Down to Earth

by Rhonda Hetzel

  If you have money left over at the end of the month, or however long your budgeting period is, use it wisely. We often have between $25 and $100 left over in our zip-lock bags at the end of the month and that always goes either in the emergency fund or, if we have enough in there already, into our savings account. When you’ve built up your emergency fund, if you’re actively paying off debt you can use the money left over at the end of the month to make an extra payment.

  Start a change jar

  Create opportunities for saving spare change by having a change jar. Find a container and put it on your desk, dressing table or hall table – anywhere you will see it when you get home – and start putting your change in it. If you have any spare small notes, put them in too. It will be easier for you to save coins if you have somewhere to put them when they come out of your pockets or purse at the end of the day. Slowly but surely that change will build up and you’ll have another source of money with which to boost your emergency fund. If your emergency fund is large enough you could put this money in your savings account, or pay off debt. You could also use your change jar funds for something special, such as:

  buying special birthday or Christmas gifts

  investing in eco and organic yarns if you’re a knitter

  buying craft materials

  saving for a longed-for appliance such as a good kitchen mixer or breadmaker.

  Don’t raid the jar! It’s not for thoughtless spending; it’s part of your savings so whether you pay off debt with it or buy something you need or want, it’s money you saved for that purpose. Well done.

  So far we’ve focused on tracking, budgeting, cutting back on spending, and saving. Now, how do we use some of those savings? When you have saved your emergency fund, it’s time to pay off your debts. If you can get rid of your debts it will liberate you and you can get back to the business of living your life.

  Unless you come into a lot of money and use it to pay off your debt, there probably won’t be one big thing that will help you with debt reduction. However, living a more simple life will give you plenty of small opportunities to cut back and pay off debt while still living well.

  I have no doubt some readers, particularly younger ones, will not yet have acquired major debt. Often people start thinking seriously about future debt when they get married or make a lifelong commitment to a partner, as there are so many possibilities ahead. So what do you do if you’re in that situation? It’s a good idea to talk about your hopes for the future and choose ways to work sensibly towards what you both want. The common hopes of buying a home, travelling and having children all cost a lot of money. But you’re in an ideal position.

  If you’re both working, commit to living on one income. The other income can go straight into the bank to finance your future plans. And just to give you a quick estimate of what that might mean, if you can save $500 a week, you’ll save $26 000 in a year. What a lovely nest egg that would be! At the same time, you’ll be getting into great habits that will help you if and when you do take on a mortgage. So as you read through this book, even if you currently have no debt the suggestions and strategies all still apply to you. But instead of paying down debt, you’ll be building up assets.

  Deal with your credit cards

  Credit cards are bad news. They epitomise the idea of spending beyond your means. Many people say they use a credit card only to pay for goods online, and then pay the bill in total when it is due. Statistics don’t bear that out. Most people pay interest on their cards every month, even though the interest is usually very high. The cards are so convenient, using credit to buy things is like a slippery slide of happy shopping – until you hit rock bottom with a bang. Even if you think you’re on a good thing with credit-card rewards, the amount of money you have to spend to get even a small reward is not worth it.

  The first step in reducing your credit-card debt is to stop using them. This can be a big step for those who are used to paying with credit. Take the cards out of your wallet and put them in a drawer at home so you won’t be able to use them when you’re out. If you can’t resist the temptation of buying whatever you see, cut those cards up.

  The first step in reducing your credit-card debt is to stop using them.

  I grew up at a time when there were no credit cards and people used to save for what they wanted before they bought it. And when you brought home something you’d saved for, you would look after it and make sure it lasted. Of course, those were the days before we all bought cheap products that regularly need to be replaced. People aren’t prepared to wait any more; they want what they want now, and credit cards facilitate that attitude.

  Now the emphasis is on quantity, not quality, and we often look for cheapness instead of value. The common feeling is that if you don’t like what you have, or if it breaks, just buy another one. It’s cheap and easy, yes, but it creates more debt, more greenhouse gases, more landfill. It’s not cheap and easy, or sustainable, in the long term. If you want to get off that never-ending carousel of buying, convince yourself that less is more, look for quality in what you buy, stop using your credit cards and pay them off.

  I have no doubt that while you’re paying off your debt you will get a letter from the bank telling you that as you’re such a good customer, they’re kindly raising your credit limit. Always remember this: it is not in the bank’s interest for you to pay off your debt quickly or completely. When you do that, they stop getting your money. They will tempt you. You will tempt you. You’ll say you’ve been so good, you deserve a reward. And yes, you do deserve a reward: to be debt-free. Never stray from that thought.

