Handling the Cost of Living
It’s no secret money doesn’t grow on trees. Many New Zealanders are currently struggling to deal with the high costs of living. Food, petrol and electricity are but some of life’s essentials that have increased in cost enormously in the past couple of years. If you’re a tenant living in rented accommodation it’s likely you’ve experienced an increase in your accommodation costs too.
Homeowners who owe their Bank mortgage money fare no better as there’s been a dramatic hike in mortgage interest rates. As wages haven’t kept pace with increased costs, many of us feel overwhelmed with the worry of everyday living.
Living in this state leads us to experience increased levels of anxiety, negatively affects our mental and physical health and even damages our close personal relationships. In a bid to help us turn this state around and grasp some degree of control, below are a couple of pointers:
Become A Cash Flow Master
To state the obvious, you can’t control what you don’t know about. So, the first tip I want to share is you need to understand what’s coming in and what’s going out. Once you are in possession of that information, you’ve got the ability to manage your cash flow.
The goal of cash flow management is to balance income against expenses, culminating in having surplus cash that permits you to build savings and then invest. Achieving that goal starts with making a list of all the income you have coming in and all the expenses you have going out.
You can use a myriad of computer programmers to complete this or you can go the old-school way and simply get out your pen and paper and start scribbling. In my latest book, I’ve provided a full spreadsheet (see page 34) that will help you.
You’re likely to encounter a couple of challenges when completing this exercise.
First and foremost you actually have to get on and do the job. For a lot of people, this can be a real mind game. They know they need to do the work but somehow never get around to it as they don’t want to confront their position. Alternatively, they tell themselves they don’t need to write down what is already in their head. Procrastination and downright obstinance leads us down the same path – an inability to actively control cash flow.”
The second issue individuals grapple with is completing their worksheet fully and accurately. This arises because it takes time and effort to gather all the information we need to complete the exercise. There’s only one solution to this and that simply lies in marking out time to complete the job. Believe me, spending the afternoon with your computer, bank statements and financial info will be time well spent.
Review and Manage
Once you know your debit and credit position it’s time to put in place a plan. Review all expenses and trim where you can. Ask yourself do you really need to incur the cost? If you can’t eliminate the expense see if you can reduce it.
I recently did this with my insurance covers. I didn’t want to give up my insurance policies but on meeting with my broker, I was able to tweak a couple of things which resulted in a couple of hundred-dollar savings per month. That really helped me through the month.
Deal with Debt
Some people live very prudently, incurring little unnecessary costs. Their hardship originates from the debt they carry and the high monthly repayments they have to meet. Interest costs can be eye-watering, resulting in ever-increasing repayments. For those faced with this position, a debt repayment strategy is a must-have.
Common approaches involved consolidating loans, transferring balances of debt, snowballing and finally, negotiating settlements. What constitutes an appropriate debt repayment strategy will differ from person to person, depending upon their life circumstances.
Debt consolidation
Debt consolidation will see you take out one new loan to repay all other outstanding debts and then concentrate on repaying that one loan. This makes repaying debt easier as you have only one loan to concentrate on reducing.
If you adopt this strategy, be sure the interest rate charged on the new loan is at a lower rate than the interest rates being charged on your existing loans.
Additionally, ensure the new lender doesn’t charge you extra fees to take out the new consolidated loan. Lastly, understand what fees you’ll incur if you don’t stick to the repayment schedule on the new loan. If you fail to tick these points off, debt consolidation could work against you.
Balance Transfer
Balance transfer is as its name suggests…transferring a credit card balance from an existing credit card provider to a new credit provider on the basis that the new provider charges only a very low interest rate on the balance transferred or charges absolutely no interest on the debt transferred.
Under this method you will effectively reduce the amount of interest you are being charged on the outstanding debt balance or if no interest is charged on the balance transferred, you will stop the interest clock. In both instances, this strategy will permit more of the money you repay to go towards clearing the debt balance rather than paying interest on the balance outstanding. That’s a benefit worth having.
There tend to be hooks associated with this debt repayment method that you should be aware of. These involve new debt and the amount of time it takes to clear outstanding debt. Usually, any new debt you incur over and above the debt balance transferred will be charged interest thereon.
Secondly, all debt transferred may need to be cleared within a specified period of time otherwise interest will be charged, often capitalized, back to the very first day the debt was transferred to the new provider.
Snowballing
Snowballing gets its name from the fact that each time you clear a debt you have a greater amount of money available to channel towards the rest of your debts you are intent on repaying, which can be likened to a snowball rolling down a hill gathering more and more snow as it gathers momentum.
