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Welcome to the December 2009 issue of the Mr Home Budget Newsletter titled “Additional saving secrets revealed...how to keep even more money in your pocket”. This newsletter is brought to you by the same people who wrote the book How to cut your debt to zero in 5 simple steps, the keep it simple stupid home budget.
Well, the festive season is here now. I hope all is going well for you and your family.
Thanks for taking time out of your busy day to read this newsletter.
If you have any comments or suggestions, please email me on mrhomebudget@gmail.com.
Thanks
Adam Goulding
Aka Mr Home Budget
www.mrhomebudget.com.au
***TELSTRA CHANGES ITS MIND (Update)****
In last month’s issue we touched on Telstra bringing in a fee of $2.20 if you pay your bill at the post office. We even started a petition to stop this unfair fee at http://www.gopetition.com/petitions/stop-telstra-charging-me.html
We will never get a chance to give them the results of that petition. Last month Telstra changed their mind on the fee.
The company is even going to give refunds to people who have paid the fee! This was all because the original decision outraged customers.
The Mr Home Budget crew applauds Telstra for admitting that they made a mistake. And that’s exactly what it was – a mistake.
This move will hopefully get other companies to back down from doing this. Optus still charges a $2.20 fee to receive a paper bill and 55 cents to pay the bill at Australia Post. Vodafone charges their customers $2.00 to get a paper bill, plus $1.50 to pay the bill at the post office.
Fees to pay your bill. That’s highway robbery.
Bushfire Ratings vs Credit Card Interest
The Victorian bushfires earlier this year were an awful thing. They really shocked my family and me, along with the whole country. It would have been extremely hard for everybody that went through such a thing.
While the bushfires were an incredibly terrible thing to witness on television, I really thought that Australians did their best to help the victims by donating their time and money. There seemed to be a mateship that was going on right around the country.
One thing that has changed in South Australia since the fires has been the warning system used. They have updated it to make people more aware of the dangers of potential bushfires.
The fire system is now as follows:
- Low to moderate
- High
- Very High
- Severe
- Extreme
- Catastrophic
This new system leaves people in no doubt as to what the daily risks of a bushfire are in their area.
This got me thinking that maybe we could apply a similar system to interest rates on credit cards. There are credit cards with all sorts of interest rates. But a few percentage points between them (for example, 15% to 25%) should not be seen as a small difference in rates. This should be seen as a huge difference in rates.
Let’s say you take out a credit card with 15% interest per year and you charge $5000 for a new plasma TV. You pay the minimum each month over the course of a year. At the end of the year you would have paid $721 in interest.
If you made the same purchase with a 25% interest rate credit card, you would have paid $1188 in interest.
As you can see, there is a huge difference in the annual interest paid for each card.
Let’s redo the fire warning system and apply it to credit cards by rating them on what I consider to be low to catastrophic interest rates.
- Low to moderate - 0% to 5%
- High - 6% to 8%
- Very High - 9% to 11%
- Severe - 12% to 14%
- Extreme - 15% to 17%
- Catastrophic - 18% plus interest rate
You might be thinking, “Geez, you consider 18% catastrophic?” Absolutely - 18% plus is catastrophic. This is almost highway robbery.
However, the funny thing is that almost all the credit card offers I get (and you too) are around 18% and more.
In fact, if you go to Credit Card Finder
(http://www.creditcardfinder.com.au/), you can get independent rankings and advice on credit cards.
On the site’s home page they have comparisons of their top RECOMMENDED credit cards. There are 12 cards here that range from 9.99% to 19.99%. This site is meant to find you the best deal. However, they are still recommending cards with 19.99% interest! This strikes me a mad.
Let me explain why I believe anything above 18% is catastrophic. Let’s pretend that in January 1980 you invest $10,000 with a bank that promises you 18% interest on your money.
So you find this bank that is willing to give you 18% each year forever on your $10,000. How much money do you think you would have now, in December 2009?
You would have $1,215,004. Yes that’s $1,215,004!
Just for fun if you kept that investment for another 4 years, until 2013, you would have $2,355,624. All from an original investment of $10,000 in 1980. This is where interest works for you, rather than against you.
Can you see why credit cards are so profitable for banks? They make huge revenues on cards that could even be higher than 18%.
Why in the world would you want to pay out 18% plus on your money? It makes no sense. Maybe the goverment should make the banks put a warning on credit card applications. If the card is above 18%, they could put CATASTROPHIC INTEREST RATES in big red letters.
Getting rid of credit cards will help you more than any other thing to get you out of debt. Warren Buffet, the world’s second richest man puts it best: “Stupid people shouldn’t have credit and smart people shouldn’t need it.”
