How to save money

Credit cards are one of the most variable methods of finance, with an interest rates from 0% to over 30%, with differing fees and too many special terms and conditions to mention. Unlike a personal loan, there is no specified time to repay the money, so what is paid off can easily be spent again.

How much can a credit card cost a person?

What is interesting about credit cards is that the lenders often give a person a higher credit card limit than they would give in a personal loan and it is also possible that a person, that is considered to be risky for a personal loan, to be given a credit card. So, in fact lenders gamble their money on that person not being able to pay off the credit limit quickly and the longer it takes to pay off the credit limit the more money they make.

Even by paying the minimum payments that the bank requires every month, that is still a very small payment to reduce the amount that has been borrowed.

Loans are a simple form of finance with a fixed term and the bank decides how long and by that how much a person will have to pay each week, fortnight or month. So, paying the loan off is compulsory, unless the loan has been defaulted or redrawn, and it will be paid off within the time specified by the bank.

How much does a loan cost?

The main cost of a loan is the interest charged. And interest rates can go anywhere from 8% to 16% depending on how risky the bank considers the loan to a specific person. So, if the person is on a low income with no assets to give as security, the bank will determine a higher interest rate.

On top of interests a person is also likely to be charged set-up and on-going fees and these fees can add a significant amount to the cost of the loan. A comparison rate shows the total cost of the loan, including fees and charges, as an interest rate only. So, this can make it easier to compare the total cost of a loan between different loan products and lenders.

How to minimize the cost of the loan?

The most important thing a person has to know about loans is that the interest charged is compound interest, which is an interest calculated multiple times during the life of the loan (usually every day).

Compound interest is calculated when the outstanding balance of the loan is multiplied by the interest rate. So, the lower the outstanding balance, the lower the amount of interest paid. According to this, a person can reduce the outstanding balance of the loan by paying more at the start of the loan. On the other hand, if a person makes lower payments at the start and higher payments at the end of a loan the interest paying will be higher.

The amount of borrowed money is called dept and it actually is the money that a person has spent but does not possess. So, money borrowing has it’s own advantages and disadvantages.

By borrowing money a person can get things right now instead of waiting to have saved the needed amount. So by debt a person can get ahead, such as to buy a car which is needed to get a new job.

The disadvantage is that debt costs money.  That is because more money than borrowed have to be paid back because by borrowing money a person pays back not only the principles but the interests as well.

In the next sections there will be a look at the most common kinds of debt, including the traps that need to be avoid, how to make the best use of borrowing methods that are available and how best to minimize with the existing dept.

Once the budget is adjusted, so the balance is positive, a person can continue by saving some extra money. And the easiest way to save money is by setting financial goals.

What is a financial goal?

The financial goal increases the motivation for saving money. So, basically a financial goal is something that a person likes to possess. According to this, a financial goal can be something that could make life easier such as a microwave, or a computer, or it can be a reward like a night out, or a holiday.

Once the financial goals are settled, saving becomes very easy. By every dollar saved the person is closer to achieving the goals.

Setting financial goals

So, the first thing at setting financial goals is to draw up a list of priorities and the ways of achieving the same. It is very important that the goals are achievable and realistic.

The best way to start setting goals is with something small like a bike or a microwave and than build up to bigger and more important financial goals. That way the progress tracking would be easier, so bigger goals will be easier to achieve. And by that the person’s confidence in the saving abilities can also be increased.

Achieving financial goals

The first thing that has to be done at achieving goals is to make a plan. According to the budget, a person can be aware of the amount of money that can be saved. So it is important that a commitment to save money every week or every fortnight is made.

Setbacks can occur, caused by unexpected events, and that is all right as long as the sight of the financial goals is not lost. So, basically the tip in achieving financial goals is putting money aside as often as possible.

How much is needed to set aside each week to achieve financial goals?

Finding out how much to set aside each week, fortnight or month is by dividing the amount of money that needs to be saved with the number of weeks, fortnights or months that the saving process is planned to take. So the result is the amount that needs to be set aside each week, fortnight or month.

The information about how long is the saving process going to last, if there are no setbacks, can be calculated by dividing the amount that is needed to be saved with the amount that can be afforded to be saved. And the result is the amount of weeks, fortnights or months that will take to save that amount.

And if a person is interested in knowing the amount of money that can be saved, by putting aside a certain amount over a certain period of time, that can be calculated by multiplying the amount of money with the number of weeks, fortnights or months.

We previously wrote about cutting down your expenses to save more money.

