Savings mode – emergency funds

Apologies for the silence on my blog, it’s taken a while to switch my mind from paying off debt mode to savings mode. Now that I’m debt free there are so many things I want to save for, purely so I can avoid getting into unnecessary debt in the future.

A new car is on the cards because I’ve had my car for almost 7 years and it has more than 250,000 on the clock so I’m not sure how much longer it will last. Having said that, I’m going to save for a new car, but not going to buy one until my current car decides to pack up – I’m hoping that’s later rather than sooner.

However, at the very top of my list is building up an emergency fund. There are a couple of reasons I have put this as the most important. Firstly, I have never had an emergency fund before, which gave me nothing to fall back on when things went wrong. If something broke and needed repairing or replacing (for example my car or a household appliance) or if an unexpected bill came my way (dentist, doctor etc), I had to rely on credit to get by resulting in even more debt. Secondly, I am on a 12 month contract at work to cover maternity leave and my contract ends mid-November. Anything could happen come November but I need to have some aside just in case I leave my job and can’t find work straight away.

I know an emergency fund may not be as important to everyone but it’s certainly a good thing to have. There is no set amount an emergency fund should have in it, so I will be making regular contributions to this fund (which I have in a separate online account) and I don’t really have a plan to stop making contributions. I’ve read plenty of finance books in the past 18 months and most of them suggested an emergency fund should have enough money to cover your bills and living expenses for three months, but even better if you have enough to cover six months.

I’m aiming for six months but I’m taking it one step at a time, putting away an amount each fortnight and not touching it unless there is an absolute emergency! I’ve started by working out how much I pay for rent, food, power, petrol, insurance, warrant of fitness and car registration each fortnight, then multiplying it to get a monthly, three-monthly and six-monthly amount. In a separate table I’ve done the same for what my expenses would be if – heaven forbid – the BF and I were to go our separate ways. It’s not exactly something I like to think about but I’m trying to be realistic so I’m covered for whatever comes my way.

In order to keep myself on track and stick to the regular savings (and so I don’t touch it), I am crossing out certain expenses once I have that much in my account. It’s a bit difficult to explain so here’s an example:

	1 month	3 months	6 months
Rent	360	1080	2160
Power	228	684	1368
Insurance	50	150	300

From the beginning

My blog is set up so the most recent posts are at the top, this makes it difficult for people who have recently come across my blog to see where I started and how I got to where I am today. For that reason I’ve put some links below for a few of my first posts that show where I started, a breakdown of my initial debt and an explanation of how I got into this situation.

My very first post on 10 June 2011 talks about why I started my blog after hitting my lowest point. The next post tells you exactly how much debt I was starting with, $49,058. $29,384 of that was my student loan and the rest was made up of consumer debt from various places. The next post gives a breakdown of my initial debt, the $19,675 I focused on paying off and documented through this blog. The last post gives an explanation of how I got into so much debt with nothing to show for it, basically a public admission of the financial mistakes I have made.

Care to share?

I noticed today my blog has had a crazy number of views! 168 visitors and 868 views when I usually have less than 20 visitors a day. Has a link to my blog been published somewhere I don’t know about or has becoming debt free caused a surge of interest? It’s pretty cool but a little strange so if anyone can shed some light on why this is I’d be grateful!

I’m still here!

Just to let you know, I haven’t stopped blogging. Just taking a bit of down time while I decide whether to continue with this blog now that I’m debt-free. Initial thoughts are to continue blogging with financial advice and savings tips and tricks since that will be my focus now.

Let me know your thoughts!

4 April debt update – there is none!

It has been 1 year, 9 months, 3 weeks and 4 days since I made a conscious decision to get out of debt. Today I have achieved that!

I started this journey with $49,058 worth of debt. $29,384 of this was my student loan, which was (and still is) being paid back through my tax so my focus for this blog was on the other $19,674. This comprised of 14 different debts including a car loan, bank loan, personal loan, bank overdraft, hire purchase, a neglected phone bill, an equally neglected power bill, a work and income bill, a bill from a budget advisory company, two store cards, one finance card and a pukeko in a ponga tree. In all seriousness though, it was a lot to deal with!

Check out the table below for a breakdown of the debts I started with. Ok so my calculations were $1 out but that’s not bad considering how many debts I was juggling!

