Archive for December, 2007

An unexpected surprise

Well, I was going through the Christmas aftermath and found that our spending was well down on the expected amounts. While our `gifts’ column went $20 over budget to $545 (still good!), food was one category where I over-budgeted. This was especially so, given that my workplace gave us all a free ham for Christmas and my relatives supplied the seafood. Alcohol was still a big expense area, and though I woke to champagne and orange juice with breakfast (a very special treat!), we didn’t go overboard and there’s plenty left to enjoy at functions over the coming months.

Anyway, we have had an unexpected financial surprise. Some of our relatives didn’t know what to give my son, so they asked if we wanted cash to `put away’ for him. They knew I didn’t want him to be overwhelmed with gifts at this tender age, and though I told them not to get him anything, they wanted to know what else they could do for him.

(In the end my son had three gifts under the tree anyway, plus two more to open at friends’ and relatives home as we visited. I loved that he took 15 minutes to play with each item before moving on to open the next. It showed that he valued them, and I hope that continues as he gets older. He has played with them almost constantly since then, but I think he has enjoyed having his cousins stay with us for the holiday season more than any specific gift!)

Anyway, these relatives ended up giving me cash for my son. As I was putting this somewhere safe, I opened a drawer and found two $100 cheques for him in the drawer. These were from his grandfather: one was a gift to mark his birth and another was for his first birthday. We never cashed these because we didn’t have an account for him, so they had been sitting in the drawer for some time. His grandfather was hassling me only last week to finally `do something’ with them.

In the end, we checked with his grandfather to see if we could swap the cheques for cash. Once this was added to the cash gifts from the other side of the family, I realised we now had $350 in total. Then, when I checked my accounts, it seemed like a Christmas miracle when I noted that I got paid more than I expected for doing an extra shift last week (I expected to be taxed more). Suddenly I wondered if we would have enough to open an investment for my son, something we have been considering for some time. With a bit of adjusting here and there to our budget, my husband and I managed to find the extra $650 we need to invest in a managed fund that hubby’s brother (a financial planner) had suggested would be best for a child.

Needless to say I am really excited about being able to do this. I still want to do some research to ensure this is the best way to go with the money. I need to know more about the fee structure and projected returns over time. And we also have to decide how much to contribute to this investment each month. We would like to put in $100 a month, but we might start with $50 as this is an extra item that I hadn’t included in my budgets going forward. Also, we still have our own debt to get rid of, before we get some investments of our own going, so this is another priority for us.

It just feels good to finally get started. I’m aware that the magic of compounding will make a great difference to the total, even if we are only investing a small amount early on. And I hope this will make certain parts of his life easier. I’ll work hard to educate him about debt and investment, and hopefully it can be used for a home deposit or some other goal a LOONG time in the future.

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Merry Christmas!

Hope you all had a great Christmas Day.

We enjoyed fantastic food, wine and weather shared with friends and family. It’s a nice time to remember what’s important in life.

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Christmas without debt … sooo nice

Well, I just finished my shopping and we managed to spend $650 on Christmas, including food. And I don’t feel like we scrimped AT ALL. Some readers may remember that we had allocated $1000 for Christmas this year. Well, part of the reason it was even that much was because we usually spoil each other a bit at Christmas to make up for our efforts to scrimp and pay off debt through the year. This year we decided we’d had a pretty nice year as it was, and we’d prefer to get each other smaller gifts. Our approach has allowed us to pay for Christmas without creating debt (I used the credit card to pay for things but paid the amounts back online when I got home from each shopping trip).

This approach also meant that today I was able to transfer $250 back into our recently depleted emergency fund, which took a beating while I wasn’t working during exams. I must admit, it was nice to be able to focus on my exams and know we had a small reserve of cash to help get us through. Anyway, I am very pleased with Christmas 2007, which might actually be sweeter this year than ever!

