Credit card scares you ? Don't be....

The Ideal Case

First thing first, your credit card should have some interest free period (55 days or better would be nice). No matter how low the interest is, should your card provider doesn’t offer interest free period, close the account and get another one.

The idea of credit card is win-win. The customer can pay by credit card without having to have cash on hand but without additional surcharge, the retailer will have the opportunity to have more customer and more sales with credit card facility and the credit card company will get a decent cut from the proceed. Everybody happy.

But if there is no interest free period, then the customer is the one at lost. So no good. You credit card must have interest free period.

So the mechanism is: you shop throughout the month and at the end of the month a statement arrive and you just pay off the whole amount. No interest charged. The main convenient factors are: you don’t have to wait the cash (salary or otherwise), your cash is accumulating / earning interest for you in your saving account while waiting for the end of the month, you can also accumulate reward point (if there is one) and convenience shopping throughout internet and normal shop.

Fall into Debt, Get Out Soon

One day, due to forgetfulness or late salary payment from your employer or other reason, you then miss the due date to pay the whole amount mentioned on your statement. What to do now?

First of all, once you know you will not be able to pay the whole amount before the due date, pay the minimum amount (always mention in your statement, usually only around 2%-3% of the total or some minimum # whichever higher). Failed to pay the minimum, not only you will be slugged by late fee, but you will flag your account to be at risk for a default. A reminder later will come and then get nastier and nastier. So, just pay at least the minimum amount.

Once you only pay the minimum amount, the hefty interest rate will kick start. All the purchase that you made will have interest charge from the day of purchase and all new purchase will also carry a daily interest rate as soon as transacted.

Now that you have fallen into debt, then let’s try to get out from it. The first step is: do not stop using the credit card – but with special method below.

How to use credit card which is still in debt:

1. Use it as “prepaid card”. So, if you want to do grocery shopping of around $100, transfer $100 into your credit card account before the shopping.
2. Keep using it, do not stop. One of the common mistake if a credit card gone into a debt is to stop using it. Why? Because of the monthly minimum payment.

For example: You still owe $2000 and have to pay minimum of $80 per month. And your shopping is about $500 per month. Then if you complete stop using the credit card, you now have to pay $580 ($500 for the usual shopping with cash or other method and $80 for the minimum payment).

But, if you keep using it as describe in item (1), then that $100 per week is more than the minimum. So, at the end of the month, you only pay in total $500 (all your transfer into the account is counted toward the minimum payment, hence no extra $80 at the end). However, please note that your  interest will accrue accordingly (meaning you will have bigger balance due next month). But this is the price that you have to pay to give you time to recover from the fall.

In conclusion: keep transfering money into the credit card account as much as possible before using it but keep using it!. Try to back out from the debt the month after if possible.

Deeper Problem

Let see what happen if instead of going out from the debt, but you fall even deeper into the debt. Your balance is growing each month and getting near to the maximum credit limit each day. Here is some items that you could do:

1. Very important. You need to manage, whatever it takes, to pay that monthly minimum
2. It’s time to put a break on your expenses. (You do have budget, aren’t you ?) Make a drastic measure until you have comfortable space, only buy essential only, no eating out, no coffee, no daily newspaper, just tighten your belt as hard as possible
3. But still keep using it as per above. Stop using the credit card will cost you more in term of cash flow.
4. If you haven’t got one, draft a budget ! Talk to financial expert that want to help you without charge you for the fee. Or even just pay the expert to get you out from this potential problem.

Take control of your financial matter is  the key. Remember credit card interest is very very high. If you need to get some loan, there are many other loan that substantially cheaper than credit card debt.

Final Words

So… I hope you are not running into credit card debt problem. Try to get help from friends or professional before it’s too late. Don’t be shy and embarrassed. There must be someone that will help you.

On the other hand, if you have proven to yourself that you are good in managing your only credit card, Well done ! Remember that credit card is just a convenience tool in doing your day to day transaction. With this in mind, consider to have 2 credit cards with similar value. Only 2 (two) though… no more…!

Don’t leave home without it !

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• Credit Card For Online Transaction, Is it Safe?
• Increase Your Credit Limit on Your Credit Card, or not?
• Credit Card: Income Revenue For Issuer
• Benefit of having 2 (two) Credit Cards of Similar Value

A little trick at Money Changer they don’t tell you about…

Most of the money changer / foreign currency shop will display “No commission” and people falsely feel that they just change more than enough money for the trip and then the unused money can be changed back later. But this way carries a hidden cost. It’s from what’s called “spread”.