  When you get rid of your debt burden you will look at spending in a different light. You will know how difficult it is to pay back and you won’t want to go back there. So, when you get that letter from the bank extending your credit, write back and tell them to decrease your limit. If you used to have a $5000 limit, lower it to $2000. When you pay off more, lower it again. It will reduce your temptation in this period of debt reduction. If you decide to keep just one credit card for emergencies in future years, the bank will be happy to increase the limit again, and your habits will have changed so you won’t be tempted any more.

  Snowballing debt payments

  I think American finance expert Dave Ramsey’s system of snowballing debt payments is a very good way to go. Instead of paying off the debt with the highest interest rate first, pay off those smaller debts first. This will get rid of a few debts fast. List all your debts, from smallest to largest, along with their minimum repayments.

  Your debts list might looks like this:

  This is the order you pay them off. With your emergency fund in place, look for all those dollars you’ve saved by taking lunch to work, not buying magazines, reducing your phone and internet plans and not buying new clothes and shoes. If you have any cash left over at the end of your budgeting period, it should go towards paying off that first, smallest debt. If you don’t have leftover cash, go back to your tracking notebook and see what you can stop buying or cut down on to give you that spare money.

  So, to pay off that first, smallest debt, instead of paying the minimum amount, you pay more:

  Instead of taking six weeks to repay Dad, you’ll take two weeks, and wipe one debt off your list. When that first debt is paid off, put the money you were using to repay it towards the second debt. So, in addition to the minimum repayment you were making on the second debt, you add the money you had been paying on the first debt, as well as any extra cash you have left over that month.

  When credit card 1 is paid off, start working on credit card 2.

  When credit card 2 is paid off, start working on the car.

  Once the car is paid off, you have only one debt – the biggest – left to pay.

  In effect, the payments increase, like a snowball: the more you pay off your debts, the sooner the debts will be gone from your life. This will keep you motivated to continue your debt reduction plan because you see results fas
t.

  Mortgage calculations

  It’s a very interesting and convincing exercise to put your figures into an online mortgage calculator. There is a good calculator in the resources section at the end of the book. Play around with it, adjusting the amount of money you pay monthly or fortnightly and reducing the number of years. Keep an eye on the interest you will pay over the term of your loan. If you have a loan for $300 000, for example, over twenty-five years you will pay back the $300 000 plus more than $343 000 in interest (at the Australian standard interest rate at the time of writing). If you can manage to pay back that same loan in ten years, you’ll pay back your $300 000, plus only $120 220 in interest. You will save yourself $222 780! If you can’t manage ten years but pay it off in fifteen years instead, you’ll pay back your $300 000 plus $188 997 in interest, saving you around $154 000. They’re incredible savings and well worth the sacrifices you’ll make to do it.

  Roles and responsibilities

  It makes sense to have one person managing the money, and that person should be the one who does it best. Obviously, if you’re single, there is no decision here – you’ll look after your own money. If you are the one who is managing everything, you should be prepared to give a summary of your combined finances to your partner every month. This will not only keep you on track, it will also help your partner understand where the money is going and how much is being saved or paid off your debts.

  Your budget can be written either by the designated money manager or by both of you. You can also both find grocery bargains, write up the shopping list and meal plans and, before babies come along, shop together. You both need to have a realistic idea of grocery prices. If you have young children and you’re both working, take turns at the shopping – always with a shopping list – so that you both understand grocery prices and have a chance to save with your prudent and careful shopping. It is better to shop without young children if possible, as you need to be focused.

  If your partner is working and you are a full-time homemaker raising children, then it is your partner’s job to earn money and your job to save money. This is one of the most rewarding and important jobs. You will manage the money, actively look for ways to save, think carefully about your grocery shopping and look for bargains and ways to cut back. Try to work out a system where your partner looks after the children while you shop. Your weekly grocery money is important: it’s a lot of money to spend each week and you need to do it carefully. You’ll also need to work out a system to manage your food so it is eaten as fresh as possible and stored in such a way that none is wasted.

  Work decisions

  There is a common perception now that it’s best for both people in a couple to work. While that is true for couples without children, I don’t believe it’s necessarily true for couples with young children. There is no doubt that working together to pay off the mortgage is a good thing to do, but you may find there is more value in having one parent at home to guide them through childhood.

  You also need to work out if the second wage is really as beneficial as you think it is. When you add up the actual cost of having both parents in the workforce, you may discover it is financially sound to have one parent at home.

  WHO SHOULD GO TO WORK?

  The partner who can earn the most money, for the least expense and the shortest time away from home – or the one who most enjoys outside work – should be the one who goes out to work. If you are very lucky it might be possible to organise a part-time job for both parents, but this is rare.

