Money: Have a promising year

Forget about the diets and going on the wagon - resolve instead to get your finances in order this New Year's Day

'Tis the season to ... make over-ambitious promises about behaving better in future.

This New Year's Day, how about forgetting the usual earnest vows, which you know you will ignore as soon as your head and stomach recover, and resolve instead to give your finances a New Year workout.

At least that way, when the season of excess rolls around again, your wallet - if not your body - should be in a better state to withstand the strain.

A half-dozen seasonal suggestions:

Do a budget


All right, so budgeting makes a wet weekend in a motor camp look exciting, but how will you get your finances to where you want them if you don't know where they are?

Budgets don't need to be elaborate - if you like working with computer spreadsheets, feel free, but a few sheets of paper work just as well.

What's more important is to be honest and accurate.

Accurate means working with real number rather than guessing. Gather up any old chequebooks, eftpos receipts, bank statements and credit card summaries to remind you of how much you actually spend.

Work out your spending on a weekly basis, or month by month if it makes the numbers easier to grasp.

It may help to divide spending into three categories - "fixed" for items such as rent or rates which are difficult to change, "variable" for things over which you have more control, such as food, and "discretionary" for spending you could do away with altogether if you had to, such as alcohol or entertainment.

Allow for occasional contingencies such as the washing machine breaking down.

And if you want to save, include your savings goal in the budget, rather than hoping to save whatever you have left over.

Being honest means not fudging the numbers to make yourself feel better.

A budget is not a test of your financial virtue, it's a way of posing questions - once you know you spend $30 a week buying lunches, you can ask whether that is a reasonable price for the convenience of not having to make your own, or whether you would get more pleasure spending the money elsewhere, or saving it to spend later.

And don't get over-ambitious - a too-rigorous budget has as much chance of success as diet plans made on a bleary-eyed New Year's Day.

Give your bank accounts a checkup


Does anything feel more like money down the drain than paying bank fees?

Resolve to stop wasting money by giving your bank accounts the once-over. The goal: to keep fees to the minimum, while maximising interest payments you receive.

Start by listing the accounts you have, work out which ones you really need, then get rid of the rest.

Use the right accounts for the right purposes. For example, don't keep a rainy day fund in your cheque account - put it into a savings account, where it can earn a few dollars in interest.

On the other hand, don't use a savings account for everyday banking if it means paying high withdrawal fees.

Save by making transactions electronically rather than physically - pay bills by direct debit, not by cheque, make deposits in ATM machines, not over the counter.

Reduce transaction fees by using cash for many smaller purchases, rather than using your card for each one, and being hit with a transaction fee every time.

You can further reduce transaction fees by paying by credit card wherever possible - just be sure you can pay off the card every month.

And try negotiating with your bank, to see if you can reduce your fees, particularly if you have a relatively high income, or a large debt.

For more information on bank charges, interest rates and an action plan for reducing fees, visit the Consumers' Institute website and click on "BankCheck."

Take control of your credit card


It may not be the most sensitive time to mention this, but as of November New Zealanders were paying interest on about $2 billion of credit card debt.

At an average interest rate of 19.2 per cent, that is a $380 million-a-year bill for the privilege of spending money we didn't have. And it's a fair bet those numbers swelled considerably over the festive season.

You could react by cutting your card into tiny pieces, but there are less drastic ways of taking control.

If you are finding it hard to shake off a long-term credit card debt, consider moving to one of the lower interest cards such as BankDirect's low-interest Visa card (10.95 per cent rather than the 19 per cent plus charged by some cards).

If you have a mortgage, think about getting your card debt added to the home loan - but avoid the temptation to start thrashing the plastic again.

And resolve not to use your card to get cash advances, for which you pay the full interest rate from the moment you get the money.

If you have the necessary discipline, take advantage of your card by using it for as many purchases as possible in the new year.

That way, you avoid transaction fees and keep your money in the bank earning interest for as long as possible.

Just be sure you can repay the card in full every month, or the interest charges will swamp the benefits.

If you're comparing cards, the Consumers Institute website is a handy place to check interest rates and other charges.

Give the mortgage the once-over


It may be the biggest financial commitment most of us make, but once you've signed up for a mortgage, the great temptation is to keep making the payments and leave it at that.

However, increased competition in the mortgage market and the many types of loans now on offer mean it's well worth reviewing your mortgage at regular intervals.

At the very least, make the mortgage first priority if you get a pay rise, inherit some money or otherwise have a little spare cash. In most cases, increasing the payments will be the best investment you can make, especially if your mortgage has a reasonable time to run.

If you need convincing, work out how much you can save in interest costs by paying a little more now.

If you have a fixed-rate mortgage with a repayment penalty, you may have to put any extra money aside in a separate bank account until the fixed period expires.

Even if you can't afford to pay any more, it's worth checking out the market every year or two. See how your existing lender compares, ask how much you could save by switching, and how soon you would recoup the cost of doing so.

Look beyond the banks and keep an eye out for lenders who offer to pay your legal fees, or waive their initial charges to tempt you to switch.

Consider whether it is worth changing the type of loan you have. If you have a high and/or irregular income, for example, it might be worth switching to a revolving credit loan.

Check your insurance


Save this one for a rainy day; why waste the sunshine contemplating the bad things life can throw at you?

But it's worth checking your policies every now and then to see if they still meet your needs.

If it has been a while since you took out contents insurance, tot up the value of your possessions to see if the policy still provides enough cover.

On the other hand, if your car is still insured for what it was worth a few years ago, you're probably wasting money, since it will have depreciated substantially.

Even if you think you're adequately covered, try shopping around for a better deal, possibly by offering to take out several policies with one insurer.

You may also be able to cut costs by offering to pay a higher excess - the amount of any loss you pay, before the insurance company kicks in.

Ask whether you have enough life insurance to clear any debts and provide enough for your dependants. If you don't have any dependants, ask whether you need life insurance at all.

Start a savings plan


Assuming your bdget uncovered some spare cash, how about saving it?

A savings plan need not be elaborate to start with - perhaps just a regular automatic payment into a bank account, finance company call account or cash management trust.

But be sure to keep it separate from your day-to-day money.

When you've got enough, you can look for a longer-term investment.

Do some research first - check some investment books from your local library or bookshop, or look at investment articles from past issues of Consumer magazine - and look for an investment that allows you to start small, is diversified, has an overseas component and won't cost too much in fees.

The numbers don't have to be huge - $25 a week adds up to $14,700 in 10 years or $33,000 in 20 years in today's dollars, assuming you earn 2.5 per cent after inflation.

But be sure it's money you can afford to lock away for the long term, and concentrate on repaying debts before you start investing.

If you have children, think about savings plans for them too, even if it just means putting some of their pocket money straight into the bank every week, and maybe promising to add some more when they reach their savings target.

* To contact Personal Finance Editor Mark Fryer, write to: Weekend Business, PO Box 32, Auckland. Ph (09) 373-6400 ext 8833; fax (09) 373-6423; e-mail: mark_fryer@herald.co.nz

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