Holm Truths Summer 2006–07

Budgeting is rather like eating healthily or exercising. Some people like to do it, but for others it’s a chore. And for many it’s a source of guilt. They think they should do it, but they don’t.

This article could be yet another telling the laggards how they will be much better people if they keep track of all their spending. But that’s hardly likely to make any more difference than other such articles.

As poet Robert Frost wrote: “Nobody was ever meant, to remember or invent, what he did with every cent.”

Instead, therefore, some tips for the less than enthusiastic budgeter:

1. Do you need to budget anyway?

   If your income covers your expenses — including a satisfactory rate of saving if you want to save — then arguably you are budgeting anyway, in an informal way.

   Don’t forget, though, to plan for expensive purchases such as a new car or a holiday. If you usually fund those out of savings, rather than borrowed money, over a lifetime you will save thousands of dollars in interest. (See “2 ways to buy cars”, Page 2)

   However, if you cannot save as much as you would like to, or if you have debt of any kind, you’ll do yourself a big favour by budgeting at some level.

2. How much record-keeping is necessary?

   If you’re disciplined, you may want to firstly estimate how much you spend in various categories. (See “Your Budget”, Page 4)

   Then either write down in a notebook how much you actually spend in each category over a few months, or compile a list using bank statements, cheque butts and credit card bills.

   The numbers don’t need to be precise. Guess where you don’t have good data, and round off numbers to the nearest $100.

   Compare your actual spending with your estimates. Wherever the actual is higher might be a good place to reduce your spending.

   Too onerous? Try for a second-best plan. Succeeding at that is better than failing at a best plan.

   Under this option, simply ask yourself as you spend money over a few weeks, “Did I really need or want that — or as much as that?”

   If you can identify some unnecessary spending and cut back on it, that might be all it takes to greatly improve your financial well-being.

   Two points that might make this easier:

• Experts say that if you want to change a habit, do something different daily for just a month. So set a goal for 30 days, rather than forever.
• If you cut back on spending that also harms your health, such as smoking, drinking too much or eating too much unhealthy food, you are killing two birds with one stone. You’re entitled to feel very virtuous about your saving!

3. Can every New Zealander cut their spending?

   There’s no doubt that some people struggle to get by on their income. But a decade or two ago, we all got by happily without many items widely regarded as necessities these days.

   It’s all a matter of expectations, which can be altered.

   If you are spending just to keep up with your friends, stop to consider whether your friends really care if you have the latest whatever. If they do, how good is the friendship?

   Budget advisers report that some people on extremely low incomes manage to save a little.

4. How can you save easily?

   The most painless way for most people is to automatically transfer savings out of your bank account, on the day you are paid, into a savings account or other savings vehicle.

   Start with a small amount. Then, whenever your income rises or expenses decrease, add perhaps half of the extra money to your regular savings.

   If you get unexpected money, such as back pay, a bonus or even redundancy pay or an inheritance, by all means spend half of it but save the rest.

5. What are the secrets of goal setting?

• Make your goals specific, such as: Paying off your credit card debt in six months or a year; saving $10,000 for travel or a house deposit; or repaying your mortgage five or ten years early.
• Break down big goals into smaller chunks.
• Involve others. Discuss your goals with a partner or friend to make sure they are realistic. This also makes you more inclined to stick to them.
• Write your goals down, and mark your diary or calendar to check your progress regularly.

6. What if you fall by the wayside?

   Don’t be too hard on yourself. Include a few treats in your budget.

   If you miss a goal one month, don’t try to make up for it next month, unless that’s easy. If you often miss a goal, perhaps you should modify it, and build up later.

   And be flexible. Circumstances change. You’ll know if you are being realistic about changing a goal or if you are just finding excuses. If it’s the latter, think about whom you are cheating.

7. What about emergency money?

   It’s good to have some money slightly out of reach, that you can call on in emergencies. Otherwise, you can end up paying high interest on a loan.

   Some ideas of where to keep the emergency money:

• In a savings account.
• In a 60-day term deposit. You can put the emergency spending on a credit card and repay it when the term deposit matures.
• In a revolving credit mortgage account.
• In a conventional mortgage. Pay extra off the mortgage, and arrange with the lender to borrow that money back whenever you need it.

• An advantage of either of the last two: It’s equivalent to your emergency money earning the mortgage interest rate tax-free — an excellent return on savings, with low risk.

RULE NUMBER ONE

Don’t borrow to buy goods or services that won’t grow in value.

Regular borrowers are obviously living beyond their budgets.

If you already have long-term credit card, hire purchase or other high-interest debt, your top financial priority should be repaying it. Otherwise you end up spending much more for the items you buy.

Remember: repaying debt improves your financial situation as much as an investment with an after-tax return the same as the debt interest rate.