 

Debt	Total paid
NZCU	3,640
Farmers Card	3,034
DTR	3,028
National bank loan	2,578
National Bank overdraft	2,112
Vodafone	1,675
WINZ	774
Jubilee	718
Flexirent	618
Contact	562
Warehouse Card	521
QCard	258
Southland Times	110
IRD	47
	19,675

And just for good measure so I can have the satisfaction of crossing the final debt off the list:

• National Bank Overdraft: $0
• Farmers: $0
• WINZ: $0
• DTR: $0
• Jubilee Budget Advisory: $0
• Credit Union: $0
• National Bank Loan: $0
• Vodafone: $0
• Contact: $0
• Warehouse Card $0
• Flexirent $0
• QCard $0
• Southland Times $0
• IRD $0

14 debts down and none to go!

Last year’s budget changes are here!

It was hard to think about the impact of last year’s zero budget when the changes were announced but now that they have come into effect some people might be feeling the pinch.

My student loan repayment obligation at 10% was $2,941.60 a year or $113.14 a fortnight. With the repayments increasing to 12% my repayment obligation is now $3,529.92 a year or $135.76 a fortnight – $22.62 more each pay.

My Kiwisaver contributions were $37.30 a fortnight but will now go up to $55.96 a fortnight – $18.66 more each pay. The bonus is that my employer’s contributions will also increase from just over $30 a fortnight to around $50.

So I will be paying an extra $41.28 each fortnight, which is manageable but had this happened a year ago it would be another story!

For a quick way to work out the difference in your student loan repayments go to the Treasury’s website.

Paying back your student loan

The start of a new tax year was marked by the implementatoion of student loan changes announced in last year’s budget. It marked the end of a 10 per cent bonus for voluntary repayments made to your loan balance. The minimum repayment was also raised from 10 cents to 12c in every dollar earned above the $19,000 threshold.

With these changes now in place, an article on Stuff reassesses the smartest method for paying back your student loan:

So what should you do? Nothing at all.

That’s it. You can breathe easy. If you’re a borrower living in New Zealand, the best course of action now is to kick back and let the taxman drag your loan back from your paycheque, cent by measly cent.

The last incentive for making an early repayment has officially gone down the gurgler.

From here on in, it makes sense to repay your loan as slowly as possible. Here’s why.

Inflation is your friend

A $5 note will buy you a lot more right now then it would 10 years down the track.

The Reserve Bank aims to keep inflation running between 1 and 3 per cent, and historical data shows it’s averaged about 2.7 per cent since 2000.

In almost every situation, inflation is your enemy. Each year, it steadily eats away at the true value of the cash in your bank account.

It chips away at your debts too, but that’s negated by the interest that you have to pay.

Student loans are unique, in that they are interest-free for borrowers living in New Zealand.

What this means is that each year, the outstanding balance of your debt shrinks by about 2.7 per cent in “real” terms.

You can use inflation to deliberately eat away at the value of your loan, and turn your spare cash towards much more productive activities.

Let’s say you have a loan of $30,000, and have managed to accumulate the cash to pay it off immediately.

You could pay that back and be debt-free. But 10 years down the track, the same-sized debt would have dwindled to just $24,000 in real terms.

Of course, you’ll be making compulsory repayments along the way. But each year, whatever remains is eroded by an extra few per cent.

Psychological vs Financial

So far we’ve only been considering a purely financial point of view.

Infometrics economist Benje Patterson points out that psychological factors come into play for some people.

“For whatever reason, it makes them feel bad to have it hanging over their head even though its more rational from a financial perspective to actually drag it out.”

He also points out there are three situations where it could make sense to get your loan off your back as fast as possible:

1. If you live overseas, and are therefore accumulating interest.

2. If you intend to travel overseas in the near future, and as such will incur interest.

3. If you’re worried that the Government will reintroduce interest to loans.

Some people in the latter camp might prefer to pay their loan off quick sharp to avoid any risk of getting pinged with interest again.

But Patterson doesn’t expect a u-turn on the interest-free student loan policy from the powers-that-be.

“The Government has ruled it out this term, and I can’t see them going the full hog and reintroducing it any time soon.”

Dunne confirms that the Government has no intentions in that regard. “It probably is politically a no-go area,” he says.

In any case, the best course of action is to put any spare money aside and save it up. That way if the unlikely ever does happen, you can repay your loan instantly.

That is exactly what I planned to do once I’m debt free. I’m going to continue paying my student loan off through my tax at the minimum rate and in the meantime I’m going to start building an emergency fund. Should interest be added to student loans, I would use the amount accumulated in my emergency fund to pay off a lump sum off the student loan because to me, interest being added to my student loan constitutes an emergency!