Of course, the alternative way is to simply increase your income. If you are really serious about being wealthy, you should focus on both increasing your income and decreasing your expenses.

We recently ran a series of financial literacy workshops for young mothers. The most common ways for these young single mothers to increase their income include:

• Picking up another shift or working overtime.
• Considering if there are other higher paying jobs available
• Considering the possibility of a second job
• Renting out the spare room or granny flat
• Teaching or tutoring others
• Baby sitting other children
• Starting a business

If you have any more ideas, why not share them?

Everyone needs to have a bit of fun every now and then but non-essential expenses need to be prioritised. Below are some helpful hints on how to minimise these expenses.

• Fun doesn’t have to be expensive –your local community resources such as newspapers, youth centres and libraries have information on many free or low cost activities such as exhibitions.

• Make your own fun – go to the park, play sport with friends or play card games. Don’t forget to bring drink and snack or lunch packs for you and your family.

• Rent movies instead of seeing them at the cinema.

• When inviting friends around for dinner and ask them to bring a food or drink item to share.

• If you smoke, try to cut down or quit smoking. If you smoke a pack a day at $12 a pack that’s $84 a week and $4380 a year. That could be a second-hand car!

• Alcohol and gambling can consume a large amount of income. If they are, try and cut down, if you have a problem please refer to section on places that can help

• Make your own cards and gifts

Reducing your expenses is one of the best ways to increase your savings. By spending less each week you will gradually build up more money to inject into interest earning investments. We list some of the ways to reduce expenses below

Basic Living Expenses

These are generally the most difficult expenses to reduce, but reductions may be necessary if your basic living costs are higher than your income.
Food & Shopping

• Instead of buying food and a drink, pack your own lunch for work or school. An average lunch costs $10 and a drink can cost about $3. If you buy both two days a week that’s $52 a fortnight and $1352 a year.
• Be organised about your shopping – shop at the same time every week (or fortnight), know how many meals you need to shop for and make a list of what you need before you go to avoid impulse buys.
• Shop at a supermarket that is close to you so to save on petrol costs.
• Look at catalogues to find the best buys. Some food items are cheaper in bulk and can be frozen such as meat and bread. Many perishable items are reduced just before closing time.
• Avoid buying junk food and pre-packaged dinners. Not only are they bad for your waistline but fresh meals and snacks are cheaper.
• The size of packaging is often misleading – compare weights (written on the packaging) when comparing prices.
  Use cloth nappies instead of buying disposable nappies. Make your own baby food instead of buying it.

Clothing
Use clothing pools for school uniforms and go op shopping for unique bargains.

Income

First you need to work out and write down your net income. You can find your net income on your payslips or Centrelink statements. You could also check your bank statements or tax return. Include any new income that you may expect.

You will need to distinguish between:

• Gross Income - your income before tax and other deductions are taken out
• Net income - your gross income minus tax and other deductions such as superannuation. Net Income is what you actually receive.

Tip: Your income is all regular money you receive including child support and the family tax benefit.

Expenses

Next you need to work out and write down all of your expenses. Most important are basic living expenses such as rent, utilities, clothing, food and transport. You also need to include other necessities such as insurance and medical expenses. Leave a gap or use headings so you can easily see which are your living or essential expenses and then work out and write down luxury or easily reduced expenses such as gifts, regular trips to the movies, shopping, takeaway or holidays.

Caculations

Now that you have written down your income and expenses:

1. Add totals for each.
2. Deduct living and essential expenses from your income. The amount that is left is called your disposable income.
3. Deduct your luxuries and other non-essential expenses from your disposable income.
4. The amount (positive or negative) that is left after this is your balance and can tell you a lot about your financial situation.

Congratulations! You now have a record of your income and spending. Now you can see where your money comes from and more importantly where it goes!

Before you begin you need to decide if your budget is going to be weekly, fortnightly, monthly or yearly. Most people find it helpful to make their budget match how often they get paid. You will need to convert all of your income and expenses to match this time period.

The following chart allows you to convert your budgeting periods

Example: if you have a quarterly gas bill but a fortnightly budget you would multiply the gas bill by 4 to get the yearly amount and then divide the yearly amount by 26 to get the fortnightly amount.

Be organised

To make an accurate budget you need to keep a record of your income and your spending - you need to be organised.
Most people find it works best to have a filing system such as a filing cabinet where you can keep your payslips, statements, bills, receipts and other financial records. You may also find it helpful to keep a diary or a payment & cash receipt book.

Tip: If you have not kept your past payslips, statements and bills most companies will provide another copy on request, although they may charge an extra fee for this.