Interest rates and big fat lazy costs

Interest rates and big fat lazy costs

By Frank and Muriel Newman

This week we are looking at frugal money management.

K Silvester from Morrinsville has a simple tip for those finding it hard to save money. “Try this to end up with $1,368 in 1 year. Think 1 year is a long time-- it moves fast and then you think I could have saved such and such, so here’s my tip. Week 1 save $1, Week 2 save $2, Week 3 save $3 and so on until Week 52 you will save $52 and have a grand total of $1368! Here’s another hint - all it takes to save $1,000 is 1000 $1 coins or 500 $2 coins.” There is also a tip for LOTTO ticket buyers: “Better $10 in your savings container than $10 lost.”

Shirl from Napier has a great tip on how to make the most of low interest rates. “Keep repaying the same amount you were paying before the interest rates dropped. This way you will be paying the difference straight off your principle loan amount. You can save thousands of dollars in interest in the long run.”

It’s worth reminding ourselves that interest rates will not remain this low indefinitely. We think borrowers should work on the “what-if” scenario. What if your mortgage interest rate were to double! Yes, double from say 5 percent to 10 percent. How would you cope? We reckon that’s reason enough to plough as much of your oily rag savings (including interest cost savings) into debt reduction so when interest rates hikes do bite, it won’t be so serious.

Erina from Christchurch says, “I keep two coin jars. The first is one which all the family knows about and contributes to. They also take money from this jar for garage sales and the like. The second jar is more secret and contains mainly $2 coins. This is my Christmas fund. There is already about one hundred dollars in this jar. We are a small family and we have a simple, humble Christmas but I do send quite a few cards so this money will come in handy. By Christmas, there could well be $250 dollars in this special fund.”

Tracy has a system for budgeting. “To make budgeting easier for our family, I calculate ALL bills for the year (including car warrants, registration, insurance, rates, power, phone, etc). I then divide the full yearly amount by 52 weeks, and deposit that amount into a bills account. I have all automatic payments and direct debits set up to come out of that bills account, so we always have the money to pay the bills and we know they will be paid on time.”

Pay off “dumb debt” first. Credit card debt is dumb debt. According to a survey carried out last year, New Zealanders have $5.25 billion in credit card debt and only one third is paid on the due date. The other two thirds ($3.5 billion!) is costing an average interest rate of 18 per cent or about $630 million a year! That’s just madness.

Once that dumb debt is repaid, then it’s time to work on the other very dumb debts like hire purchase payments. Unfortunately, once these lenders have sunk their teeth into you they don’t easily let go. They may want to have their pound of flesh, even if you pay their debt off early. We know of one couple paying 24.5 percent interest on their car loan!

This folly applies for business HP loans as well as consumer purchases. The number of businesses that buy assets on HP is staggering and it is no wonder they get into financial strife. The other major sin that most businesses commit is having Big Fat Lazy Costs. These are costs that contribute nothing to the success of the business. The business would be far better off without them so the saving can go straight through to the bottom line, where it really matters.

Have you got any Big Fat Lazy Costs sitting on your couch at home? Are there costs that actually contribute little or no benefit to the household? If so, cut them and use that money where it will make a difference – like debt repayment!

Frank and Muriel Newman are the authors of Living off the Smell of an Oily Rag in NZ. Don’t forget to send us your favourite money saving tip so we can share it with others. You can contact us via the oily rag website (www.oilyrag.co.nz) or write to Living off the Smell of an Oily Rag, PO Box 984, Whangarei

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