with the loan amount that you fix the rate on and the fixed term period.
If you’ve fixed too much for too long, this restricts your ability to make extra repayments (usually limited at $10k pa). Or you can be penalized for breaking the loan if you wish to relocate to a new property (portability) and close the loan off. Penalty fees for breaking fixed loans are very exorbitant and can be up to even $40,000 to break.

13)If your bank reduced the loan interest rate, maintain your monthly repayment amount instead of reducing it.
This will ensure you pay off more loan principal because the ratio of interest to principal has changed due to the interest component decreasing. In Australia, banks ordinarily maintain your monthly payments when rates go down (which is a good thing for you!), unless you contact them to change the monthly repayment amounts.

14)Rent out your spare rooms.
Take on some renters and rent those spare rooms out. This could provide you with 300- 1000 per month (for each room) in extra income to pay off your mortgage faster. This can save you thousands, the earlier you do it, the better the results. The bonus is that you don’t even have to work hard for the income. Let your property pay for itself!

15)Check your mortgage contract for any early prepayment penalties and/or deferred establishment fees that may be applicable.
These could cost you up to $700 and more depending on the penalty stipulated on your loan contract. Deferred establishment fees are usually charged when you pay off your loan within 3 or 4 years of the loan start date. This differs between lenders and is usually stated on your loan contract.

Why would anyone pay their mortgage off early when they can invest that extra amount instead?

Roughly, each $1000 you owe on the mortgage, you will end up paying $2,500 to $3000 to the lender in return if you pay according to their required monthly payment amount and do not make any extra repayments.

The earlier you make those extra payments above the required mortgage amount the bank has stipulated for you, the quicker you will pay off your loan and end up saving yourself thousands of dollars, not to mention, you may also be among the rare few to pay off your mortgage loan in less than three years.

Paying off your mortgage quickly may not always be an ideal (or the best) financial goal, but for most people, it’s better to have this as a goal to aim towards than to have no goals at all. Without any financial goals, we trend towards excessive consumption(of crap) and buying too much useless consumer goods. If you can earn more from investing, then it’s always better to invest than to pay off your mortgage early. The challenging part is finding an investment that yields something worthy of your attention.

But I can earn more if I invested the extra amount saved instead of dumping it into my mortgage?
If your mortgage loan rate is 6% pa, each dollar that you pay off your loan principle is in essence, earning 6% pa tax free for you for the life of your mortgage loan, whether that be 1 year or 30 years. That’s equivalent to 6% after tax. If your tax rate was 40%, your investment returns will need to yield at least 10%pa to even justify you not paying off the mortgage with that extra dollar.

Many people are now fearful of the share market and investing in stocks, properties, mutual/managed funds, superannuation and retirement accounts. How could you not feel wary when the market has been as volatile as it has been in 2007, 2008 and 2009? Portfolios and asset values plunged by up to 60% and more. Property values careening below the value of the mortgage loan (particularly in the US) and retirement savings annihilated worldwide.

For these reasons, paying off your mortgage faster is a sure fire way to build equity in your property without as much volatility as investing…not to mention the huge peace of mind that you get, especially if you’re at the retirement(older) end of the spectrum.

I’ve read somewhere that in the US, mortgages are supposedly tax deductible. The problem with tax deductions is that people are so misguided with this feature that they do not try to pay off their mortgages early (so that they can maximize their tax deductions). Instead, the unwise ones will pay only the minimum mortgage amount required and with the funds left over…it’s spent on consumption, keeping up with the joneses and buying flashy cars.

If you can find investments that yield more than the interest charge you pay on your mortgage, go ahead and invest those extra funds. Although, just be sure to adjust the yield rate for taxes before you compare it to your mortgage interest rate.

On that note, I have to say, choose your path and walk your own road.

Wednesday, September 30, 2009

Using the right type of loan for your spending needs

In a perfect world, you would save up the entire amount before you buy the item, buy the item on your credit card and then pay the credit card balance off before interest is incurred. So basically by your superb account management, you've picked up reward/frequent flyer points which translates to goods and holidays for free (excluding the annual credit card fee that you pay of course).

Unfortunately however, this does not work for many people because they don’t save up the amount before they rush off to buy on the credit card. So when the bills arrive, they scramble around trying to find the money to pay the bills because their income isn't sufficient to pay everything by the due date.

The most important thing I can ever write about how to utilize loans is to match the loan type to your needs. If it’s a long term need, don’t match it with a short term loan or else you’ll be penalized by paying higher interest than you would normally be paying if you had organized the correct loan type in the beginning.

Companies know this. They don’t use a credit card or overdraft to buy a company car, they use leases and car loan financing. They don’t use a credit card or overdraft to fund office renovations. They analyse whether they can afford to buy goods upfront. If they can’t and they really need to buy the goods, then they analyse what type of financing they need, find the best loan type and deal (financing) and then they go and buy the goods.

Most consumers lack this critical research and analysis stage. They want something and they go buy it immediately.

Ordinary folks get into all types of difficulties because of this lack of awareness. If you have no choice but to buy an item that you can’t pay off before the interest free period ends then you shouldn’t be using a credit card. You’re better off using a longer term loan such as a Personal Loan or a Line of Credit to fund your purchase.

DO NOT use a credit card to pay for it. DO NOT use a payday loan to pay for it. In other words, do not use short term loans to buy something that you can’t pay off in the short term. That will be the best advice you ever need regarding loans.

Tuesday, September 29, 2009

In Your 20s, flushed with "Good Debt"

"You're beautiful, dirty rich" sang Lady GaGa. Young, beautiful, rich, intelligent and switched on. You're the master of your credit card and multiple investment loans, know where you're headed in life and you've had successes. Great. Where to from there?

What is "good debt"? If you're reading this and you've got "good debt" then I presume you're looking for something to validate yourself or your choices. Or maybe to compare how you've progressed in life and where your peers are. Good debt - loans on assets that provide you with investment income or capital growth. Margin loans and investment/mortgage loans are good debt. You borrow money, you buy some shares or buy an investment property and it pays you back in the form or dividends, rental income and/or capital gains. Life is just peachy!

If you find yourself in this situation then you are either a child prodigy, a trust fund kiddo, an ambitious person, operate your own business, high income earner, had an education in finance or had financially literate parents who taught you by their actions or directly. It's not a common scenario at all to be in your twenties, have plenty of savings, assets and also experienced the shady and crazy side of life in your twenties.

So what are you hoping to learn from this?

1) Buy more investment properties
2) Buy more shares/stocks, grow your portfolio
3) Increase your superannuation/retirement savings
4) Watch your asset allocation and rebalance when necessary
5) Keep repeating all of the above for your wealth strategy

That was simple wasn't it? ;)

Ah but now you say, I just wasted my time on reading crap. You know so much, and you've achieved so much but you lack the finer points and the finesse which is probably what led you onto reading about these matters. Congratulations but you've reached the pinnacle of the investing pyramid, early in your life and you are going to be a millionaire.

You should be perusing financial advice for those in their 30s and older, learning the finer techniques of investing in multiple properties, refinancing loans, directly investing and trading stocks, the finer points of calculating returns and reading financial statements, the ideal vehicles to buy your investments under (company or trust structure) and have a fantastic team of accountants/financial advisors/lawyers/solicitors working for you.

Articles about financial management in your twenties should not really apply to your scenario anymore. They focus too much on debt management and how to handle credit cards.