Surviving in a Hostile Environment
By Mariana Castrejana
Hmmm. A snowman trying to survive in a hot desert. Kiwis in a recession. Does it really need further explanation?
A recession may affect the average New Zealander on many levels-not necessarily all of these being of a financial nature. It could be detrimental to "stick our head in the sand" and pretend that nothing has changed. We need to face up to the facts that some things have changed, realise what they are and how they affect us, as well as what actions should be taken to leave us in the best position possible at the end of this recession.
For the sake of simplicity, let's assume that you are not preposterously wealthy and that money may even be a bit tight. You'd like to make your money go further perhaps. Maybe a shrewd investment to get a better return is required. Let's go over some of the key points most New Zealanders need to consider at this time.
1. Get rid of debt.
As sure as the sun comes up, most New Zealanders have debt. It may be in the form of a personal loan, car loan, hire purchases, or even the humble credit card. Although not an attractive way to spend your evenings or perhaps part of your weekend, looking in detail at the amount of interest and fees being paid out on this debt can be quite eye-opening if you haven't already done so.
You can do a variety of things to pay off debt quicker. One common and effective method is to consolidate all of your loans into a single loan at a good interest rate. Set aside money each pay if you are an employee or at set regular intervals if you take drawings from your business. Talk with your bank consultant regarding this, as in many cases they can offer things such as longer personal loan periods (up to seven years) to reduce monthly costs if money is tight for you right now, or they can arrange a consolidation loan where you won't be penalised for early repayment.
If you have two loans, for example two car loans then paying extra money off just one car in order to pay it off sooner is better than paying both off evenly. The same is true for multiple loans. Simply target one at a time and only when it is paid off in full do you move onto the next one. How do you determine which loan to target? Easy! You take the loan with the highest interest rate first. Often this will be credit card debt but not always. If you have have two loans with the same interest rate you take the one with the least amount left ot pay (i.e. it will be paid off sooner).
2. Take advantage of good interest rates.
Currently the banks are offering some excellent interest rates on home mortgages. You can get 2 years fixed for 5.9% or in some cases 3 years at a mere 5.95%. With interest rates changing daily you need to keep an eye on these. Although there is always the chance that interets rates may drop further, it is a fact that they are usually much higher and therefore a reasonably safe assumption that the interest rates will not remain this low for too much longer.
If you have a home mortgage or investment properties that are on a comparatively high mortgage rate, you would do well to have your accountant do some number crunching for you to see what you could be saving if you prematurely end your current mortgage including paying the fee for early closure and then renegotiate a new mortgage at the improved interest rates. Do not get a floating mortgage, as this would negate the purpose of restructuring your loan. A fixed loan is what you are after.