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Act small, save big

The best things in life might be free, but money allows us other pleasures, both big and small. No matter how much we earn, the sooner we take control of our finances, the faster we’ll reach our goals, explains Esther Goh 

Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t pays it.

If you’re anything like me, this quote – usually attributed to Albert Einstein – might have your eyes glazing over. Maths is hard! Money is boring!

But odds are at least some of the things you enjoy in life – good books, designer shoes, fine wine – don’t come cheap. You may have bigger ambitions, too, like buying a house, starting a business, or going travelling. So unless you’re planning on becoming a Trappist monk, getting your head around the basics of personal finance is in your best interests.

Between the lack of financial education at school, the general perception that money is a taboo topic and a relentless consumer pressure to buy, buy, buy, it’s no surprise many of us rack up balances on our first credit cards and go on to live a life fuelled by consumer debt. (Our national credit card balance hit a record high of nearly $6 billion earlier this year, according to the Reserve Bank.) Borrowing cash might seem like a quick fix but that debt can limit your options later on. Just like putting on extra weight, getting into debt is easy; it’s getting out that can take years. 

Not all debt is created equal. Here’s how financial advisor and author Sheryl Sutherland sees it: “A typical example of good debt is money we borrow to go to university and prepare ourselves for a career – or to set up a business that will generate a future stream of income. Bad debt is unnecessary and unsustainable debt, usually accumulated in the process of buying merchandise not really needed in the first place.”

There’s no shortage of institutions willing to lend you money, but even at a low interest rate debt is still debt, and the longer you take to pay it off the more it will cost you. According to www.interest.co.nz, paying the minimum monthly amount towards a $2,000 balance on a typical credit card will take 60 years to clear and cost you more than $10,000 in total. Now that’s compound interest in action – but not in a great way for us.

Think of it like a snowball: when we earn interest on our money, those earnings are put to work for us as well, on top of the original balance. The reverse is true as well – if you’re in debt, compound interest is stealthily working against you. So if you have high-interest debt, make paying it off a priority – every extra dollar you can throw at it counts.

Money Matters author Amanda Morrall advises steering clear of “financial vampires”, be they payday lenders, finance companies or credit cards. She writes that manageable weekly or monthly payments create a false sense of security. When you buy something on credit, you’re using someone else’s money and paying extra for the privilege – even interest-free deals usually have setup fees.

You can be young without money, but you can’t be old without it – Tennessee Williams 

Journalist and former personal finance blogger Greer Berry admits to feeling a little smug once she paid off her consumer debt.

 “I felt like I’d clocked the system, like I was no longer a victim of advertising, and ‘interest free’ deals and believing that I had to have everything then and there. Being in consumer debt was a huge embarrassment. I never talked about my finances and I tried to keep up with the Joneses on the outside, but inside I was screaming with stress!” 

You might feel you’re constantly treading water, as Berry did. Paying off her $10,000 interest-bearing debt felt like emerging from under a big black cloud, she says. “While friends would be going on amazing holidays that they had worked hard and saved for, I would just sit back and try to work out why I never had any money. It turns out I did – I just wasn’t putting it in the right places.” 

The best – and scariest – thing she ever did was calculate the total amount she owed. “Once I had that horrifying number, I prioritised which needed paying off fastest. I set up automatic payments for my payday … Watching the numbers come down became addictive, it was like being on a successful diet!” 

For a lot of people, the easiest way to reclaim control is to use cash. Studies show we tend to spend more when shopping with plastic.

“The problem with cards is you don’t feel like you are using real money – the purchasing process is quite disconnected from the painful feelings when you get the credit card statement,” Sutherland says.

“Taking control of your spending will empower you in a way that spending never will. Take control of your spending or you may not be able to save for your retirement, or acquire the things you will truly need, or at the worst you could face bankruptcy.” 

According to Morrall, your finances will flounder without a sense of purpose and motivation. “Finding your flow is a deeply personal journey,” she writes. 

Every financial decision you make is a step in a larger direction. Where are you heading? Are you on the path towards reaching your dream? 

Thing is, if you can pinpoint what is truly meaningful to you, then you can set appropriate financial goals, give them a dollar value and a timeframe.

Getting on track financially isn’t all that complicated. Make a plan to tackle debt and grow your savings – and yes, that means drawing up a budget. 

“Budgeting is equal parts detective work, discipline and drudgery. It’s also a fundamental first step towards building up your bank account instead of draining it,” Morrall writes. 

A budget helps you keep your spending in check and money flowing toward your goals. Importantly, a good budget still allows you to have a life – the most intricate spreadsheet in the world won’t do you any good if it’s not realistic. If you spend $100 on alcohol every week, don’t kid yourself you’ll immediately cut down to $40.

If you were to look at your bank statements could you tell where your money’s going? If not, it’s time to start a spending diary. How you keep track is up to you – whatever works. Take notes on
your phone, in a notebook, or download an app like Spendee, BDGT or Level Money. 

Armed with that data, you can start budgeting. (If Excel gives you hives, there are lots of templates online as well as various software.) 

Spending more than you can afford? Look for any ‘leaks’ – small but regular purchases that add up to a big expense, aka the ‘latte factor’. Cutting these out can yield big savings. Also consider larger changes – reducing housing, transport or utility costs. If you’re in the black, congratulations – aim to build up an emergency fund with three months’ worth of expenses, as well as directing cash toward your bigger goals. As your buffer grows, you’ll reap the rewards of compound interest – that’s free money rewarding your saving efforts. 

You might find temptation lurking on every corner, but don’t be too hard on yourself if you give in. Blogging about her financial journey, Berry says she felt like the world was watching her whenever she went shopping.

There is only one class in the community that thinks more about money than the rich, and that is the poor – Oscar Wilde 

 “I was forever in fear that a reader would come up behind me and snap me, saying ‘Do you really need that?’ when I was eyeing up a new handbag. I wrote one post about how I splashed out on some lovely winter boots and got absolutely slammed by readers. Even my justification of a cost-per-wear basis wasn’t sitting well with them!”

Hannah McQueen, financial advisor, accountant and author, says it’s not impossible to enjoy life and get ahead financially at the same time. The key to that perfect balance is a plan that rolls with the punches. Burglary, illness, job loss … life has no shortage of curveballs to lob at us at any point in time. These ‘financial wobbles’ can easily throw you off balance, and McQueen says most of us will experience at least one a year.

“Some will be good, like a bonus. Some will be negative, e.g. the car blowing up, a dentist bill or urgent travel.” 

You’ll be glad for your savings when those emergencies arise, and while setbacks hurt, they should even out over time.

“Your financial plan needs to be flexible enough to absorb these costs without giving up momentum. Life is seldom smooth or linear.  All too often I see financial plans that assume life will always be sunny or that life will never change.”

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