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.

Buy in Bulk

I know it’s a cliche but buying in bulk really is a great way to manage your consumables and your costs. A lot of people focus on bulk food buying however then you encounter the problems of:

• Where do I store the food
• How quickly can I consume it before it perishes
• Will I ever use the 100 cans of baked beans

I do buy in bulk however mainly non-food items such as:

• toilet paper
• shampoos, conditioners
• soaps
• detergent powder
• nappies
• deodorant
• some canned foods such as tomatoes (I like to make my own Italian sauce)
  

The reasons I buy these type of goods are:

• It saves me a lot of money
• I can store most of these items outside of the house in the garage
• It saves me time and energy when I do my weekly shopping trip as I don’t need to buy or carry and move them
• I can buy some of the brands that I really like and still save a lot of money
• I can save even more money on the no-brand products that I like

So one lazy Sunday afternoon I wrote a complete list of all the items that I buy for the house and family and chose the most suitable for bulk buying. I then did some research online, used the local papers and asked some friends if they knew of any outlets that sold in bulk and purchased as far in advance as my budget allowed. The next regular shopping trip was great because I didn't have to carry these items and could focus on buying best value for the rest of the shopping list.

Supermarkets Aren't Always Cheaper

When you have kids and need to do the weekly shopping it's generally easier to go to one place and complete all your shopping. Rather than visit many shops within a shopping complex I used to visit just one large supermarket thinking that as a supermarket chain I would be getting better and best prices.

Well one day I visited an Italian delicatessen looking for some cookies I couldn't find in the supermarket and whilst browsing I noticed that the pasta was much cheaper as well as the sauces and cheeses. I was shocked at the large difference in prices and after chatting to the proprietor discovered they were buying from specialist suppliers that could buy better than the supermarkets and pass those savings onto their customers.

That experience encouraged me to visit all of the specialist food stores in our local shopping complex and found some cheaper and some more expensive than the supermarket chain. Overall I was able to save between $10 and $50 dollars by buying from different shops. The only drawback is that it takes me an extra hour to complete the weekly shopping task but the money savings are well worth the effort.

Credit Cards

With the wide range of bills and purchases that we make it's pretty hard to not have a credit card. It is possible but it means carrying a lot more cash money and sometimes in an emergency you may not have the money on you. For the convenience we choose to use credit cards but use them as wisely as possible:

• Chose a card with an interest free period giving us the opportunity to pay without penalty
• Chose a card that allows supplementary cards for free
• Chose a card that provides an incentive, in our case points towards free flights (this helps us with our vacation planning)
• Chose a card that allows automatic bill payments
• If we have a large transaction on our card we transfer from savings to pay it off because credit cards have the highest rate of penalty interest for us.
• Put any spare cash into the credit card before other debt in order to reduce the interest paid
• We reduced to only one type of card to avoid the multiple annual fees
• If we do have the cash at hand we use it
• Avoid if possible using the card if there is an interest penalty to use it

If I'm unable to pay off the balance before the due date I use a mini plan to pay off the amount as quick as possible. We keep a spreadsheet that tells us based on the current balance how many weeks it will take to pay the balance and the amount we need to pay. For example if we owe $1000 we use a 6 week plan to clear the debt being $166.67 per week.

If we buy something else we'll use a 12 week plan so as to not increase the weekly payment so significantly that we can't live. So if we buy something for $750, we add another $62.50 to the weekly minimum making the new payment $229.17.

It means that we may pay some interest if we don't have much savings at the time however we try and pay off the balance as quick as possible. It's not an exact science however it works for me.