Use Credit Wisely - SPEND RESPONSIBLY

It’s always good to have goals to aim for – they chart a course for the future as well as providing a benchmark of what we have achieved. But reaching goals is not always easy. There are certain steps you can take to help you achieve your goals.

A good starting point is to make your goals measurable. Setting general goals like “I want to save more”, is unlikely to work because you have nothing concrete to aim for. Instead, try giving each goal a benchmark. For example, you could aim to save $50 each week, and arrange for the money to be transferred to your savings account.

Writing your goals down is also useful as it helps you remember them. But be prepared to alter your goals for changes in your circumstances.

Try setting a timeframe for your goals. Divide them into short, medium, and long term objectives, but only set a few goals for each stage. And get the whole family involved - it’s a good opportunity to pass money skills on to your children.

Short term goals

These are goals that you expect to reach in the next one to two years. They may include things like saving part of your income each week for a holiday, or paying $1,000 off your credit card.

Medium term goals

These are goals you can achieve over three to five years, and they may include things like saving a deposit for home or buying new furniture.

Long term goals

These are goals that will take more than five years to achieve. Saving for your children's education, paying off your mortgage early or building a retirement nest egg are common examples.

Keeping a budget

Good money management involves you having control over your money – not the other way around! And budgeting plays a key role in that process. Even careful spenders can find themselves sliding into debt – sometimes due to unforeseen circumstances, like the loss of a job. Often though, people find themselves in financial hot water simply because they spend more than they earn.

The best way to prevent – and deal with, credit problems, is to develop good money habits. Budgeting encourages us to do just that. It is the only way you will know both where your money goes each pay period, and where you can cut back if you are overspending.

Track your spending

To make sure your budget shows an accurate picture, rather than a ‘best case’ scenario, you will need to allow for all of your household income and expenses.

For day-to-day spending, a good starting point can be tracking your spending over a week or a fortnight. Carry a small notebook with you to record all your purchases and bank account withdrawals during the period. You will also need to include annual or infrequent expenses, like car registration.

To make sure you have covered everything, review your bank statements, credit card statements and cheque butts.

Drawing up a budget

Once you have all the information on what you earn and what you spend, divide it into two categories – income and expenses. These will form the basis of your budget.

What you earn

This can include your regular, after-tax salary or wage, social security payments, child support payments and any income from investments like interest or dividends. If you receive commissions or bonuses, you can include these too but be careful not to overestimate these as it can blow your whole budget. Add the income from these various sources to find out your total annual income.

What you spend

The money you spend can be divided into certain categories, for example, those that relate to your home, your car, your health and so on. Divide your spending into these categories and add the total for each category. Then add up your total expenses.

The bottom line

The final step in your budget, is to subtract your total expenses from your total income. The difference is a key figure, as it shows if you are spending more than you earn. If the figure is positive, it means you have spent less than your income. That’s good news, but aim to do something sensible with those savings, like paying off part of your credit card, or putting the money into a savings account.

If the bottom line is negative, you are spending more than you earn and you could be using debt to meet the difference. Unless you can increase your income, you will need to cut back your spending, or risk falling further into debt. Your budget should give you ideas about how you can trim your spending. Remember though, people tend not to overspend in areas like health care or transport. It is spending on ‘non-essentials’ – things we could easily do without, that often gets us into trouble.

Don’t worry if you to have to use estimates the first time you prepare a budget. Your spending patterns will become clearer over time.

For more ideas on how to keep your monthly spending under control, click on ‘Make your budget work’ in this section.

Make your budget work

Sticking to a budget is not always easy, but it is worth persisting to maintain or regain financial control and stay on top of your debt. Here are some ideas to help you do just that.

Keep track of your spending on a regular basis.

Aim to trim your spending on a different expense category each month. Just cutting back by about 5% to 10% can make a real difference over time.

Put some money away on a regular basis to cover large or infrequent expenses, so that the bills don’t come as such a shock.

Regard the balance of your bank account as a guide to what you can spend – not the limit on your credit card.

A ‘bargain’ isn’t a bargain unless it is something you really need and can afford. You may save $40 on a $100 sale item reduced to $60, but you still need to spend $60 to buy it.

Think about how long you would have to work to pay for an item using your take-home wage. If you earn $12 an hour after tax, it’s going to take you most of a day’s work to pay for an item costing $70.

Look at ways to increase your income through, say, a second job. Think about selling something you no longer need, especially luxuries like a second car, which are costly to own and run.

Most people don’t get into debt overnight. And getting out of debt can be a long, slow process. But your financial freedom is worth the effort. Reward yourself for staying on track. Find inexpensive ways to celebrate your progress.

Are you headed for trouble?

We all like to think we can manage our money, but the increasing number of Australians experiencing debt difficulties shows that this isn’t always the case. If you are consistently spending more than you earn, you could be in trouble, or heading for it.

As a general rule of thumb, if your debt repayments (including those on your credit card) are more than 15% to 20% of your take-home pay, you could be heading towards the danger zone.

If you’re unsure, take a look at the list of warning signs below, and if two or more apply to you, it could be time to cut back on your spending and reduce your debt.

Regularly spending beyond your budget.

Living from pay packet to pay packet.

Being unable to meet large one-off expenses like household insurance.