Currency Exchange

For example: I am in Sydney Airport and about to travel to Hawaii and I want to change my Aussie Dollar to US Dollar, this means I want to buy $US and the shop will sell the US$ to you. In the shop you will see something like this: US$ Buy1.160 Sell 1.237.  This means they will sell US$ 1  for A$1.215, but will only buy US$ 1 for A$1.160. So my A$10000 then become $10000 / 1.237 = US$8084.  Now, after the trip you did not actually use all of it, you just use half , so you still have $US4042 in your pocket and you want to change it back to $A. So US$4042 will bought at 1,160 rate and become 4042 x 1.160 = A$4,688. So, your half of your $10,000 is no longer A$5000. It  is now only $4688, thanks to “spread”. (The difference of $312 is the profit for that shop – that’s how they make money)

So, changing more money than you need is not a good idea as you will have to pay the spread to the money changer. (Of course, if during that holiday, say the $A become significantly weaker, then probably you pay very little spread, but on the other hand, if the $A become significantly stronger then you pay even more to change back to where you were)

Furthermore, carrying cash is probably very risky as it can get stolen quite easily.

Credit Card Cost

Let us see about credit card. Yes, even with credit card, you will need to pay the exchange rate – no one will escape from this if they want to change currency. But who will likely able to give you the best currency rate,  a local money changer with tens of thousands proceed a day or Master Card/Visa/American Express with billions of dollar a day ? I would say the chance are the one with big proceed will give better deal.  Of course, not always, you will probably find some local shop that is “on sale” and give you better deal, but it is unlikely as these local shop also get their supply of money from their banks who deals with these credit card companies on wholesale pricing.

On other note, there are “transaction cost” that usually being charged for international transaction. And 2 middle men charge this transaction fee: the credit card company and your bank/card issuer. But the total amount of fee will likely no more than 2-3% (although depend on the country and currency. But if they charge extra for certain currency/country, the chance are the local shop will charge even more expensive rate). Check your credit card fine print for more detail.

Recommendation For Overseas Travel – Money-wise

So, knowing both aspect above, here is the list of recommendation for your consideration for your next overseas trip

Prepaid the bulk cost of your trip: airfare, hotel, guide tour, car rental, etc before you depart. And yes, pay it with credit card as you will accumulate points (but don’t pay surcharge for this as it will defeat the purpose)

Bring only minimum cash of the foreign currency only to cover petty cash: pay tips, buy ice cream, small purchase, etc. Just exchange whatever amount that you think you would use it up. Don’t plan to have the money exchanged back.

Pay everything else with your credit card: souvenier, taxi, restaurant bill, theme park ticket, etc… Everything else. Just pay with your credit card.

Have online access to pay your credit card from internet. You need to be able to transfer some money from your saving account to your credit card account as your credit card limit is not supposed to be that high. Do this maybe once a week or so at your convenient

How about emergency fund ? If you can have debit card: “Debit Master Card” or “Debit Visa” this will be your best alternative as the money will not be touched until you withdraw them in emergency and the cost of withdrawal is very very small.
Other alternative is to prepare traveler’s cheque for your trip. They have better spread in case you want to convert back to original currency and you can split it for your convenience. Say you want to carry $10,000 emergency fund, then you can purchase 2 x $5000 traveler’s cheque. This way, if you only need to access only some of that emergency money , you don’t need to cash out all $10,000.
Otherwise, just spare some credit limit on your credit card for this emergency purposes. But withdrawing cash from credit card is quite expensive, not only it attract the interest rate straight away (regardless of free interest day period) it also attract cash advance fee at the time of withdrawal.

Final words

The actual cost using credit card for overseas travel is just that “transaction cost” around 2-3% that will be charge for each transaction. But avoiding this cost by carrying cash is becoming more expensive at the end. Not only the risk of cash being stolen but financially, you will pay “spread” cost to put the cash back into the original currency. This is a hidden cost that not many people realize it.  Just bring and exchange cash for petty expense and don’t expect to change it back to the original currency.

So, as final word: just use your credit card on your next trip: domestic or international !

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How to Get Rich Explained: 4 Simple Plans

Without further due, these are the 4 simple plans that will make you rich but only if you do it all:

1. Earn more income. Make sure your income beat the inflation
2. Spend less money than what you earn. As less as conveniently possible.
3. Invest the difference between (1) and (2)
4. Protect all activity above: (1) and (2) and (3) with insurance.

Financially Wealthy

That’s it. That’s the very key secret of getting financially rich. The only caveat here is : you need to do all fours without exception. If you do all four, then the different between one people and other people is the speed to become rich. Some will be very quick and enjoy the the rest of their life as rich man. But for some, the speed toward richness is just too slow that they will sadly be gone first before it got there.

Plan 1:  Earn more income. Make sure your increase of income beat the inflation

The goal in this first plan is to earn as much money as possible and increase your income every single year above the inflation rate. For example: if the inflation rate is 5% then you need to increase your income at least by 6% or more.

But it does not necessarily mean asking a pay rise from the company that you are working for. Fine if you can get a pay rise, but your income could increase by doing freelancing, some part time job at late evening or week end, It does not mean you increase the price of your product eithr, but perhaps get some more customer will do.

Plan 2:  Spend less money than what you earn. As less as conveniently possible.