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How attitudes change as you pay off debt

It occurred to me while writing a post yesterday that so much about the way I look at life has changed since I began this process of paying off debt. Early on in the process, as I looked down the debt hole we had dug and tried to imagine how we would ever fill it in, I think I got a little depressed (though I kept it up). Now that we are more than half way there in our debt reduction goal, I realise that my whole attitude to life has changed, and I wonder if this happens to other people when they set out to pay off a lot of debt.

I’ve grouped the changes I’ve notcied in myself into 4 broad categories, which are (no doubt) intertwined:

 1) Less focus on debt

2) Less focus on acquiring assets

3) Greater focus on investing

4) More focus on how to be less dependent on a wage for income

Let me take each of these independently and explain what I mean.

1) Less focus on debt

This might seem like a bad thing, and also a little untrue as any regular reader of my blog can attest (I’m always talking about my debt!). But what I mean is, now that debt repayment is a normal part of life, I’m less concerned with the best way to go about it, or the impact on my quality of life. I now have the automatic payments sorted and I have read and re-read every debt repayment approach I can find in books, blogs and magazine articles. I used to devour articles on the best way to rid myself of credit card debt or how to avoid paying too much interest in personal loans.  I’m still focused on repaying the debt, but less likely to beat myself around the head with how and more interested in thinking ahead to the next step in the cycle ie planning my approach to money in the future.

2) Less focus on acquiring assets

This, I think, is the biggest difference between me now and last time I attempted to pay off all my debt. This time, I’m not trying to pay off all my debt just to be able to afford my next sofa or new car.  Suddenly, I really like the idea of having a good emergency fund, having money in the bank and not necessarily going out of my way to fill up our house. This is probably partly because we are sharing a home with a relative, but it also means that we can spend our spare time playing at the local pool or hanging out with our son, rather than cruising the furniture stores looking for the next `thing’ to buy. I also no longer miss the money that is going on debt repayment, so that means I will be able to save that money when the debts are gone.

3) Greater focus on investing

Suddenly, now that I can see the light in terms of debt repayment, I want to think about how to accumulate more income-producing assets once my debts are gone. I wasn’t brought up in a family of investors so I need to teach myself everything. That’s OK though, I don’t yet have any money to invest because I’m still repaying debt, so I can use this time to educate myself about shares and investments and think about what I might want to invest in in the future.

4) More focus on how to be less dependent on a wage for income

Don’t get me wrong, I am not even on the same planet as someone who could contemplate being in this position. I am certainly not aiming for it any time soon, and in fact am working pretty hard in my studies to BEGIN a career, not STOP working. But lately I have been meeting a lot of people who love their job but who are working to ensure they don’t have to be dependent on it later in life. I have to admit that until recently I had never even thought of a life where I wasn’t dependent on a salary. It just means that I have broadened my mind a little about what the future might hold, and that’s got to be a good thing.

So there you have it, the process of paying off debt does seem to have changed me, and that’s probably one good reason why – even though it’s hard – it’s a process worth going through.

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Net Worth skyrockets, husband on side

Well, Christmas approaches and of course, I am running around like crazy trying to get meaningful gifts that people actually want. The pressure is higher on my side of the family, where each person receives only one gift. The pressure is causing most of us to resort to gift cards at each person’s favourite store, but it feels really impersonal. Even my significant other wants me to get him a gift voucher! In some cases it makes sense because I know he wants to spend some cash on outdoorsy stuff, and he knows that I wouldn’t know exactly what to choose, but still …

I think part of the problem is that just about everybody in our society has enough money to buy anything they really want whenever they want it. Hence even if you do know enough about your niece or grandmother to know what they are into, you also need to be sure they don’t already have the item you can afford. It makes things a little more complicated. Add in the fact that we only spend $30 on Secret Santa, and our options do go down (though I believe this amount is more than enough!).