  Before you make the decision to have both parents working, calculate what it will cost you. Some things to consider are:

  loss of certain government benefits

  childcare or babysitting costs

  public transport, fuel costs, or running a second car

  equipment or tools of the trade

  new clothes and dry-cleaning

  haircuts and cosmetics

  lunches, coffees and bottles of water.

  Include everything you know you’ll spend money on. Be accurate and realistic because you’ll use this to decide if work outside the home will actually contribute to your family.

  As an example, if your new job pays $800 a week, you might lose $115 of that in taxes, making your take-home pay $685. You have to get to work, so you spend $35 a week on public transport or running the car. Your $685 is now $650. Childcare might cost around $250 a week, so now your income is $400. Take off the amount you need to spend on clothes and grooming, and your coffees and lunches and it might reveal that both parents working is sometimes not as financially beneficial as you think it’s going to be.

  You should consider related matters too – those factors that will lessen the impact of one parent not working. When one parent is at home with the children, they can shop for grocery bargains to make the most of the food budget, food can be cooked from scratch and they can bake bread – this is the healthiest way to cook and it’s also the cheapest. Sometimes there is the opportunity and the space to grow vegetables and have chickens for eggs. If there is surplus in the garden it can be preserved by canning, freezing or drying, for eating later in the year – again saving money. Clothes can be sewn and knitted, and in general, there will be time to look after the things you already own.

  If you choose to stay at home with the children, you can read to them, teach them how to write their name, how to count and identify colours. You could show them how to plant seeds, tie a knot or collect eggs, explain the role of chickens in the vegetable garden and show them, by example, what a joy simple living can be. You can be there when they come home from school, or you could homeschool them, and as they grow older, you’ll be there to guide them. Value comes from many things, not only those with a dollar sign attached.

  I think the ideal, which is not always possible, is that you both work hard to save for the deposit on a home and then pay off as much as you can on your mortgage while you still have the double income. When your babies come along, you can start on this next stage of your life – raising your children in a strong and loving family where both parents have a good balance between family and work.

  Value comes from many things, not only those with a dollar sign attached.

  I have no doubt there are many couples who don’t have a choice about staying at home; both must work to make ends meet. There will also young parents who decide to return to work, either full- or part-time, because they need a break from raising children, or they choose to develop their career, or they want to continue to make a financial contribution to their family.

  This is not an easy decision but don’t just go along with what everyone else is doing. Think about it and talk to your partner – preferably before you have children – and make the decision that is right for you. No matter which way you go, do everything you can to make it work for your family as a whole. The way you work at home, and outside home, is your decision and no one else’s business. There is no room for guilt here, or for people who try to make you feel guilty. Support each other and share the work at home if you’re both working, and be confident in your decisions. If you’re sure that your choice is the best for your family, work towards your goals together with no guilt and no regrets.

  Saving for retirement

  The baby-boomer generation, of which I am part, is about to make another huge impact on the world. We have started retiring and in just twenty years’ time there will be more old people in Australia than young people. A few years ago the retirement age for Australian women went up to sixty-five. By 2023 the retirement age for men and women will be sixty-seven. It is possible that the pension age will keep increasing and might eventually cease to be paid. For many baby boomers, the superannuation scheme came in too late for us to take full advantage of it. But if that’s not the case for you, I encourage you to budget for retirement and make sure you’re part of a good scheme.

  As I wrote earlier, keep all your superannuation funds in one account and make sure you give the det
ails to your new employer each time you change jobs. If you let them put your contributions into the account they usually use, you’ll end up fragmenting your investment. If you have money in several accounts right now, I encourage you to take some time in the next few weeks to contact those companies and instruct them to transfer your funds over to your preferred account. Find out if there is a fee for doing that, but in the long run you’ll get a better return if consolidate your funds. You’ll avoid transfer fees in the future if you give your information to each new employer.

  No matter where you live or how old you are, look into the future. How much money should you have when you stop working? What will you need to support you through the rest of your life? How can you prepare now for a world you have no idea about? It’s worth doing your best to answer these questions, but I believe the most practical way to approach retirement is to pay off debt and live simply.

  Saving your money and your life

  It can be quite difficult to change patterns of behaviour, but change is happening right now – all around the world. Many more people are using their cars less, and giving up the extras they used to take for granted. More parents are staying at home with the children, more couples are working part-time and some are setting up home businesses instead of returning to work. I think these changes have come about because despite being worried about the rising cost of living, people want to spend more time with their families. They have discovered that saving money at home can give them a good life.