Originally this was intended to be one blog, but after my first draft realised it should probably be broken down into multiple parts, and to clarify what I wanted to achieve by writing this blog.
The main goal of this blog is to assist in relieving financial stress in the community. This is the motto of the budgeting company I work for, and am very proud to be working towards this goal. To do this, I wanted to break it down into two different blogs
1. Analysing your financial situation and determining whether you have a problem.
2. The credit card trap, and what you can do to fix your situation.
In most cases it is obvious when you have financial difficulties; you can't pay your bills on time. Sometimes though, especially when there are credit cards involved, you could be spending more than you earn and are heading into a financial trap that is harder to get out of, the longer you are in it.
I have access to software that helps me analyse quickly and accurately, but it isn't difficult to get a handle on your own situation. You can do it reasonably quickly with Excel or any spreadsheet application and look at your financial situation on a monthly basis. The first thing you need to do is establish your income (if you share your finances with your partner, you can do a budget together). The next thing you need to do is figure out what you need to spend on a regular basis. Some bills are not monthly and may be quarterly or otherwise; schedule these in the month that they are due. Any amounts that are overdue should go in the current month.
Things to consider are;
Loans/Credit Cards – Any interest bearing debts that you have, figure out how much you need to pay each month. If you pay more than the minimum, it's best to start with just the minimum. Some examples of a loan might be - mortgages, credit card, car loans, pay day loans, and don't forget similar things like lay-bys.
Basic food items – Generally supermarket shopping, and cigarettes if you smoke (after you add that up yearly, you might think twice about the habit!)
Housing Expenses – List any of your ongoing utility or household bills; gas, electricity, rent if you are renting, appliance rentals, phone bills, council rates, strata fees etc.
Insurance – Add any insurance that you have. Health Insurance, Life Insurance, Building/Contents Insurance, Motor Insurance etc.
Leisure – As well as the 'essentials' people tend to spend money on themselves, whether that be going out for dinner or drinks with friends, gym memberships or regular fees to play sport, or other recreational purchases (like monthly games).
Medical Expenses – Some people have prescriptions, and others may have ongoing doctors visits, or other specialist visits. Make sure you budget for any of these that will be upcoming in the future.
Personal Expenses – Aside from recreational expenses, there are also personal expenses like haircuts, or how much you might spend on clothing on a regular basis.
Vehicle/Transport Expenses – Most people have vehicles, and related expenses. Petrol is obvious, but make sure you also account for registrations, and car repairs if this needs to be done on a regular basis. If you don't have a car, then think about how much you normally spend on public transport or taxis etc.
Other Expenses – Now it is time to include anything else. It's hard to have an all-encompassing list, but think about anything else you pay for on a regular basis. Some examples might be - School Fees, Donations, Pet Expenses, Day Care, Christmas, Birthdays and Child Support are some other regular items that people need to budget for.
Important : If any of the expenses above are usually paid for on a credit card, it needs to be budgeted for as a separate expense, as well as the minimum payment on your credit card.
The 4 budget types
Once you have plugged all those figures into your spreadsheet, you will have one of four basic patterns to your budget.
1. Heading in a positive direction
2. Late bills, but heading in a positive direction
3. Heading in a negative direction
4. Late bills, heading in a negative direction
1. You don't have any late bills, and your expenses are less than your income. You don't really have anything to worry about. You could always look into reducing your expenses to increase your savings, but it isn't necessary.
2. If you have late bills, but heading in a positive direction, you probably don't have to worry too much (depending on the circumstances). Your ongoing expenses are less than your income, and any surplus you have can go towards paying back your arrears. Reducing some expenses and making arrangements with your creditors to pay the arrears over a period of time usually solves this problem.
3. You can be heading in a negative direction even if you don't have bills that are overdue at the moment. This means you are spending more than you are earning. Many people in this position think they are in position number 1, because they are using credit cards to make their purchases.
4. This is like number 3, but you have reached a point where those ongoing expenses have caught up with you. Usually this is where people have been using credit cards to spend more than they earn and have reached the maximum limit on all the credit cards that they have, they can not get any more credit, and can not afford the ongoing payments as well as their lifestyIe.
On some occasions, position number one can instantly change into position number three due to some unfortunate situation; the loss of a job or reduced income, a housemate or boarder moving out leading to reduced income, or medical emergency that increases your ongoing expenses. These things can't necessarily be avoided. What can be avoided is building up 'bad' debt before that happens, even if you can afford it prior to that event.
It is unfortunate when people on high salaries also have high credit card debt (which they could afford on their high salary), then lose their job and have to take a more drastic measure like sell their house because they can no longer afford to make the minimum payments on their credit cards. What I consider 'bad debt' is anything you are borrowing to buy something that doesn't increase in value. Credit card debt is bad debt. Pay day loans are horrendous; usually you have to pay them back in a few weeks, and if you work out the annual interest you would be paying, it is usually in the 100's of percent. Loans obtained for cars are essentially bad debt too; cars go down in value, not up. This doesn't mean you shouldn't get a car loan; the asset itself fulfils an almost essential need for many of us. But if you can, you should save up for a car, or if you get a loan for one, pay it off as soon as you can. Appliance/furniture rentals also cost more in the long run. If you don't need it immediately (like a bigger TV), then save for it.
If you avoid these things, your potential for moving from category 1 into a 3 or 4 is reduced, or the impact less severe, if something does change in your life.
In the next blog I will explain further the credit card trap, and also explain ways you can correct any problems you have, particularly if you fall into the category 3 or 4 above.
If anyone has any thoughts about anything else they might like me to discuss, let me know.