Anyway, while I am excited about this next tidbit of news I have to share, much of the rest of this post is going to be about superannuation, so I’m ready for a few of you to fall asleep or move on to another blog about now! This week my husband received his pension plan information for the last financial year, and between his monthly employer contributions, a small rollover amount from a previous job and the investment’s growth, the total value climbed by nearly $20,000! His account is still not huge, but it is looking a lot more respectable than it did this time last year. I added the new value to the month of December in our Net Worth chart (I keep my own record on NetworthIQ) and the huge jump dwarfs every other hard-earned gain in 2007 – even the month where a $4000 lump sum helped us cut our credit card debt to almost nil.

The best part about this is that it has made my husband excited about the benefits of such plans and he now wants to contribute $100 a week from his salary towards maxing out his pension plan. Given that he is a little older than me, this is not a bad idea and is one I would fully support, even if it affects the financial goals for 2008 that I set out in my last post. There are a few reasons why I think this is a good idea. One is that I will definitely encourage any interest in money management that he develops. I love that he is very happy for me to plan our money each month and I know he thinks I do a great job, but sometimes I want him to get more involved. The fact that he actually wants to put money away is a great step forward for him. Secondarily, under salary sacrifice arrangements he can make at work, he can put some money into his pension plan before tax, so we wouldn’t actually lose the whole $100 in net salary  – it would probably be more like a $60 drop in what actually enters our accounts. I have warned him not to expect such a great result next year – the world economy is a bit shaky and I don’t really know which way the markets are going to go in 2008 – but I figure that it never hurts to put money away.

One advantage of the mandatory pension plan system in Australia is that it is a real opportunity for young people to see compound interest at work. My super is not huge because I have taken nearly seven years off full-time work to study. But I started working casually at 16, and my pension plan has been accruing since then. In the first few years, it wasn’t much to be impressed about. I think some years the fees actually outweighed the growth and I went backwards!  But last financial year the total of my pension plan was about $25,000. Not bad for a full-time student – it even outweighs my student debt (which is interest-free). Though the last few years probably aren’t typical because the growth has been impressive, I love opening my yearly update and finding that my plan has risen by several thousand dollars. It makes me think about what I could do with shares or a managed fund. Then I remember that I still have to focus on getting rid of my consumer debt first. Given how well the markets have gone in the past few years, the opportunity cost of servicing all that debt has been great, I’m sure. Yet, in some ways I think my focus on repaying debt has taught me something important pretty early in life. I never want to do this debt repayment thing again. I want to live within my means as much as possible, and focus on living well, not living hell!

Anyway, I now have to re-enter the fray at the stores. Wish me luck!

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Financial goals for 2008

I’ve been thinking about making a list of my financial goals for 2008 – it seemed like a pretty boring list that any regular reader could probably recite verbatim (yeah I know, I need to vary my themes a little).

1)      Save for a home deposit

2)      Pay off my car

Well, to do both of these in the coming year is a pretty big goal. We still owe nearly $12,000 on the car and we’ll need at least $15,000 for the home deposit. I usually make less than $15,000 a year (in a good year) so this is looking like a BIG challenge.

Added to that, we have a couple of other goals. I’m going to list these here, so that I’ve committed to them.

 

WHAT: Fund a joint party

 

COST: $2000

 

WHY: We both have significant birthdays this year and plan to celebrate.  We were initially planning to hire a hall and make a big event of this, but instead we have decided to do something at home. Since we have a huge garden (and we know a lot of smokers who would be outside all night anyway!) this is probably a better idea for us and will save a lot of the expense. I think this budget is way over what we will spend, but if I start high I can always reduce it down.

 

HOW: This is going to take about $100 a week in savings to achieve, starting from the New Year until almost mid-year. In a future post, I’ll explain my costs breakdown and ways I can save.

