How to Live Now the Recession is Over.

Is the recession over?? It's hard to tell but economists are saying that things are picking up. Businesses are talking about increased sales and individuals are breathing a sigh of relief hearing that the worst may be behind us. One recurring comment from many of our clients is that they want to be prepared just in case there is a next time. The question is then, what can individuals like you and I do to "recession-proof" ourselves?

The answer is quick and simple.

They are the same three rules that always apply to personal finances;

1] Spend less than you earn.
Obvious maybe but the average New Zealander is not doing it. You'll have read in this newsletter before; In New Zealand today the average person spends $1.17 for every $1 they earn - and that does NOT include mortgages.

Where does that extra 17 cents come from? It is debt; usually in the form of credit card or personal loan debt. And that 17 cents is very dangerous. Let's say a person earns $45,000 after tax a year and overspends by 17%. That means at the end of the year they will be $7,650 in debt. Assuming this is credit card debt, they will be paying up to 20% in interest. That means the following year, if they are to clear this debt, they will have to stop that 17% overspending AND put 21% (approximately) of their income into debt repayments.

The answer is obvious, don't overspend in the first place. The challenge is that many people don't realise they are going backwards and it comes as some surprise to some people that they are spending more than they are earning?"

Here's a test - can you pay off your credit card bill right now? Is the amount owing lower than last month? If the answer to both questions is 'no', then maybe you are going backwards with your finances.

2] Pay off debt.
This also is a recurring theme in these newsletters. In the past there was a notion that it was fine to have money in the bank and just drip feed our mortgage or debt repayments. When we do that we are losing money!

The interest we receive from bank savings will almost always be less than the interest we are paying on debt. And we pay tax on interest earned from our savings.

The answer is simple, pay off debt as quickly as possible. One simple rule is, wherever possible pay off more than the minimum repayment. This is especially true of credit card debt.

3] Save for the future.
This seems to contradict the challenge to pay off debt so we need to get these two points in balance. As I've said, pay off debt as quickly as possible. Once debt is paid off develop a plan - work out how you're going to save money for the future.

It also pays, while you are repaying debt, to have an amount of cash on hand so that if something goes wrong (car breakdown, washing machine breakdown or the like) you can get it repaired or replaced without sinking further into debt.

Many FORTIfi Clients have commented that, in the tough economic times we've just endured, they were saved from going into debt because the way their loans were structured meant that they were able to pay for daily expenses rather than using their credit card.

That's it!! Follow these simple rules and you will discover a degree of financial stability now and will find a recession - if we are forced to go through these past few months again - easier to get through next time.