Published: Wednesday, 18th August, 2010 5:00pm
Moneytimes with Jill Kerby
PART 2: Control your discretionary spending
Personal finance columnist, Jill Kerby.
Pic by==: 97
The two surest ways to lose control of your spending in these increasingly difficult times is to hang on to already over extended credit cards and to not pay all your bills by direct debit.
Credit cards have become the last refuge for many people struggling to meet the gap between their pay cheques and the grocery bill at the end of the month and as such, they are often considered to be a lifeline. But at what price?
If you barely pay the minimum required payment, then you're becoming a slave to the card, not its master. Your debt is growing exponentially and will take many years - perhaps as many as 10, even 20 years - to clear it at that repayment pace.
There are cheaper life-lines, the first of which is the one you fashion for yourself by doing a root and branch review and cull of your essential spending in order to get better value and then by keeping a spending diary of all your daily purchases as well as the other discretionary purchases throughout the year: the holidays, dining out, second car, clothing and electronics, home decor, hobbies and sport activities, even the choice of a private rather than state education for your children.
The next lifeline, which will hopefully be a lot smaller and more affordable once you've done a proper budget, is to get rid of the credit cards that got you into so much trouble and replace it with just a debit card or a debit Visa card. The latter provides Visa facilities, including using it for web-based purchases and for withdrawing money at international ATMs, but requires payment directly out of your current account. There is no credit or borrowing facility and so no build up of high interest payments.
Another lifeline is to arrange for all your bills to be paid by direct debit. Knowing that the electricity and gas bill, the mobile phone and digital TV package as well as the credit card bill (if you still have a credit card) are all being paid on the same day every month means you don't risk impairing your credit record by missing a statement deadline or by underpaying the amount due. Again, this all depends on you having sufficient money in your account to meet all these obligations.
Here's where a revolving overdraft comes in (though these can typically cost 15% now) or better still, a more formal 'pay path' overdraft in which the bank agrees to divide all your standing bills by 12 and allow an overdraft to kick in only during those months that your income is insufficient to meet those occasional, higher payments, like at the start of the school year, Christmas or when big insurance bills fall due.
Finally, another (almost) last resort life-line for the person whose bills and arrears (though perhaps not mortgage arrears) are causing difficulty is to try and refinance this debt with an affordable personal loan. The banks are not particularly keen to do this - especially not in the form of a mortgage refinance unless the person has substantial equity and a very small balance on their home loan - but even a personal loan at 10%-12% interest is better than letter credit card and hire purchase payments at 18%-25% fester.
If the bank turns you down, go to your credit union where loans typically cost 10-12% on the depreciating balance.
If that doesn't work, your family might be able to throw you a lifeline, no matter how reluctant or embarrassed you may be to ask for their help.
The irony of the credit and capital crisis in this country is that while the banks cannot or are reluctant to lend because they have to repair their own balance sheets and there is considerable risk in their traditional mortgage and small business markets, there is an estimated €88 billion sitting in retail deposit accounts. This money is being saved by mostly older people who are still employed and mostly debt free; a large cohort are well off pensioners, the 50% or so who have additional income to their state benefits.
These older generations will be last ones to enjoy generous pension benefits (both from the state and from employers) and while they are concerned about their financial future, and especially their long term care costs, they are still in a position to contribute to come to the rescue and recovery of a younger generation (of 25-40-year-olds) who are the most affected by unemployment, the collapse of property prices and the financial collapse of the state.
If an older family member or friend is willing to lend you some money to clear expensive debt at a fair interest rate, (ideally on the depreciating balance so there is no expensive compounding effect) you should ensure that a legal agreement is drawn up and payments are made via a direct debit.
This is a win-win situation: the younger person, who has trimmed their spending and is now following a budget they can genuinely afford, gets the heavy yoke of debt off their neck; the older person earns a higher interest rate than they would otherwise get from a bank.
Best of all, this mutual agreement creates something that's priceless: hope.
This column is sponsored by Aviva.
Your future is in safe hands with Life, Pensions & Investments from Aviva. Call 049 4325200
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