WHAT: Travel interstate to visit a friend and her baby in August/September

COST: At least $2000

WHY: I just found out a good friend of mine is pregnant and there is no way I will be able to avoid (or would want to avoid!) being there to see that baby in the months afterward. If we start planning now, we should be able to get there. She lives in a city I have never seen, so we would probably take some opportunities to see some of the sites. But they will be the iconic landmarks, not the expensive eateries or shops. And I think we’ll spend a good amount of time at her home visiting and helping with the new bub, so we should be able to put the brakes on our spending.

 

HOW: To do this in late September, we will need to save $100/week starting straight after the joint party is over.

 Basically, I have listed $31,000 worth of goals here (not even counting the accruing interest on the car loan), and this represents a HUGE chunk of our income. But planning is a big factor in this, and I think we can do almost all of it if we try. And if we don’t make it all the way, we will certainly go close (or closer than if we didn’t try at all).  One thing I’ve learnt since starting this blog is: if there’s one occasion I can rise to, it’s a big financial challenge!  Another thing is that I have promised to focus on how we can cut some of our expenses some more, as I think we have let this area down a bit. Just because I budget $200 for groceries doesn’t mean we have to spend it. I am going to look at my options in this regard too. Come to think of it, notice I keep saying that but never seem to actually do it! Must be a bit of a mental block for me, huh!

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New ways of looking at old problems

rich-dad-poor-dad.jpg 

I’ve just finished reading a classic PF book that I’d never before gotten around to – Rich Dad, Poor Dad by Kiyosaki & Lechter. I found it to be a real eye-opener and a great way to think a bit deeper about money and our approach to it. I like challenging myself with new ways of looking at things, and this book certainly does that.

One of the central concepts of Rich Dad, Poor Dad is that you should buy assets that `put money in your pocket’. Essentially an asset should contribute to your ability to make money passively. So the more assets like this that you buy, the less you are dependent on your wage income to survive. This is a profound thought because I’ll admit, it’s only been the past few years that I have ever even dreamed that you could make an income without a wage or owning a business. I know, I know … I’m not from a family of investors OK?

Anyway, this concept of buying an asset that puts money in your pocket sounds easy until you realise that the average person’s major asset – their home – doesn’t fit this criteria. Essentially your home is a liability, according to the authors, which only creates expense. It certainly doesn’t put money in your pocket. This is a challenging concept to me, because buying my own home is one of the things I’ve looked forward to most since I was in my early 20s. I admit I have often heard that buying your own home doesn’t necessarily make sense from a financial perspective. I’ve even heard an Australian investment guru say that (in a perfect world) we should all do a deal with our best friend so that each buys the home the other one likes, then essentially `rent’ to each other. That way we’d get the tax advantages of owning an investment home. Of course, we’d probably get a lot of lost friendships too but I know what he’s saying …

Anyway, from the perspective of someone wanting to buy a home, it’s challenging to hear that this isn’t necessarily the best option to make the most out of my money. I know that where I live, repayments on a basic home are at least $600 for a home that would cost $300 a week to rent. Then you add on the costs of insurances, rates and repairs, and I admit the deal doesn’t look that great. I also fear missing out on the rising value of my home over time — except that in our market, the boom has occurred over the past 5 years (while I was studying and we couldn’t afford to buy) and I doubt it will keep going up much longer. (Then again, that’s what I said last year!)

The way things are planned, even when I start work, most of my wage will go on mortgage repayments for a 30-year loan. If we trade up in terms of home value, it will only get worse. And when do I make plans to start other investments while tying up so much money?

So I can see Kiyosaki & Lechter’s point. It’s just so hard to imagine putting my money in to some other asset when I don’t even own a home. I definitely think it’s worth reading this book though, and I recommend it if only to allow yourself to think a little bit outside the box. Sometimes we only look at a microcosm of our options (I know I tend to).

In reality, I need to consider getting rid of the last of my consumer debt before I would take up most of the advice in this book. But I definitely intend to read it again, and pick up some of the other titles in the series. I recommend you take a look at it – it was a New York Times bestseller and should be in most libraries.

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