Debt – Page 2 – Financially Wise

This may not be what people, especially parents, want to hear just after the September/October school holidays – but it’s best to start budgeting for Christmas, which is now less than three months away.

Christmas could be a stressful time for some people’s budgets, and hip pockets if you don’t prepare yourself for it and give yourself enough time.

Many people, especially parents with younger children, could easily overspend and exceed their budget during the Christmas season if they didn’t plan for it early enough.

If you leave it until the last minute you could end up putting most or all your Christmas purchases on credit card and then suffer from bill shock when the statement arrives in January.

Quite often your ‘friendly’ bank will offer you a holiday reprieve by allowing you to defer for a month the repayment that would normally be due in January.

But don’t be fooled, that ‘bill holiday’ will cost you more in interest and the bank is not doing this to be nice, it will end up as more profit for them.

This is made worse if the whole balance is not paid off at the end of each month; you end up paying interest on your interest. For many people, this is a reality, with many people carrying credit card debt for many years, in some cases long after the item originally purchased has broken or stopped working and been thrown away.

So, ideally, the earlier you start planning for events like Christmas and even birthdays and anniversaries, the better. But with a bit of planning and saving, it’s not too late to get control of your finances for Christmas.

Here are some tips to help you prepare now for Christmas spending:

Prepare lists of what you need to buy: That includes gifts, food and entertainment, postage for gifts and cards as well as tree decorations and holiday plans.
Budget for the costs: Work out the costs of these items to give you a total amount as a guide and add five to 10 per cent for unexpected expenses.
Put money aside: Work out how many pay days you have left until Christmas and then divide your expenses by days – now try to save that much each pay, preferably into a separate or Christmas account.
Sales: Take advantage of sales – if you see an item from one of your Christmas lists on special, buy it when you can.

An alarming number of Australians have an even more alarming amount of debt. A lot of debt is tied up in housing, or so called “good debt”, which is a large risk in itself, should property prices start to head downward.

But a large amount of debt is also consumer debt, or so called “bad debt”, which is also worrisome.

Debt levels have reached record highs with the Australian Bureau of Statistics reporting that Australian personal debt levels are now just under $1.8 trillion for the country – or nearly $80,000 for every Australian.

A recent Barclays survey lists Australian households amongst the most indebted in the world.

It would be good to remember that all or any debt, whether good or bad debt, is a claim on future income for today’s consumption.

If you don’t have a buffer in place or allow for adverse instances should circumstances change, you can be caught short and have to make quick financial decisions which could have devastating consequences and impact you for many years.

Christmas presents

It is, quite frankly, astonishing how the world’s economies and markets reacted recently to the possibility that the US Federal Reserve MIGHT, and that’s the key word here, MIGHT, have raised interest rates during September.

Stocks and commodity prices crashed and volatility increased massively at the possibility of a ONE QUARTER OF ONE PERCENT official interest rate rise by the US central bank.

Seriously!?! Are the world’s economies so fragile, that the thought of a 0.25 interest rate rise in the US sends everything and everyone into a tailspin?

This is what happens when official interest rates are kept too low for too long. The world has come to rely on cheap credit to keep it going. If it is to be used at all (and I don’t think any central bank should ever artificially lower interest rates to stimulate an economy), it should only be used sparingly for a very short period of time.

Now, because it’s become so cheap to borrow money, global debt levels are at record highs, even high than before the GFC. Because investors cannot get a decent return on their cash, they move into riskier and riskier “investments” to try and get a yield, quite often using borrowed money, because after all, it’s cheap to borrow.

It doesn’t help any that quite often this borrowed cheap money wasn’t actually put to productive good use, it was instead used to buy back shares, boost director salaries and bonuses in the case of listed companies, or used for dubious and speculative ventures by others.

It has now been seven years since the GFC and interest rates are still incredibly low, or effectively at zero or even negative in some countries when inflation is taken into account, and they are still at “emergency” levels.

Shouldn’t it be patently obvious by now that the zero interest rate policy (ZIRP) or ultra low interest rates don’t work? Neither does stimulus, money printing, quantitative easing or whatever you want to call it, which was only possible due to these low interest rates.

Einstein has been credited with saying that the definition of insanity is doing the same thing over and over and expecting a different result.

Central banks think they can control an entire economy and get it to do what it wants. So it keeps cutting interest rates, and then when the short term boost it provides wears off, they cut them again. And again. And again.

But due to the law of diminishing returns, each interest rate cut has shorter and shorter impacts, until it doesn’t have any more effect.

And our central banks sit there wondering what more they can do, not realising they are one of the major contributors to the problem. And we look to them to fix the problem that THEY helped create in the first place.

Now THAT is insanity!

Category: Debt

Get organised for Christmas NOW

Zero interest rate policy is a disaster