How not to use your credit card
For most people, debt is a fact of life and the idea of saving can seem like a distant fantasy. However, with some careful planning, it’s possible to do both, in fact, it may even make you better off.
The first thing to realise is that not all debt is created equal - some debt comes with high interest whereas other debt may have low or no interest. Similarly, some debts have a fixed end date while others are open ended. Generally speaking, paying off debt before saving is usually a good idea, however, because of these variations, it’s possible that going all out to pay off debt before thinking about saving may not be the best use of your money. Since everyone’s debt structure will look different, the answer isn’t a one-size fits all, so let’s take a closer look at how it might work for you.
1. Make a budget
The first step is to paint a detailed picture of your financial situation - that means making a budget. This doesn’t need to become the chore many people think it is and can be done in just a few minutes. If you have kids, get them involved in the process - not only will it be a good way to instill good financial habits from a young age, but they’ll become more careful with money themselves and may even help you cut costs as a family. Whether you bring the kids in or not, what’s important here is that you’re able to see exactly what money is coming in and where it goes - the idea being you can identify areas to make savings and cut backs if needed.
2. Take a close look at your debts and prioritise them
In your budget you’ll have a list of expenses that remain static and others that go up and down. Some of these will be your debt payments - things such as the home loan, personal loans and credit cards - isolate them from the general costs of living so that you can take a closer look at how they work and how much they cost you - this is the part that determines if saving is going to be an option.
3. High interest debt comes first
High interest debt, such as credit cards, can be painful, so focus on these first. In your budget, allocate more than the minimum monthly payment for high interest debts to get rid of them sooner, saving money in interest charges along the way. For tips on how to do this, have a read of ‘Take control of your credit card’.
Another way to tackle it is to lower the interest costs - investigate whether a balance transfer, low rate credit card or - if you have multiple sources of high-interest debt - a consolidation loan could be an option for you.
4. Use low or no interest debt to your advantage
While it makes sense to pay more than the minimum monthly amount for high interest debt, if you have a student loan or a store card with zero-interest, there’s little point in pouring money into these right away. You’d be better off paying the minimum and then putting any leftover cash into an interest bearing savings account or term deposit where it can actually start making you money.
5. Create an emergency fund
Your first step towards saving should be to create an emergency fund (for unexpected costs like car repairs, dentists and so on). If you can avoid dipping back into the credit card when the unexpected happens, you’ll be better off in the end.
6. Take full advantage of all your bank has to offer
Banks have a range of accounts and loans to suit a variety of approaches to managing your money, so it’s worth having a chat with them to ensure your finances are running as efficiently as possible with the right account structure.
For homeowners, you might find a different style of home loan works best for you. For instance, an offset home loan can work well for savers because it reduces the amount on which you’re paying interest.
7. Set goals - large and small
Because we’re only human, we sometimes need a little extrinsic motivation from time to time. Set saving goals, but don’t just make them large, end-game affairs, also set small, easily achievable goals - these give you the opportunity to taste saving success early on and can spur you on to hit those large goals.
8. Grow your savings
All going well, by this stage you will have created a budget that’s enabling you save while still keeping on top of debts. That means the time is right to think about maximising your savings. To do this, it’s matter of finding the right combination of tools - consider a variety of savings accounts and look for ones that suit your income, habits and expenditure. Some savings accounts reward you for making deposits and actively discourage you from making withdrawals. Also look into investments such as term deposits and KiwiSaver to maximise your returns. Speaking of which, check out our guide on how to get the most out of KiwiSaver to ensure you’re taking full advantage of the various perks it has to offer.
The bottom line is, while it’s important to pay off debts sooner rather than later, don’t go rushing in without first taking a good look at how getting some savings underway at the same time might benefit you in the long run.