This is where your budgeting strategy come into the play. With budgeting, you need to make sure your income is larger than your spending. Delay instant gratification and just plan ahead of the actual need. Not only you become more in control on your spending behavior but this will maximize your saving. The counter balance is that you should still live comfortably. For example: budgeting only eating every second day is not only not comfortable, but it also absurd and not healhty. Don’t do that. But reducing eating out at the restaurant from weekly to biweekly is something that everybody can do.

Plan 3: Invest the difference between (1) and (2)

The goal here is to make return of investment as high as possible, which includes following aspect:

• The higher the saving (difference between income and spending), the more capital you have. The more capital the higher the return value.
• Choosing the right investment strategy is crucial. Putting money in saving account in the bank is the standard here. This method of investment is too slow and will not get you to richness level that you want. You need to be able to choose other investment strategy that give much better return.
• Accelerate investment with debt

Plan 4: Protect all activity above: (1) and (2) and (3) with insurance.

When I mention “insurance” it does not necessarily only insurance product that you can buy from insurance company, but in wider understanding. The goal on this plan is to protect whatever we already have as much possible against any unexpected occurrence a.k.a “risk”. This plan will includes:

• Protect your income with “income protection” insurance
• Protect your spending by purchasing insurance that limit your liability: car insurance, indemnity insurance, business insurance, health insurance, etc
• Protect your investment with some kind of hedging or capital loss protection such as put option protection or some other advance scheme. With this, even there is another global financial crisis that bring down practically everything down to its knee , the value of your investment is protected. Especially if you are using debt as leverage, managing risk is a must.
• Protect the whole activity by having “emergency fund” (before even do investing) that guarantee you can do everything as per normal for at least 6 months without any income at all.

Without all the protection above, you will be vulnerable of any mishap and unexpected circumstances. Remember nobody will really know what happen next. Just prepare enough for the worst, just in case.

Complicated ?

I hope the essences of those 4 plans above is not too complicated for you. Basically all your activity in pursue of wealth can be categorized into one of those 4 plans.

Now you know the big picture how to get rich, the next step will either:

1. to implement the 4 simple plans above into real tactical strategy how to do it the fastest –or–
2. to make excuses that the plans will not work

Remember the quote from Henry Ford: “Whether you think you can or can’t, either way you are right“ This is just the way things work. So, your call !

One important note before I end this article: the journey to wealth is not easy and require a lot of sacrifices, but it does not mean that you have to suffer. On the contrary you still need to make it enjoyable on the way, for example: make sure still have quality family time every day and weekend despite extra part time work, still budget for holidaying together every now and then, although not as often but you should still enjoy eating out with family and friends, etc.

Of course if you lucky enough to get that 50 million lottery jackpot, don’t worry about above plans. The question is how do you control it that you will get it someday ? Maybe do something more within your control like these 4 simple plan.

Hope this inspires you ! Take Care!

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All about Loan Serviceability

When you apply for a home loan on a mortgage, it’s all about loan serviceability. A bank or other lender only want to know whether your income can pay for the loan – in other word whether your income can “service” the loan. This is what they call as “loan serviceability”.

This is how it works. Let say if you want to borrow $500,000 with 5% interest rate and you only take the “interest-only” loan.

1. Hence you need to pay the bank $2083 monthly.
2. The bank will now taken into consideration of the living cost. They have standard table for your local city/area based on number of children, age of the children,  your marital status, etc. For example: In Sydney, family with both parents working with 2 children below 5 years old will have more expensive living cost compare to Family with boths parent working but with 2 children between 5 and 10. Well the reason is because the cost of child care is more expensive than primary school cost.
   Let say for this example the living cost is deemed to be $2500 per month.
3. Then the bank will now look into other loan: car loan, personal loan, shop card, credit card, etc. They need to know how much you need to pay/service those loan monthly. Let say your monthly obligation is $500 monthly.
4. So, total from 3 items above will be:  $5083 monthly

This is where the notion “cash flow is the king” come into effect. From example above, your income (can be combined with your spouse/parter) HAVE TO BE more than $5083 monthly or $61k per annual after tax. Some lender will prefer to have also additional safety band and add 10% or more into the calculation. But basically this is how it works. Your income have to cover this monthly commitment.

But how about if you have quite some money sitting in the bank, say: $100,000 sitting on the bank? Nope, it wont help. The amount of money you have in the bank will not affect your serviceability above, because:

1. You can spend those money without any control from the bank/lender anyway
2. Without regular income, the amount of money sooner or later will be depleted.

(You can though, withdraw this amount and make it as additional deposit so instead of borrowing $500,000 you only borrow $400,000 which in turn will reduce your serviceability criteria)

Credit Card and Mortgage

Your Credit Card Reduces The Serviceability

Some people will always pay off the monthly expense on the credit card, but some other people won’t. So, the bank or lender will assume the worse. If you are committed with the new loan that they provide and you have some kind of financial difficulties, the chances are you will max-ed up your credit card and pay only the minimum amount. So, this is the calculation that will be used by the bank.