Paying only the minimum repayments on your credit card each month.

Not knowing how much your total debt is.

Being near, or at, your credit card limit – especially if you have more than one card.

Consistently paying bills late.

Hiding your indebtedness from your spouse or partner.

Applying for funds from high-interest, short-term lenders – often called ‘loan offices’ or ‘payday’ lenders.

Getting spending under control

Most people get into debt simply because they spend more than they earn. It may be possible to increase your income, but it’s usually easier to cut back your spending.

Cutting back on expensive items like holidays or expensive clothes can create savings, but it is easier to make small changes that simply become part of your lifestyle. Money spent on non-essentials, like a daily cappuccino and muffin, can really add up. Yet these are costs that can often be trimmed quite painlessly.

Ways to cut your expenses

Here are some simple ideas to trim your spending. For more tips on ways to save, click on ‘Money saving ideas’.

Try taking your work to lunch a few days of the week. Even a modest take-away lunch can cost around $8, buying take-away each day can cost $40 each week.

If you smoke, think about quitting, or at least cutting down. At around $10 a packet, you could save over $3,600 each year by giving up a pack-a-day habit.

Try car-pooling. Most cars in peak hour traffic have just one occupant. By sharing the journey, you cut back on petrol as well as wear and tear on your car.

Visit the shops less frequently. The more often we shop, the more we are likely to purchase ‘impulse’ buys.

Shop around for the best deal. Let retailers know you are comparing prices. Many will offer you a better deal or a ‘sweetener’.

Aim to pay in cash. It helps to keep your debt down, and can be a good negotiating tool to get a better price, especially on large ticket items.

Getting on top of your debt

Getting deep in debt doesn’t usually happen overnight. It takes time - often building gradually. And that’s also the best way to get out of debt – slowly, over a period of time. While there is no simple solution, sticking to a budget is one of the key steps in regaining financial control and reducing your debt. The following steps can help you get back on top financially.

1. Pay more than the minimum

The only way you will make serious inroads in your debt is to pay more than the minimum repayments. Minimum payments cover the interest charge with just a small reduction in the principal. By paying more than the minimum repayments you will lower the principal and thereby reduce the interest charge. That way you can start to turn the tide in your favour.

Let’s say, for example, that you have an outstanding credit card debt of $1,000 at an annual interest rate of 16%. If you stick to the minimum repayment set at 2.5% of the card balance, it will take you more than 15 years to repay the debt, at a total cost of $1,186. And that’s assuming you make no new purchases on the card and your card does not have an annual fee. On the other hand, if you devoted $100 to repaying the debt every month, it would be paid off in eleven months, costing you $81 in interest.

2. Prioritise your debts

List all your debts, ranking them according to the rate of interest (if you are unsure of the rate, check your statement or contact your lender). Concentrate on paying off the higher interest debts first. Once the highest-rate debt is paid off, add the total you were paying on this debt, to the next one on your list. This way, you will have more to pay off each debt on your list, with the benefit that these payments are already built into your budget.

Be sure to continue to pay the minimum amount owing on your remaining debts so that it doesn’t affect your credit bureau file.

3. Talk to your lenders

Reputable lenders would much rather find a suitable repayment plan for you, than have your payments overdue or worse, lose your debt altogether. If you can’t make your payments or are struggling to make the payments on time, it is important that you contact your lenders.

Explain to your lenders that you want to pay in full, but that you need more time to pay. Provide full details of your situation, and emphasise the positives - like a pending job offer. Explain that you are taking steps to reduce your spending, and show them your budget plus a suggested repayment plan showing a specific amount allocated to repaying each lender.

Some customers make the mistake of avoiding making payments all together as they fear contacting the lender. There is no need to be embarrassed; lenders are willing to try to help in these circumstances and its much better that you call before your credit history is affected. It is likely that they will revise your repayments and/or extend the time you have to pay.

A sample debt organiser or schedule that you can present to your lenders is outlined below. It will help you keep on top of your debts, showing the amounts you owe, together with the new repayments your credit provider has agreed to. For the record, send each credit provider a letter with the details you have agreed on.

If a credit provider or lender is not willing to renegotiate a new payment plan ask to speak to a senior manager, or a collections or credit manager to discuss your situation. If you prefer you could always write to the lender setting out what you believe you could pay and ask them to contact you to discuss your situation.

If you are still unable to agree a plan, contact the Department of Fair Trading, or Consumer Affairs office, in your state. You may be able to get a Court Order changing your repayments if you can show that:

you have already tried to renegotiate with your credit providers,

your hardship is the result of unemployment, sickness or another reasonable cause and,

your situation is likely to improve in the future.

4. Consolidate your debts

Debt consolidation involves combining all your debts into one loan. This can have many advantages including reducing your minimum monthly repayment, establishing a payment structure that will see the loan paid off in a structured way, setting a fixed monthly payment that helps with budgeting. In cases where you consolidate debt into a home mortgage, it can also reduce the interest rate.

Note though, that this strategy only works if you change the spending habits that got you into debt in the first place. You will need to be disciplined for this process to work.

5. Get professional help

The Financial Counsellors Association provides a list of contacts, which can provide free or low cost help with financial difficulties.

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Gaining financial control

Set some goals