“Additional saving secrets revealed...how to keep even more money in your pocket”.
Welcome to 2010 and the seventh issue of the Mr Home Budget Newsletter titled “Additional saving secrets revealed... how to keep even more money in your pocket”. Of course 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 can you believe we are into the ’10s? How quickly time flies. I hope you and your family had a great Christmas.
Remember to go visit my blog, mr home budget on money. I update it twice to three times a month. It has great articles on there about saving money and current news about your saving.
http://mrhomebudget.blogspot.com/2010/01/australians-debt-is-about-to-bubble.html
Some of the articles we have done already include:
These articles plus new ones every month go to:
http://mrhomebudget.blogspot.com/2010/01/australians-debt-is-about-to-bubble.html
Plus if you are on Facebook why not join up with the mr home budget page.
http://www.facebook.com/pages/mr-home-budget/71088964963
Thanks for reading and supporting Mr Home Budget.
Adam Goulding (Also known as Mr Home Budget)
www.mrhomebudget.com.au
Scared to death of another interest rate rise?
In May of 2008 a friend called me up wanting advice on a home he and his partner wanted to purchase. The home he was looking at was $465,000. However he would only owe $435,000 after he had paid his deposit and got the government’s first home buyers’ grant. He was offered a variable home loan with one of the big banks at the then low interest rate of 5.33%.
So I started by asking him some questions as follows: His answers are in red.
What do you and you partner earn each week after tax? He said that they both took home just over $600.00 a week after tax. So total they earned was $1200 a week.
Do you expect to have children any time soon? No, none planned.
Do you have any other debt? $8000 on a credit card at 18% per cent interest.
How much money will you have in the bank after you purchase the house? Around $1500.
Do you have any other assets that can be sold quickly (e.g. shares)? Around $1000.
After some quick calculations I could see that his weekly payment on the home loan at 5.33% would be $605. This is a total of 50.41% of his take home wage. Meaning 0.50 cents in the dollar would go straight out the door in home loan payments.
If you refer back to my book, you will see in chapter 8 (How to pay so much money off your house that is sends shivers down your bank manager’s spine) the rule with home loans is to never go above 33% of your after tax pay.
So right away my advice was that they couldn’t afford this house. I knew this for four main reasons:
- It was above 33% of their nett after tax pay (well above)
- If you included their monthly credit card payment, their home loan and credit card payments would become 53.66% of their after tax pay.
- Interest rates were the lowest they have been in years. There is always a big possibility that they could jump up again.
- They had no assets of any great value. If one of them lost their job they would be in trouble very quickly.
To my calculations, he could afford a home $274,000 before deposit and first home buyers’ grant and $244,000 nett price after. Plus they could only afford this after they paid off their credit card in full.
Well you probably can guess what happened. He and his partner fell head over heels for the house they wanted and because the bank would lend them the money, they purchased it.
Now let’s fast forward to Jan 2010, only nine short months since they purchased the house. He has since called me in a panic about money. His problems are as follows.
Interest rates are now on the rise and have hit 6.08%. He and his partner are now paying $651 a week in payments... up $46 a week or $184 a month. This means their total weekly percentage of weekly wage to the home loan and credit card is 57.5% up from 53.66%.
When they moved in they took out a $10,000 personal loan to redo the garden. The bank that sold them the home loan suggested they could get it. This loan is over 3 years at 8.5%. This makes their weekly payments an extra $72.67. This makes their total nett percentage of paying back their home loan, credit card and personal loan up from 57.5% to 63.5%. So what that means is for every dollar they earn after tax (take home) $0.63 is going back out to pay debt.
This is before they pay for shopping, electricity, gas, car costs; insurance (the list is endless).
Can you see how their finances have taken a really hard hit?
To make matters more complicated, in Dec 2009 they found out that they are expecting their first child. This brings up new questions and problems. Will one of the parents stop working or go to part time? How will this impact on their spending? How will they pay for the expensive things to go in the nursery before the baby is born (cot, pram and change table)?
If one parent has to give up work, they will have to pay $762 a week in debt payments on a nett salary of $600. This is 127% of their nett after tax wages just to pay for the debt alone. This is impossible!!!
Let’s put the baby aside for a second. Let’s say that over 2010; interest rates on their home loan went up by a further 1% to 7.08% p.a. Now the weekly payments on their $435,000 loan would be $714, plus the $39 for the credit card and the $72 for the personal loan. They would now have to pay $825 each week. Or to put it another way, 68.75% of their nett after tax pay would go to debt payments.