The typical minimum amount to pay each month from a credit card will be around 2%. So every $10,000 credit card debt you will need to pay at least $200  monthly. So, in example above, as you pay 5% for the home loan, then additional $200 monthly will be equal if you borrow additional $4,000. Therefore in other words, every $10,000 credit card limit will cost you $4000 home loan serviceability. Although this example is mathematically correct, we will never know the exact calculation that the lender do when it comes to reducing the serviceability. Therefore , I would recommend this rule of thumb:

Reduce the serviceability by the same amount of the credit c ard limit.

So, if you have a few credit card with total credit limit of $50,000 then if you think you can service $500,000 home loan, then with because of this credit card limit, then expect that the bank will only allow you to have $450,000 home loan.

Even if you don’t use the credit card at all, the lender will assume you will use all of the credit. This is quite unique to credit card as for other type or fixed loan, such as car loan, if you already pay off 75% of the loan, then your “obligation” will be only calculated as only the rest of the 25% of that loan.

Things that You Can Do

There are 2 easy things that you can do to help with this issue:

1. Close the credit card that you never use. Ask for the closing statement (the one which explicitly mention in words that you have closed your account)
2. Reduce the credit limit to your comfortable level (read this article about maximize your credit card benefit before decide). Make sure to ask the statement that explicitly mention that you have reduced your credit limit.

The statement about your account closing or limit decrease is quite important. Why? The bank/lender knows that you have a credit card from other bank (from your credit history check) and you will be most likely be asked to provide the latest statement, but a change of credit limit or closure is not that obvious (they cannot really check it) – hence you just provided it for your own benefit.

Also you can do: close all of your credit card except 2 (read Benefit of having 2 (two) Credit Cards of Similar Value) and consolidate all of your credit card debt into your new home-secured loan. Remember home loan is the cheapest loan around, so maybe it’s a good ide to have them all consolidated.

As final word, remember that getting a new home loan should not change your lifestyle dramatically (you won’t survive as home loan is long term commitment). Also credit card should be just your convenience tools. So you need to balance between these two:

• don’t push it to the highest home loan possible by increasing your serviceability by closing credit card account such that you have no convenience anymore -or-
• having too much credit limit in credit card so that your home loan serviceability is too small.

Well, you decide – no one else does. Good luck !

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Although personally I do not really like Robert (try to sit on one of his seminar, not only he is swearing a lot, but he is rude to practically anyone publicly), but it does not mean that what he preaches is not good. On the contrary, many and many of his teaching is pure gold and something really need to be adopted by every one. This is one of them….

Inflation is your enemy

Invest or become a loser

Most people will associate inflation with price increase, but that’s not really accurate – price increase is the effect of inflation, not the cause. The real cause is because there are more money in the market. If there are more money and resources is scarce then people will be willing to offer more money to secure the resource for himself. Because of this the price of that resource become higher. Read this article for better illustration.

But what makes more money exists in the market ? Government is printing it rather out of control. Before US President Nixon abolish the ‘gold standard’ on 1971, every $100 printed need to be guaranteed by about 3 ounces of gold (1 ounce is $35). So, since gold is precious metal that cannot be just made from thin air, this kind of controlling the value of money.

But since then, all moeny if the world is now without gold backing. It’s called “Fiat money” meaning the money only become valuable because the government make it so/force it by law – otherwise it will just worthless paper. But with gold backing, you can be sure that if you have $1000 you can go to the government to swap it with around 30 ounces of gold.

Why all government doesn’t want to use gold standard? Because it make it difficult to them. For example: just bailout of Citigroup on 2008 costed $300 billion. That required 9 billion ounces of gold or 900 million kilogram of gold. Not easy , right ? But that occasion, the treasury just sign a check and $300 billion “money” created from  thin air.

It’s only a matter of time that US Dollar in particular will lost most of its value because of their excessive debt. All other country have similar diseases but not as severe as US.

Invest Money

Invest Your Money

So, if you have some money, it’s not really good to just save it. You have to invest it. Buy property, stock or better just buy gold or silver. But it doesn’t mean at all that you just spend your money without control. You need to come to the level of investor. In order to do that you need to first save your hard earn money first, have some emergency monry to survice at least 6 months, then invest the rest of the money. You need also to be comfortable with debt, because debt leverage your money and make you achieve your goal much faster.

Some number for illustration: if 20 years ago, you have $50,000  and inflation is at 5% per year, then:

• If you buy small house in outside Melbourne, it is now worth $200k
• If you just invest in IBM stock (was $30, now $120), it is now worth around $200k
• If you invest in S&P500 index (was 300 pts, now 1000) it will worth more than $150k
• If you buy gold (was $400/oz, now $1000/oz) now it is $125k
• With 3% interest, your bank account will be around $90k
• Save under your pillow or in your drawer, it will still be $50k

Of course, this is hindsight. But we need to treat hindsight as possibility -or- statistically probable (as it has happen), right?

