(NOTE: the article is date-specific [written April 2009]; while the general principles are the same, some aspects of this story may change over time).
For some time now the newspapers have been full of news of the global recession. It’s not all doom and gloom, however. If you are one of the many New Zealanders who, through clever budgeting and wise use of your money, coupled with lower interest rates, have a surplus of income over expenditure each month then there are things you can do to improve your personal finance situation during these tough times.
So, here’s FORTIfi’s five top tips to use the recession to your advantage:
1] Interest payments are down so principal payments can go up! FORTIfi clients will know that the best way to save money on your mortgage is to pay more sooner. The temptation when interest rates drop and monthly repayments go down is to pay less per month on the mortgage and use the surplus money on other things. Take maximum advantage of falling interest rates by either;
• Keeping your monthly repayments at the same amount as before the interest rate cuts. That way you are paying off a higher percentage of principal than before and that will translate to a saving on interest paid that can be quite significant.
• If you do decide to pay less per month, keep the savings you are making and use it to make an even greater lump-sum repayment on your mortgage than you would have been able to otherwise make.
2] Pay off other debt. The lower interest rates make this a great time to consolidate other debts you may have. (Consolidate means to take your debts and combine them into one loan). Especially if you have credit card or hire purchase debt – consolidate these into one lower interest bank loan and pay it off as quickly as you possibly can.
3] Think of other ways to invest and make the most of any extra cash. At FORTIfi our Mortgage Consultants have been kept busy with clients who are taking advantage of the lower interest rates by choosing to purchase investment properties. Experienced property investors suggest that now is a great time to invest in property. There are other investment opportunities, however. It could be something as simple as putting more money into your KiwiSaver or superannuation account.
4] Put aside some savings so that you’ll have a buffer in case of redundancy or income loss. For many people the recession has brought a sense of nervousness about the security of their job. The main concern is, “how will I pay my bills?” That’s why there is no better time than now to save an amount each month as an Emergency Fund. That way, if the worst happens we can survive while we look for another job. The suggested amount for an Emergency Fund is three months living expenses.
5] Remember the old saying, “Cash is king.” Think of the impact buying with cash can make. Retailers are feeling the pinch too and welcome cash buyers even to the extent of giving cutting their margins for cash purchases. Next time you shop for a retail item, take cash and look around for a discount.
If the worst comes to the worst:
For those who have been made redundant or lost their job, here are a few hints and tips;
• If you received a redundancy payout think carefully about how you spend it. Pay off any debts that cannot be deferred and put the rest aside to cover expenses in the time you take to secure another job.
• Redundancy payments are taxed but there is a tax credit available. See, http://www.ird.govt.nz/yoursituation-ind/redundancy/redundancy-tax-credit/ for details.
• Make sure you draw up a budget and spending plan as early as possible. Don’t wait until things are tight financially before getting organised.
• There are allowances and help available from Work and Income. Check out the website; http://www.workandincome.govt.nz/individuals to see if you qualify.
• If you have a mortgage talk to your bank about what you should do. Banks are flexible in this regard often allowing borrowers to convert to an interest only mortgage or even granting a “mortgage holiday” for a period of time.
