When times get tough, it becomes clear just how healthy (or not!) our financial situation really is. Here’s what you can do to get your finances back into shape – and keep them there.
First things first. When it comes to getting your finances on track, a written budget is essential. The COVID-19 lockdown has highlighted for many people just how much they spend on small things – takeaways, coffees, impulse buys – and just how much they save when they stop spending on these things! In everyday life, it’s easy to think that cutting down on takeaway coffees won’t make that much of a difference to our bottom line, but the lockdown has proved every dollar really does count. A written budget will help you track how much you’re spending on essentials versus non-essentials once you’re back into the busyness of regular life and, hopefully, this will help you whittle down the non-essentials and beef-up your savings.
Will your spending behaviour change after the lockdown? A lot of people are telling me that they plan to be more careful with spending now that they know how much they can save – it will be interesting to see how many are able to stick to new behaviours. It’s been said that one key difference between making a new habit stick and letting it lapse is having a clear goal in mind. So, think about what that goal is (getting out of debt, buying your first home, entering the investment property market, whatever it is), and get it written down. This ties into your budget, of course. If you want to save your deposit by the end of the year, then you’ll need to put your weekly savings target in your budget – and stick to it!
When it comes to your goals, stay focussed, but play the long game rather than looking for quick solutions. That means avoiding taking on debt for things that you could just as easily wait for. Shelve those store cards and only use credit cards for emergencies (ideally, you’ll be saving up an emergency fund so in time you won’t need to turn to your credit card even when unexpected expenses arise). If you do have short-term debts, like credit or store cards, HPs or car finance, and you’re finding it hard to see the light at the end of the tunnel in terms of getting them paid off, think about consolidating them into one personal loan. You’ll most likely benefit from a lower interest rate and, with only one payment to remember, you’re less likely to miss a payment and incur additional fees. If you already have equity in a home of your own, you may even be able to add your debts to your mortgage, which will give you an even lower interest rate.
And when it does come time to buy that first house or investment property, don’t max out your mortgage by borrowing right to the limits of what the bank will lend. In many cases, the bank will offer lending at a level above what you can comfortably live with. Although it might seem tempting to borrow just a bit more to buy a bigger or ‘better’ house, borrowing the maximum amount can put you in a precarious position if the economic situation changes or you find yourself out of a job. Be realistic about what you can afford and be honest about what a comfortable lifestyle looks like for you (yes, making sacrifices is part of buying your first home, but if your mortgage means you’re going to be living on baked beans for the next five years, you probably need to rethink your plan).
If you already have a property, then now is the time to really examine how much you’re paying, both in interest and in principal. In my experience, 80% of Kiwis still have a ‘set and forget’ attitude to their mortgage, but really you should be keeping an eye on it and reviewing your set-up every three to six months. The other day I had a client who found out the interest rate on her mortgage had dropped – and, therefore, so had her repayments. But rather than just forget about it, she called me up and asked me to arrange with her bank to increase her weekly mortgage payments by $60. The beauty of this is that because the interest is already covered, this additional $60 will all be going towards the principal, and that’s going to mean she ends up paying her mortgage off much faster. So, watch what’s happening with your mortgage and, if you need any advice, please don’t hesitate to give me a call – I can even review your existing mortgage for you (at no cost to you).
Whatever your goals and your financial situation, remember that I’m only a phone call or email away. I’m always happy to offer a free assessment of your finances so you know exactly where you stand and what’s best for your financial situation.