Have a quick look if you have debt? With inflation the debt become les and less in value, in other word your debt is actually decreasing in value. That’s one of the reason why having debt is a must for the rich…

What To Do

If you really want to back in charge on your own financial affair, the level of hurdle that you need to overcome is roughly like this:

1. You start earn some money: the more you earn the more the bill is
2. Budgeting comes to play: make sure whatever your expenses MUST BE less than whatever you earn. You start create a saving .
3. Your saving is growing and start to pile up more money in your bank account.
4. Once you have enough for emergency and the amount is quite substantial START INVESTING.

This is the essence of what Robert Kiyosaki said, don’t be a losers just by sitting around doing nothing with your money. Learn how to invest – it’s your money anyway and be a winner. The investment vehicle itself is totally up to you.

If you want fast and high return with unique capital protection capability then sharemarket investment probably suitable for you. If you like more calm investment and longer term, then property investing is your choice. Or if you want real action of business, then invest in a business and start make money. The key here is choose the one that you know, do not rely to someone else.

And of course while you are doing your investing, don’t forget also to protect yourself with insurance.

Conclusion

“Savers are Losers” is a true statement. You need to learn about investing and then invest your money with an investment vehicle that you know and comfortable with. Don’t let it just staying in bank account. Beat the inflation and go toward your own financial freedom.

Hope this helps.

Hear Robert Kiyosaki yourself: rich_dad_difference3

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Homeloan/Mortgage and Other Debt

Let start with our debt. The biggest debt that we are involved with, is homeloan / mortgage. The loan itself is long term loan, usually 25 years or 30 years, and the amount is gigantic, several hundreds thousands dollar maybe.

Additionally, we will have many kind of other debt: a personal loan, business loan, car loan, and the most common one: credit card debt. These loans usually have shorter term and the total money borrowed usually less than $100,000.

So, think about them this way. Whose money are these hundreds thousands of dollar money (or more) that we owe? Well, in a nutshell it is bank’s money. Or probably in more general-technically-(more) correct term: all of those money belong to a financial institution (backed by bank or private lender). Yes, those money can be made out of nothing, but this is another matter. Technically, all those money are our liability, but they are assets in the book of these financial institutions.

Let Them Payback Their Own Money

The Bank's Money - Our Debt Money

Now the question is: how about if there is a way to make these banks or financial institutions pay off our debt. Won’t it be a very sweet revenge for you ? Of course !

Surprisingly, it’s not that difficult. It will cost us a bit of money, but the end result is exactly what we want above. How we do it ? By taking insurance.

By taking insurance, in particular life insurance and income protection insurance, as long as you are not underinsured, if something happened to you (sick, accident, death, etc) and you no longer able to produce income, the insurance will pay your cover and in turn you can use that money to pay off all the debt you left behind.

“OK, but it’s not the bank’s money, it’s from the insurance” you might protest. Let us see this. These big insurance companies (Deal only with the big one as you want to make sure they are still around when you need them the most)  are usually public listed company and its share/stock are traded in the stock exchange. Who own these stock/share? If you study them carefully, the majority of the shareholder/stockholder of these giant insurance company will be financial institution: investment banks,  managed fund, hedge fund, and another financial institution. So, the insurance money is their money as well (direct or indirectly)

Furthermore, when you study about money, you will understand that only bank can ‘create’ debt money out of nothing. So the banks is really in the middle of these money business.

In other words, these banks lent you money, you took insurance, and when you could not pay it (sick, die, terminally ill, etc), they will pay our debt (a.k.a their ery own money). Isn’t that sweet ?

Yes, it’s not free. You need to pay the premium of the insurance on regular basis but the benefit outweigh the cost. Imagine that you have $500,000 life insurance whose premium is $50 a month. These $50 per month, even you accumulate it for 30 years with 10% interest, it’s very small compare to the potential payout. Not to mention the peace of mind factor that really very invaluable and worth much more than $500,000. It’s good to remember that usually the insurance will not pay any money if the claim is due to your own fault (e.g: suicide, fired by employer, etc)

Although this strategy can be applied to any debt that you have, but you will find that taking a debt for business/investment will work the best.

How The Rich Did It and You Can Too

When it comes to borrow money to invest (business or other investment), they will choose (and you can too) to take “Interest Only” loan. It’s interest only, so the principal will never ever paid. If you borrow $300,000 for your investment house, taking “interest only” loan, 30 years later, the debt will still be $300,000 not a cent less. By using this way, there are some advantages:

• After 30 years, the value of $300,000 will be much less because of inflation. In other words inflation becomes their friend.
• They have certain asset protection as the asset (investment house or stock or anything else) is mortgaged to the lender, so technically they don’t own the asset, although they have total control the asset. If they don’t own the asset, then somebody else cannot really sue them for that asset, isn’t it ? That’s why the rich loves debt. They control not own.
• The interest paid to serve the loan is usually ‘cost of business’, hence, tax deductible.
• The extra money that they would pay if they took “principal and interest” are invested to make them even richer.

Conclusion

The main point of this article is NOT about “no need to pay your debt”. The most important point is that when you do business/investment, taking debt (even a large one) is one big alternative. By taking proper insurance, you don’t even have to worry about the debt in case somnething happen to you, just use it to make you more money.