Be one of the smart people and don’t get sucked into this extremely high interest way of borrowing money.
Just for fun I found that the highest interest card I could find on the credit card finder website was 29.49%. Had we invested $10,000 in January 1980 at this interest rate, it would be worth $17,982,502 in December 2009. Yes, that’s nearly 18 million dollars!
Plus if we wait just four more years, until the end of 2013, it would be worth $50,558,597. Not bad for a $10,000 investment.
Additional Saving Tips 1
Ok, here is something to get into the habit of. Back in my bad days of spending I would always purchase something for myself when I paid for fuel. It might have been a drink, a bag of chips, a packet of lifesavers or any other small impulse buy. Just something small - around $1 to $3 dollars.
When I started cutting back and saving my money I came up with a trick. Well it was more like a rule. If I wanted one of these small things I was not allowed to get it at the service station. I would only be allowed to get it from a secondary place, such as a deli or milk bar.
What this did was force me to make two stops instead of one, making getting this small snack more inconvenient for me.
And guess what? By making this small rule change all of a sudden I started not wanting a snack. Or I waited to get to where I was going to eat/drink something. It’s much cheaper to wait and get a drink from your fridge than pay $2.00 for a can of Coke on the way home from work. Or to go to work and get a free drink than getting one when you fuel up.
Sure, sometimes we all need snacks and I would make that second stop from time to time. However, I cut back from getting snacks 100% of the time when I fuelled up to around 10% that I had to find that second location to purchase the snack or drink from.
Start implementing this rule when you are fuelling up and you will see an instant rise in your bank balance.
This rule could also be implemented to help cut back on smoking!
Additional Saving Tips 2
Same product but a different price.
It still amazes me how many people don’t get quotes on products they are purchasing. For example, Renee and I just got some new curtains installed in our house. We called three companies to do a quote and then went with the cheapest.
The prices between companies went from $1800 to $4000. These were, from what I could tell, the same type of curtains.
When the installer came to the house, I got to talking to him about the other companies. He told me that he had been in the industry for 20 years. He was not actually an employee of the company that we brought the curtains from but a subcontractor.
He also subcontracted for the other two companies we received quotes from. He said that they all purchase the parts and materials from the same factories. In fact, he said that he had only just installed the same exact curtains as ours earlier that day but charged the other people nearly double what we paid.
This is a huge difference in price. You need to shop around to get the right price on such a big item. I would be kicking myself if I paid $4000 or $2200 for the same item/product.
Imagine if you could save the $1800 and put it towards your next project! Please, please, please shop around. It doesn’t pay to go with the first people you see.
Additional Saving Tips 3
Refinance your mortgage? Have you ever checked into refinancing your mortgage? The internet is full of sites that can show you the best mortgage interest rates from different companies.
Aussie Home Loans offer a One-Minute Mortgage Explorer to see if there is a better deal out there for you.
Please note that refinanceing your mortgage should not be taken lightly. You should do your homework and see if you will save money.
Remember, just because you find a better interest rate you will still need to pay cancellation fees to your current bank. These fees may cancel out any benefit you get from getting a lower interest rate.
Also don’t get into the trap of paying less per month because you get a lower interest rate. You must continue to pay the same amount to save on interest over the life of the loan.
Last but not least, call your bank before you change loans. You never know if they will offer you the same rate to keep you as their customer.
Additional Saving Tips 4
Get practical gifts for birthdays and Christmas. Each year Renee and I have a set spending amount for our birthday and Christmas presents. However, we also get each other what we call “one practical gift”.
Birthdays and Christmas can be great times to get all those things you want during the year. You know, fun things like iPods, CDs, DVDs and fancy clothes. But we do is ask each other to substitute one of the gifts for something that the house needs. Something that we would buy during the year anyway because we need it.
For example, last year Renee got me a toaster because our old one was on the way out. And I got her an iron for the same reason.
Sure, a toaster and an iron are not the best gifts to get, but it was still fun to wrap them up and give them to each other. Plus, due to the fact we know that we are spending less on luxury items over Christmas, and more on practical items, we feel good about saving money.
Last year I even asked my parents to get me a new home phone. Sure it’s not the most fun gift, but it’s one less thing I had to worry about paying for.
The question you need to ask yourself is: Can you just substitute a small percentage of luxury Christmas gifts for practical ones?
Actual Comments from a Former Credit Card Company CEO
Normally I have an inspirational personal story in the newsletter about someone who is in debt and is turning things around. This month, however, I found something that I thought was very important. Please read on!!