Under this method, you’ll meet all minimum monthly repayments on all your debts but will throw every spare dollar you have towards paying off your smallest debt balance. Once that debt is cleared, you’ll apply the money you would have paid to its repayment towards repaying your next smallest debt. When that debt is repaid, you’ll repeat the process. Each time you repay a debt you should have more money to hand to channel towards repaying the next debt.
There could be a disadvantage to this strategy that you need to know about and that involves the amount of interest you ultimately repay. You may end up paying more interest because you will be making only minimum repayments on all debts and as you may not immediately clear the debt that has the highest interest cost, you may end up paying more interest overall. It’s for this reason, snowballing isn’t for everyone.
Negotiated settlement
Negotiated settlement is as the term denotes … talking to your creditor with the objective of reaching a full and final settlement of the debt that is lower than the existing balance. Creditors may be willing to settle a debt in this manner in order to receive a lump sum rather than waiting for their debt to be repaid over the long term.
Of course in order to be able to invoke this strategy, you will need to have a lump sum of money. Alternatively, you may be able to negotiate a length of time within which you will repay the debt in its entirety in lieu of paying a lesser interest rate. Creditors may be willing to accept these terms if they know this will permit them to receive their money in full.
If you do implement this strategy be sure to get the new payment arrangement in writing and understand the consequences of not adhering to the arrangement. Frequently this involves all bets being off and interest being reinstated, perhaps even with additional fees.
Sell What You Don’t Need
Have you ever noticed just how much ‘stuff’ you have laying around that you don’t use anymore and that you don’t need? If you can relate to this, take a picture and put it up for sale. Listings on your local neighbour group site or Trademe can be fantastic portals to advertise your items. Just remember to be realistic with your sale price and put the sale proceeds towards meeting living costs and debt repayments.
Put The Cards On Ice
In life delayed gratification pays in spades. Often what seems like an absolute must-have, loses its appeal if we put a few days between our wants and our spend. Take your credit cards out of your wallet and leave them at home. If you don’t have the ability to immediately spend on what you want, you’ll buy yourself some breathing room.
Don’t think this means you can’t have what you want. Rather, jot down in a notebook what the item is, where you saw it and how much it was. At the end of the month, or six, ask yourself if you really still want to buy that item. Chances are you’ll prize not having spent the funds over having the item.
Use Cash
If you really want to get on top of your costs, you must control spending. We can all suffer financial leakage. This is where we whip our EFTPOS cards through machines on a regular basis, deleting funds from our accounts. Somehow using EFTPOS/Pay Wave doesn’t have as much significance to us as if we used cold hard notes. Given this, I recommend doing what you can to change the way you spend money.
Ditch The EFTPOS Card
Visit the money wall, take out a certain amount of cash from the machine each week and live off those notes. Each time you take the cash out of your wallet, you’ll be conscious of how much money you have left to last you the week. I realize this is very retro, but I’ve found the technique works. It changes your mindset and thus your spending habits.
Swap Time For Money
Sometimes, no matter what we do, there simply isn’t enough stretch in our dollars to meet all our expenses. If this is the case, you’ll need to get inventive. Have a look around and see if you can pick up some extra work.
Yes, you’ll be cutting into free time, but in exchange for those hours, you’ll be earning moo-lah which should help you meet your living costs. The financial relief experienced is generally worth the forgoing of personal time. Besides, it need not be a forever thing. On the other hand, you may find your side gig becomes quite lucrative and you want to keep it up even when the need to earn extra funds dissipates.
I once recommended to a friend she become an ‘overnight and weekend nanny’. This permitted her to charge reasonable fees which went a long way towards meeting her living costs. Parents loved the fact she was available for an overnight stay and even whole weekends. The children she regularly looked after also liked it because they got used to her.
Besides earning a higher rate than what most babysitters earned, my friend reaped the benefit of a reduction in electricity and food costs as she was away from her own home for several nights a week. She kept this side hustle up for a couple of years until her financial position really improved. Nowadays, she does the odd spot of this work but that’s more out of wanting to have a little extra funds than a pure necessity of meeting her living costs.
Your Money In a Nutshell
For many Kiwis, living costs right now are at an all-time high. Grasping control of expenses seems to be a never-ending exercise. For those who feel like they’re losing the battle despite their best efforts, I hope this article helps you.
Remember … in time the high living costs we are all facing will reduce. To see when I think the tide may turn, read next month’s article to see how our money world works in New Zealand and when I see a new day dawning.
Janet Xuccoa
Trust Advisor
BCom – LLB