So, as final words:

• If you have debt, especially homeloan/mortgage, it’s only logical for you to take insurance. Life insurance and Income Protection insurance to be specific. Read further info here: Protect Your Financial Life: Insure Yourself, Income Protection: Your Salary Cover In Need
• Consider taking “interest only” loan when doing business to take advantage of its potential. Have a sweet revenge! But read this beforehand: Be Careful With “Interest Only” Loan: a Potential Problem You Should Know

And as always, please remember, do not take debt to finance your lifestyle or for consumption (read more) . Only take debt for money making activity (business and investment) – read more.

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How It Works

As the name implied, if you have offset account, amount of money that you put on that account will offset / reduce the actual homeloan. For example: say you have $300,000 homeloan and it has offset account linked to this homeloan. Then if you put $10,000 inside that offset account, the interest of your homeloan  is no longer $300,000, but it’s now $290,000.

So, with interest of 6%, amount of $10,000 above will save you interest payment of $10,000 x 6% = $600. So, it doesn;t matter if the company charge you $250 per year for that facility, you still end up with more saving.

But of course you will not find this facility on fix term interest rate mortgage as it has fix repayment as well.

What is The Benefit

The actual benefit is enormous. Let say you won a small lottery prize of $5000 or your employer give you a bonus this month fr $5000. Well, the general wisdom will be to try to pay off the mortgage as soon as possible, so you are considering this $5k for extra repayment for the mortgage. But… you also remember that you need to have emergency cash for financial protection that can support you for rainy days. At the moment you hardly have this ‘emergency’ saving. So, you’re also considering this option to put the amount aside for emergency purposes.

Well, if you don’t have offset account facility, you will end up with splitting the amount. Maybe $2500 for extra mortgage repayment, and the other $2500 will be put aside for emergency. Or any other composition you think the best.

But now, if you do have offset account, you simply put that extra money into this offset account. And not only you will reduce the calculation of the interest by $5000 (the exact same effect if you pay extra $5000 into the homeloan account), but also you can make the money (all $5000) as your emergency cash, as the offset account is usually just another saving account that ‘linked’ to the main homeloan account.

So, just by having this facility you virtually ‘doubled’ your money: $5000 for extra mortgage ‘repayment’ and another $5000 for part of your emergency money.

A Few Tips

Other tips that you can do if you have offset account:

• Ask you employer to transfer the salary directly to this account. As you know the interest payment calculation is based on daily balance. If the salary or other payment is transferred directly to this account, there will be 1 or 2 day that the full amount of that transfer being used to offset the mortgage (before you use most of the amount to pay other bill). In this case, you really maximizing the saving on the interest.
  For example: if your $1500 salary is paid fortnightly (hence 26 occasions), assuming interest rate is 6%  and each of the occasion it sits there for 2 days, then you make yourself roughly a saving of $1500 x 6% x (26 x 2)/365 = $13. Well, not much, but it did not cost you a cent to make this saving, so it’s still a good saving.
• Make sure your annual fee is being “paid” by this offset account facility. For example: if you have $250 yearly fee and 6% interest, then your need to put in the account at least $250 / 6% = $4167 for the whole year. If you do that, the saving of the interest repayment will be greater than the annual fee that they charge. In other word, technically you have “free” annual fee.
• Pay your monthly credit card bill and other bill just 1 or 2 days before the due date. Make your money stay as long as possible in this offset account. Remember there is no reward if you pay the bill 1 week in advance, but if you put the money in your offset account, that 1 week give you additional saving for the next interest repayment.
• If you have a social gathering or similar occasion in restaurant or cinema or anywhere else, volunteer yourself to pay collectively (while the other pay you the cash) with your credit card. Then put the cash on your offset account. When the credit card is due, pay it off as usual. Not only you will earn more point on your credit card, but you have additional saving on your mortgage.

What To Do

If you currently don’t have offset account facility, just try to call your lender whether they can easily add this facility immediately even for a small fee. Otherwise, make sure you have this one on the next refinance / remortgage.

If you have one, then make sure you reap the maximum benefit as suggested above.  Well, at least make your annual fee of the account “free”.

Related Posts

• Taking a mortgage ? Do Not Change Your Lifestyle Dramatically
• Be Careful With “Interest Only” Homeloan/ Mortgage: a Potential Problem You Should Know
• Getting Your First Home Loan or Mortgage: Not That Hard!
• Why You Should Always Use Mortgage Broker For Your Homeloan
• Mortgage: Change To Fixed Rate or Keep It Variable ?

How It Works

When you take the insurance, you will need to provide a proof of your salary. Then based on the profile of the job and the industry the insurance company will give you a quote of how much you need to pay the monthly / yearly premium to obtain this protection. For example: you earn $3000 per month as programmer then you probably quoted $50 monthly as premium.

Please note that the payout that you will received when you lodge a claim will not 100% of the salary but some high percentage of it (usually up to 80% or 90% depends on the provider). Of course this is designed so that you will prefer to continue to work rather than not working and receive lower pay.