If it went up a further 1% to 8.08% they would owe $779 on their home loan or a total of $890 a week on all their debts. This is a total of 74.16% of their take home after tax pay.
Can you see why my advice is not to go over 33% of your take home pay for your home loan? My friend is scared to death. He has cut back his expenses everywhere he can. However he is just scaping by. And if interest rates do go up again, he says he will have to sell his house.
My friend had very real problems before they found out they were expecting. Now his problems are magnified.
Please, please, please anyone reading this do your sums if buying a house. Also if you live in a house, do your sums to see if it is too expensive for you. Just 20 to 30 minutes of doing your homework could save you headaches in the future.
Do not fall in love with a house or a suburb. You might find that you have to sell only a few years later, due to a lack of money.
Scams: they are real
Have you ever read something too good to be true? More often than not, it is.
We have scams presented to us every single week:
*People emailing us telling us that we have won the lottery. Then they ask for your name, address, phone number, birthday and bank account details. So how do they know you have won the lottery, if they don’t know your name?
*People writing us letters telling us they are princes from other countries that have been jailed and they need our money to get them out. Once out they will reward us with huge riches.
*Newspaper adverts offering extremely high percentages of interest on invested funds.
As I looked through Adelaide’s biggest paper the other day I saw a classified advert offering 37% on any amount between $25, 000 and $2 million. It had an 1800 phone number to call to leave your details for more information.
Right away this classified advert has a huge number of red flags written all over it.
Let’s start with the fact that it is a classified advert. Classified adverts are the cheapest way to advertise in a newspaper. In fact it will only cost you around $50 to $100 for one of these small adverts compared to 1000s of dollars for even a medium sized advert at the front of the paper. If this company is so good at making huge percentages on your money why don’t they advertise with a full size advert at the front of the paper?
The second point is why when you call the 1800 number is there only an answering machine for you to leave your details? Surely any company that can make 37% profit on your money would have the money to hire someone to answer the phone call?
And the biggest tell all is the 37% that is offered. 37% is not a good return on your money it is a massive return on your money. In fact the world’s 2nd richest man (Warren Buffet) has only managed to average a 20% return on his money since the 1960s. This company/advert implies that it can give you a 37% return. A 17% better return than the world’s 2nd richest man has achieved.
Plus if you’re getting 37% on your money, they would need to be making more than 37% on their investment so they could make some money of their own. This makes their claim even more ridiculous as they would need to be making 40% plus to even consider giving you 37% on your money.
The bottom line is, this is not a real company at all. Not real in the sense that the offer could possibly be true. This is a scammer somewhere with an answering machine attached to an 1800
number. However people still fall for these scams. And you know how I know people still fall for this, because these types of adverts have been running in newspapers since before I was born.
They would not run these adverts week in and week out if they had no takers. It makes no sense to keep advertising something that no one wants.
If you took up the offer to invest $25,000 in their moneymaking venture at 37%, then you left your money with these people over 10 years and let the interest compound, you would have $797,748. This is a ridiculous return on $25,000. But if you took up the full 2 million dollars you would have $46,583,880.
Boy, if only this were true... but it is not. Use your calculator and your mind before taking up any business offer.
Westpac tries to explain rate rise. Extra bit to the newsletter.
If you were an unlucky Westpac home loan customer, you would have had your home loan rates increased by 45 basis points. This is while the RBA only raised the cash interest rate by 25 basis points.
Westpac tried to explain this by sending their customers an email that shows that banking is similar to banana smoothies.
In case you missed it, here is the video in full. I ask you to watch it in full.
http://www.youtube.com/user/mrhomebudget#p/a/f/2/dbRo98A1zZQ
Here is a video by Choice magazine that is a send up of this video that explains it better.
http://www.youtube.com/user/mrhomebudget#p/a/f/0/BMPiU50dXFM
Now I’m not an expert on international banking. However there are a few things that I do know. In the 12months ending 30th Sept 2009, Westpac earned $3.45 billion dollars. This was slightly down from the $3.86 billion dollars they earned the year before.
Banks have been making record profits year after year for what seems like forever. Each year we have heard about record bank profits from the big four banks. They have achieved this by raising their fees and charges for everything from credit cards, saving accounts and home loans.