For example, if your credit card charges 20% interest, repaying credit card debt is like making a 20% after-tax return on an investment. Fantastic!

2 WAYS TO BUY CARS: THE POWER OF SAVING v BORROWING

Let’s say you want to get a newer car every five years.

Each time, you want to spend $5,000 more than the trade-in on your old car.

You either:

(a) Save for 5 years, at 4% a year after tax, and then upgrade the car. Savings each month: $76

(b) Don’t save, and borrow $5,000 when you buy each car at 15%, which you pay off over the following five years. Payments each month: $120

Difference: $44 a month

Notes:

• There is no allowance for inflation.
• If you want to spend $10,000 more each five years, multiply all numbers by 2.
• If you want to spend $20,000 more each five years, multiply all numbers by 4.

YOUR BUDGET

INCOME

Wages or salary
Investment income
Income from rent or boarders
Other

SPENDING

Savings
Food and groceries
Alcohol, cigarettes etc.
Rent or mortgage payment
Rates
Home maintenance
Electricity, gas
Telephone
Insurance: Life, house and contents, health, car
Entertainment
Recreational activities
Magazines, newspapers etc
Computer costs
Subscriptions/membership fees
Clothes
Doctor visits and other medical costs
School fees
Children’s pocket money
Gifts, donations
Lawyer, accountant fees etc.
Holiday expenses
Car: payments or saving for next car
Petrol
Registration
Car maintenance
Public transport
Hire purchase payments
Credit card repayments
Other

Total Income:

Minus Total Spending:
Answer:

If the answer is negative, you need to find ways to boost your income or cut your spending.

FROM THE MAILBOX

• It’s best to sell your home before buying another
• Nobody can predict the housing market
• Look around now, and make low offers

Dear Mary:

My husband and I sold our house in June this year as the mortgage was about to roll over, the roof needed replacing, the house was too small for our family and the interest rate hike was going to cost us an extra couple of hundred a month.

We are currently renting (which has halved our outgoings) and have invested the $150,000 equity in an account that earns us around $12,500 annually after tax. And that’s not to mention the savings from renting — which has enabled us to save an additional $500 a month into that account.

Our plan is to rent until the market eases a bit more and then swoop in and pick up a property that fits our needs. A cunning plan? Or are we deluding ourselves?

Dear Reader:

You’ve certainly obeyed one of the golden rules of house buying and selling: You’ve sold well before you will buy.

Anyone who has done it the other way around will probably be familiar with the pressure that can put you under. You’re desperate to sell because you’re committed to buying another home, and you want to avoid paying expensive bridging finance to cover both houses.

If you’re waiting for somebody to come and buy your home, there’s little you can do to speed up the process — other than reducing your price. Too often, that’s what happens.

On the other hand, if you sell first, you can then put a lot of effort into house hunting. And, if the worst comes to the worst, you can stay in a motel between houses.

In your particular case, though, it’s more than a motel, but rental accommodation.

And the question now is whether you should buy a new house soon, or wait and hope prices fall.

The trouble is that nobody can predict house prices accurately.

Prices are currently at record levels, relative to rents and incomes, and that would suggest they could fall.

But when? Some experts have been predicting a house price slump for a couple of years, and it hasn’t happened. Maybe it won’t. Maybe prices will continue to rise, or stay roughly static for a long period.

How much risk are you willing to take? What if interest rates fall — reducing your savings accumulation and at the same time reducing mortgage costs, which will tend to push up house prices?

If you wait, and house prices keeping rising, you might feel forced to buy a less-than-ideal house just to get back into the market before you fall further behind.

And in the meantime, you have to put up with the disadvantages of renting. You can be kicked out at short notice, and you have less control over your home environment.

On the other hand, as you say, you are saving lots — making the most of the fact that rents are relatively low and interest rates relatively high. And that’s no small consideration.

There are other advantages to renting, too. You have less responsibility for the house, and you can move easily and cheaply.

And, of course, if house prices do indeed fall, you’ll be laughing.

There’s no obvious answer on when you should buy.

If I were you, I would look around for suitable houses now, and make low offers on them.

You never know who will accept much less than their asking price. The house market is not really a single market moving at a single pace, but a conglomerate that always includes some desperate sellers. Find one, and you’ve got your bargain early.

To negotiate hard, though, you have to be tough.

Promise yourselves you won’t fall in love with a house and so end up paying more than a bargain price. That’s easier said than done when house hunting. But if you miss one gem, there’ll always be another coming onto the market.

You’re welcome to send questions to From the Mailbox. Email them to [email protected]. Please include your phone number. Unfortunately, Mary can’t answer all questions in Holm Truths, and cannot correspond directly with readers.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.