Waiting Period

Protect Your Income

There is one most important parameter when you take this insurance: the waiting period. The waiting period is a time between the lodging of the claim and the start of the payment. Usually you can select this from 1 month to several years. If you choose 3 months waiting period for example, once you lodge your claim, the insurance company will only pay you after 3 months later. The longer the waiting period, the cheaper the premium. So, if you choose 1 month waiting period, you will pay the most expensive rate compare to 2 years waiting period or longer which will be significantly cheaper.

Why people want different waiting period ? Actually, it’s all up to you in consideration of your own financial situation (emergency cash available, etc) and the current budget. If you have some financial protection and can continue live without support for several months, then you can choose longer waiting period that reward you with cheaper premium.

Expiry Date

The second important parameter is the expiry date. Some insurance will provide you with the salary replacement payout only for the first 2 years of the claim. Other can provide the protection until you reach the age of 65 years old. Of course, the one only give you 2 years protection will be much cheaper than the one provide you up to 65 years old in term premium that you need to pay.

Which One to Choose

As life insurance, income protection insurance is also a product that you buy but you wish you will never need to use it. But when you do need it, you want to make sure it give you the full benefit. So, in my opinion, you need to cover yourself up to 65 years old or more if the offer exist and get the shortest waiting period possible. But what is the cheapest way to save on insurance.

Here is what I find the most economical that give you maximum benefit:

• Get income protection insurance from your Superannuation ( IRA / 401k / other pension plan fund). Usually the income protection available is only limited to 2 years expiry date. Choose the smallest waiting period, say 1 month. In Australia, most superannuation fund will offer this , check your local agent. By using this benefit, actually you don’t have to pay anyting extra as the premium will be debited directly from your fund. The money that you probably cannot touch until 65 years now give you immediate direct advantage. Of course if you want to maintain this fund you can always add some extra payment to cover this direct debit.
• Get the second income protection from other company that require 2 years waiting period but can cover you up to 65 years old. Because the waiting period is quite long, you will find yourself only have to pay some significantly cheap premium.
• Tips: do the above combination with your life insurance as well.

So, with this arrangement, for the first 2 years you will get income protection from your superannuation fund with “free” premium, after 2 years to 65 years old you will be cover by the 2nd insurance and you pay very cheap premium for that.

What To do Next

I would recommend you find an insurance broker. Then make appointment to review your situation and  get a quote for your income protection insurance. Wait his/her recommendation, but if they did not recommend the combination above, then explain to him/her that you want it for your maximum benefit. Then review your budget to make sure you can afford it. If the budget is too tight, you need to find something to slash to incorporate this important item.

Related Posts

• Protect Your Financial Life: Insure Yourself
• Rule of Ten: The Least You Can Do
• A Sweet Revenge: Let The Banks Pay Your Debt

Insurance Comes To The Rescue

Luckily, the answer of this problem is really simple:buy life insurance. To be exact, a life insurance that also cover disability and trauma cover. We will never know ever, when we are going to be sick or die. Jokingly said, yes, if you die, it’s no longer your problem but it become your love ones’ big burden. But how about if you ‘just’ become disable or need constant (expensive) treatment, not only you will suffer from your medical condition, you will feel the financial suffering as well.

Protect Your Family With Life Insurance

Imagine for one second what will happen if the primary provider of your family suddenly cannot provide that support any more. Not long, your home under mortgage will be seized by the bank as repayment can no longer be made. Then your family will need to rent out. Your surviving partner may need to take multiple jobs to keep the children at the best school  chosen before. Maybe, they don’t even have extra money to cover your funeral and have to fall into further debt that they cannot afford to pay. Well, you don’t want all of these happen to them, don’t you?

The cost of the insurance is relatively very small with the benefit. Think like it’s the price for your peace of mind. So, life insurance premium is something that you need to add to your budget.

Do Not Under Insure

Insurance is one of those things that you buy but you wish you don’t need to use it. So, when you do need to use it, the worst that could happen is that you under insure. The sum of your life insurance should at least covers:

• All mortgage / homeloan, personal loan and credit card debt (Total the maximum limit, not the current usage).
• Living cost for 6 months for your family based on current budget.
• Sum 2 item above, then add 20% for administrative cost and the unexpected (funeral cost, hiring lawyer / conveyancer, etc)

For example: say you have $300k mortgage, $30k car loan, $20k credit card limit ==> Total $350k. Your household budget is $2500 per month ==> 6 month=$15k. Then you need to take a life insurance that pays ($350k+15k)x120%=$438k. (You may round this up to $450k)

So, the idea is when something happen to you, your family/ spouse can immediately pay off all mortgage / debt / credit card and continue to live at least 6 months without you without financial burden. The hope is during that 6 months, your family/spouse can adjust whatever needed to continue/improve their lifestyle now that at least they are debt free.

On the other side of the coin, you don’t want to have the pay out become too big as you will need to pay higher for the premium monthly/yearly.

Where You Get One ?