However when things get tough for the banks they want us to help chip in and save them. Let’s be honest you’re not saving a company that has $3.45 billion dollars in profit. It’s not like they are on the verge of bankruptcy. You’re saving them from a smaller profit next year. They have to make their shareholders happy and return their profits above where they were only a year ago.
If fact one of my favourite lines in the real Westpac bank advert was: “There is a bottom line, the money that we buy has become more expensive. That means we have to charge more for it and that can mean rates will go up. When we make rate increases we do so because there really is no other option. By not taking these actions, we risk the future of our business and the future of our business means repercussions for all Australians”.
Give me a break. Risk the future of their business! No other option. There is another option. Charge what the RBA and the government have been asking them to charge and make a smaller profit. Believe me they will not go bankrupt. This will not affect the future of their business.
All businesses have a hard time from time to time. Their costs in a product or service can go up quite a lot. The difference with Westpac is that it is extremely hard for their customers to change home loan products to a different company. It’s not like changing your favourite fruit from bananas to apples. This means that the majority of their customers are stuck! And they just have to accept the increase whether they like it or not.
While you’re thinking about how hard done by Westpac is. Take a look at what their CEO (Ted Evans) recently said in a Dec 16th speech, well after the rate hike.
"The Westpac Group starts the new year well-positioned and with strong business momentum," he said.
"As a result, we look forward to the period ahead and the continued delivery of solid returns for shareholders."
So on one hand they are crying poor to their customers. However on the other hand they are talking up their business to their shareholders?
Do those statements above look like they are from a company that also said, “By not taking these actions we risk the future of our business”?
Inspirational Story (Anonymous Person/ Marge Simpson)
This week I have interviewed someone who has written an email to me saying that they are having great success with the book. I have asked them to do an Inspirational Story interview for the newsletter. They were happy to do this; however they wish to be kept anonymous. So for this interview we shall call her Marge Simpson.
Hello Marge, let’s start slowly. When did you get the book and how much debt were you in?
I got the book around 6 six months ago. And I was in about $32,000 of personal debt and owed $275,000 on my home loan. I was really struggling to pay each month as our family is now on only one wage.
What stage are you up to now in the book?
I’m up to stage 3. But I have to admit, I only stayed on stage one for 1 month and not 3. However, I felt like I was ready to move up as both my husband and I were very committed.
So tell me about the months before you got the book and what your money situation was like?
Well I thought we were doing well financially. We paid all our bills on time and kept the electricity on. However then I was let go from my job that I had been at for 11 years. Then two months later it hit me. We can’t just live on my husband’s wage. The bills kept coming and we didn’t have enough money to cover it all. I was really panicking. Then we came across your book and started speed reading through it.
What has changed since reading the book?
We have made huge strides in our life. We have gotten rid of pay TV. We have changed home phone, mobile phone and internet companies to save money. We have started using fuel vouchers. We shop around on price now. Plus we have even changed our electricity company for a saving. But the best bit is we now know where every dollar is going and we are paying off our debts and getting rid of our credit cards. Plus our kids have even helped by taking a cut in their weekly pocket money (every dollar counts).
Are you able to live on what you earn currently?
Just, it’s still tight. However once I get a full time job again (hopefully before March) we will be extremely comfortable. Also we will be able to make additional payments off our debt, making that go down quicker.
If you had some advice for people reading this what would that be?
I thought I had an extremely safe job. There was no reason for me to worry about my position. However out of the blue I was let go. Look at your debt and think what would happen if one person in your partnership lost their wage. How could you cope? I’m back working part time, but only 10 hours a week. So until I find a full time job it’s still going to be hard.
Can you give the readers some saving ideas?
Look very hard at all your bills: phone, internet, mobile phone, electricity and gas. I never really thought about them before. However, it seems the companies that I was with would charge up to 20% more than other companies that I could find. Shop around. We are still waiting on getting cheaper insurance because our insurance is on a contract. But I look forward to that.
Anything final you would like to say?
Yes, if you are in a partnership you need someone who is committed to doing this. There is no way that it will work if there is only one person doing it. I was lucky that my husband wanted to do this from the start. If only one person is committed you won’t be able to achieve anything.
Thanks (Anonymous/Marge Simpson).
Funny Money
Thanks again for talking the time to read this newsletter. Thanks Adam Goulding (Also known as Mr Home Budget)
www.mrhomebudget.com.au
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