Here are some comments from Shailesh Mehta in a recent interview on an American news show called Dateline. Why should you care what he says? You should care because he used to be the CEO of Providian Credit Cards. Providian is in the top five credit card lenders in the USA and has 12,000 employees.
I have taken out some of the best comments from his interview. He basically admits that credit cards are extraordinarily profitable but also extremely hard for the average consumer to understand.
Plus he admits that they don’t want you to pay back you credit card on time.
If you would like to look at the full interview follow this link: http://www.pbs.org/wgbh/pages/frontline/creditcards/interviews/mehta.html
Reporter: Right. And by allowing them to make 2 percent minimum payments, your hope was to keep them paying basically in perpetuity, right? You never wanted them to really pay it off.
Shailesh Mehta: Yeah. If they make the minimum payment, yes, then that loan will take almost 20 years to pay back. Absolutely.
Reporter: And you make more money then.
Shailesh Mehta: We make more money.
And, of course, this was something that was criticized later on by some consumer advocates - and understandably - that, "Why would you put this monthly payment so low? You should increase the monthly payment and have the loan amortized faster." And that could have been done. The question is that we say it's a minimum payment, not a recommended payment.
Reporter: Well, the criticism is that it's exploiting the customer, the fact that they don't really understand what's going to happen (with there credit card payments).
Shailesh Mehta: In a way, I will say yes. In a way, the pricing was designed that it will require a degree of some sort to understand how many different ways I'm paying and what I'm paying. So industry profit did go up.
Reporter: Now, when you get solicitations (credit card offers) today in the mail, what do they tell you?
Shailesh Mehta:..I haven't applied for credit cards for I don't know how many years. I don't need one. But I do look at the solicitations.
Reporter: You get them in your mailbox?
Shailesh Mehta: I get them in my mailbox, and I get from the mailbox [from] companies I already have a credit card with. (Laughs.) So it's surprising how their system works.
But I always saw the deterioration in the way the stealth pricing, the penalty pricing kept rising. And I said, "My God, who is going to understand all this thing?" I mean, borrow on a credit card, nobody knows what the real cost is. Higher and higher late fees and over-limit fees.
Reporter: By the way, how profitable was Providian?
Shailesh Mehta: Providian was very profitable until the day I left. In the quarter that I left, despite all the hoopla, I still made over $180 million quarterly profit.
Reporter: Almost a billion dollars a year.
Shailesh Mehta: We were making a billion dollars a year.
Reporter: In profit.
Shailesh Mehta: In profit, before tax.
Reporter: And what kind of interest were you charging?
Shailesh Mehta: We were charging 21.9 percent interest.
Also later in the interview he goes on to give a couple of other interesting opinions about credit cards:
- “Your average consumer is not going to be able to translate to what the real pricing is, OK?”
- “Lending money to people is never a difficult, OK? People will take money if you're willing to give [it to] them.”
- “We're not going to target the people who pay their monthly bills in full.”
Great Advice
Here is a saving tip from James Towers.
We were unaware that there are not just outlet stores for clothing, but there are also supermarket outlet stores. They sell products that are discontinued by the brands in the supermarkets.
For example, we found that at our local store in South Australia (called Right Price Supermarket) we could get cans of energy drinks for $0.50 each. This is a big diffence to paying for Red Bull or Mother at $3.00 a can.
Also we found bags of 5kg pasta for $2. The great thing is we can use it when we need it and it doesn’t go off.
Plus they have things for Christmas parties, like lollies and bon bons.
They even have soaps, shampoo and conditioner, toothbrushes and toothpaste. All way below what they sell them for in Coles or Woolworths. A lot of the products are name brand products such as Colgate.
Products are continually turning over, so we go back each month just to see what’s new. Plus they even offer a money back guarantee if the product is not up to your standards. You can’t lose. It’s a great way to make a dent in your supermarket bill.
Congratulations to James Towers. He has won a 12-month subscription to “Additional saving secrets revealed...how to keep even more money in your pocket” valued at $39.95.
Well done, and thanks for a great tip.
Thanks for reading and taking time from your busy day. Hope that you have a safe and great Christmas and New Year. Please don’t drink and drive over the holidays.
Just wanted to say thanks for all your emails and support over the first year of our book and newsletter. We appreciate our readers’ feedback. We have some great things planned next year. Renee and I are really looking forward to 2010.
Thanks
Adam Goulding (Also known as Mr Home Budget)
www.mrhomebudget.com.au
NOVEMBER 2010 “Choose a job that you love and you will never have to work a day in your life” - Confucius
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