I would suggest to always get the free and friendly service of insurance broker. Not only they can compare various insurance provider to get the cheapest cost/premium, but also they can help to make the claim, should you needed to claim one, faster. Yes, they will get residual commission as long as you still hold the insurance, but just like homeloan, you will pay this commission money regardless. (It’s not cheaper to go direct to the company, the person who serve you will get the commission anyway, and you did get to compare the market)

Another factor to consider is that the insurance company need to be good enough and to stay around in the market when you need it later. This is quite hard to judge so your insurance broker might have better idea. Remember: get at least quote from 2 different insurance brokers

What To Do Next ?

Go find an insurance broker, make appointment to review your situation and  get a quote for your insurance above. Then review your budget to make sure you can afford it. If the budget is too tight, you need to find something to slash to incorporate this very important item.  Remember, if you have a debt, you have to have an insurance.

(Before that, maybe you want to read about another important , but optional, protection for your income: “Income Protection: Your Cover In Need“)

Related Posts

• Income Protection: Your Salary Cover In Need
• Rule of Ten: The Least You Can Do
• Taking a mortgage ? Do Not Change Your Lifestyle Dramatically
• A Sweet Revenge: Let The Banks Pay Your Debt
• Debt is Good: Only for Investing & Business Though

Budgeting in 15 minutes

Maybe some of us have confused budgeting with accounting where you need to track and write all your transaction. Which to me, it’s a bit overkill for a house hold to do accounting. (Of course if it’s a business, you don’t have a choice except doing the accounting properly)

So, my opinion is: every household in the world should have a budget.  I recommend to do monthly budget for a year. And also I suggest align it with your tax financial year. I mean if the financial year starts at July, you do your budget from July to June next year. If your financial year start on January, do you budget from January to December time frame,  and so on.

How to Do a  Budget in 15 minutes (each year)

First of all, your budget need to be in written form. You CANNOT just do it on your head. But you don’t need any software, just a piece of paper (well, if you’re fluent with a spreadsheet you can load your Excel or Open Office’s Calc now).  You might need a calculator. Let’s get started:

1. Divide your papers in 12 column to represent every month, add 1 column as your row name
2. Start with INCOME. Estimate your main income per month and put it on every months. Do the same with your partner’s one.
3. Still in INCOME, put all your other income, including your partner’s or children: every single benefit, government support, social security, tax return that usually you receive during the year. Put it into the months that usually you received it.
4. Sum all those income in (2) and (3) above
5. Now let’s do the REGULAR EXPENSE. Do for ALL THE REGULAR BILLS the monthly cost or quarterly cost on the month that you actually pay the bill. For example: if you pay the electricity quarterly on Feb, May, Aug and Nov then only write the amount only on that month.
   Includes: Electricity, Water, Gas, Phone, Mobile, Child Care, Petrol, Bus Ticket, Home Insurance, Car Insurance, Health Insurance, Credit Card Fee, Monthly Bank Fee, Mortgage Repayment, Car Loan Repayment, etc. Includes everything that you see the bill in regular basis.
6. Sum all those regular bill in (5) above
7. Subtract no (6) above from no (4) above and label it “DISPOSABLE INCOME“.  This is the income that you can use for food and other purposes.
8. Pay yourself first ! From this ‘DISPOSABLE INCOME’ decide how much you want to put aside as saving. You have to scan through all 12 months looking for the smallest one. This amount need to be consistent each month to make it easier for your self.
9. Subtract (8) from (7)
10. Do your Groceries & Food expense per month. You have to eat every day so, you have to budget enough for adequate food. If your number already to small, then you have to knock down some of the regular bill (Disconnect service, find cheaper alternative, downgrade, etc)
11. Plan all other purchase after subtracting (10)… holiday, new computer, new car deposit, new TV, etc
12. That’s it you made your self a yearly budget and you have been promoted to elite group above average that have a written budget on the house hold.

Software

The problem with using software mainly is that it will take some time for you to learn the software for you to be able to use it fluently. It does take some effort only to learn the software. The problem is if you found a difficulties about the usage of the software then you will loss your momentum to do the budget itself which by the above method will be just done within 15 minutes.

But if you insist you want a software. Quicken Deluxe 2009 is my recommendation for your personal budgeting/accounting need. It’s has simple and straightforward interface, but to make the most of it you need to track all your transaction (accounting), perhaps even on daily basis. You can visit our corner store for broader pick.

Conclusion

Doing a budget does not need to be very sophisticated. Even this 1-page budget that I describe above it’s enough to give you guidance. You may even show it to your mortgage broker or bank to prove to them that you have a budget for your house hold. Now the most difficult task is to execute the budget. At least now you have written guide, you know exactly that you will be into a problem if you don’t follow your budget as you can see those bill will come the next month (see your budget paper).

Do your budgeting , 15 minutes and you’re done ! See you with a budget soon !

Related Posts

• Improve Your Finance Position: The Big Picture
• Kiyosaki: “Savers are Losers” – A Sad Truth with a Catch
• Everybody Can Be Rich Financially, Do You Know How?
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