Never Forget the Tough Times

Most people have gone through financially and personally tough times in their lives. We certainly went through a tough few years:

• Failed Business Venture
• Main income earner out of full-time work for more than 15 months
• Mortgage going up instead of down (up $20K)
• Credit card max’d out for over 2 years at over $10K
• Accumulated line of credit personal debt of $25K that took 5 years to clear
• Personal health of myself and my husband became very low.
• Bouts of depression – we tag teamed on that one
• Caring for a young child throughout – kept us focused on what really mattered in life

I don’t mean for this to be a depressing post and I want to show the great points that have become part of our lives as a result of the life challenges we faced five years ago. Here are some of them:

• We learned to manage our costs really well
• We bought in bulk and cooked in bulk
• We cut wants such as cable TV and focused on what we really need
• We focused on developing a really tight budget that was easy to use once it was made
• We focused on legally minimizing tax liabilities for the higher income earner
• We looked at alternate sources of income apart from our main jobs such as online businesses with residual or passive incomes
• We sold unwanted or unnecessary items on eBay and the local fairs and markets
• We eliminated several high fee bank transaction accounts by consolidating into one transaction account
• We focused on paying our highest interest debts first
• We changed our spending habits looking first for value and quality rather than just low cost
• We cleared most of our debts excluding our mortgage debt and now focus on the mortgage as our pseudo-savings account (we have a redraw facility)
• We focused on improving our physical and mental well-being
• We spend more time together as a family

We focus on enjoying our lives now with each other and our families but we never forget the tough times because we prefer the better times :)

Saving For a Rainy Day

During my upbringing I was told to always put aside some money for a rainy day. It’s a logical thing to do however once I got married, Mr Finance told me to stop that and we should put the money into the mortgage. No I said, we should always keep some money aside for emergencies, for our holidays etc. Mr Finance said that was valid when I was single and no mortgage, which is now our biggest debt. Mr Finance produced a calculator so I knew I was in for a lesson.

Here is the lesson I received (NB Hubby Finance is not a financial planner and neither am I).

If you have spare cash and can make more money in an investment than your debt rate, then go ahead. If not, put the money in your debt. OK, I didn’t understand this so I wrote down some examples with some arbitrary rates.

• Mortgage 6% interest
• Credit Card 14% interest
• Investment 10% return
• Savings Acct 5%

Say you have $1000 spare cash. Where do you put the money ?

Example 1: Put $1000 in the investment

In a year you would earn $100 interest. Let’s say your tax rate is 25%, tax on $100 is $25, leaving you with $75. Credit card interest cost on the $1000 = $140. Mortgage cost on $1000 is $60. Net result of investment vs credit card (highest debt rate) = $75 – $140 = -$65.

Example 2: Put $1000 into credit card

Interest saved from credit card = $140. Mortgage cost = $60. Net result = $140-60 = $80 better off.

Example 3: No credit card debt, money into savings or mortgage ?

$1000 into savings, $50 interest – 25% tax ($12.50) = $37.50 less $60 mortgage cost on the $1000 = -$22.50.

$1000 into mortgage, $60 better off.

So, if our credit card debt is 0, instead of putting that $1000 or $100 or $50 into our savings account, I place the money into our mortgage and redraw the money when needed. I asked what if the savings interest rate was higher like 7% ? Back to the calculator:

$mortgage = -$60
$savings = $70 – 25% ($17.50) = $52.50 I’m still worse off by $7.50!!

Of course if the credit card has any debt we try and clear that first and then we use our mortgage account as our pseudo savings account. If there’s any flaw to the logic I’d love to hear your comments.

Budget Planner

Budgeting as always been a struggle for me. I always associated the budgeting process to be associated with being poor or those that can’t handle their money – that attitude changed when I moved out of home and left mom and dad. Well guess what, when you get married, start a family and run a household you feel poor. The bills never stop and the expenses can run out of hand if you don’t make an effort to manage them.

My key problem has been out of site out of mind. For example when we were DINK (double income no kids) and both earning well, I used the credit card without even a thought of the ever increasing debt balance. When the credit card bill arrived it wasn’t a problem to pay the outstanding amount.

That had to change of course as our lives changed and we needed to budget. We’ll there was a slight problem – I actually didn’t know how. We’ll after some tears and some patient explaining by hubby that budgeting did not mean the end of our lives, we sat down and listed all our expenses and income. We broke it all down in weekly chunks so we could determine when the expenses fell due and when our income was received.

There were quite a few items so I knew I needed to list them or type into a spreadsheet. Hubby created a simple and wonderful spreadsheet that I can easily use and displays on one page our complete budget. If you want to use it you can download Mom’s Finance Budget Planner. It is very easy to use and has some conversion calculators built-in.