How to avoid financial disasters

From over-spending to racking up a massive debt or falling victim to a financial scam, financial disasters come in all sorts of forms.

Here are some valuable tips to help you avoid financial disasters of all kinds.

Budget basics

Budgeting is a necessity, according to Steve Crawford, Director of Experience Wealth Advice. Setting out your income and expenses ­– regular (rent or mortgage, groceries, utilities bills) and irregular (insurance payments, clothing, car maintenance) – is the first step in ensuring you are in control of your finances.

Creating a budget may seem like a daunting task but smartphones and the internet have made the task easier than ever.

“Every bank has their own online free budgeting program on their website, and there are more than 15,000 budgeting apps available. There are no excuses; you don’t need to be an Excel wizard – you just need to commit to small steps,” Crawford adds. 

Spend less

Spending less than you earn sounds obvious, but not everybody does it. Crawford suggests breaking down your expenses into timeframes that make sense to you.

“If you break it down into 12 months of the year, you can save for 10 months by spending less than you earn and spend more in the other two months – one month might be a holiday, the other might be Christmas,” he says.

“If 10 months out of 12 you’re winning, it will compensate for the other two.”

But being disciplined about it is the key. Work it into your budget so you can keep track of when a saving month is and when you can spend a little bit more. 

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Cash reserve

Living pay cheque to pay cheque can leave you vulnerable in financial emergencies and tip you into disaster from which it can be hard to recover. Greg Pride, financial adviser with Centric Wealth, recommends setting aside a small amount each month in savings to act as a “cash reserve” if unplanned expenses crop up.

“You need a little buffer to make sure you can deal with unforeseen events,” advises Pride.

Look for high-interest savings accounts, which reward regular deposits and charge lower fees, and aim to save up around $5000 to help handle life’s curveballs.

Debt control

There are unavoidable debts (mortgage) and then there are get-out-quick debts (credit cards). Interest on credit cards can be as high as 20 percent or more, so if you only pay the minimum each month you end up paying a lot more than the original purchase and can get trapped in a cycle of ongoing debt.

Try to pay off the full balance of your credit card each month and pay any other debt, such as personal loans or other lines of credit, as fast as you can to avoid an interest blow out. If you can, it’s also a good idea to make extra repayments on your home loan to reduce the interest you pay and shave years off your mortgage.

If you find yourself in a bit of a debt hole with your credit card, consider a balance transfer credit card, or a low-rate personal loan to help you get the debt under control.

RateCity currently lists a number of 0 percent balance transfer credit cards. These aren’t a get out of jail free card though, and many have higher revert rates, so it’s important to read the fine print on balance transfer deals.

Scam alert

“If it looks too good to be true, it probably is,” says Crawford, advising to steer clear of get-rich-quick schemes or other overly generous offers of wealth creation.

He cites the example of a newspaper ad by a property company he recently spotted, promising willing participants a debt-free existence within six years, no reduction in income and $3 million in debt-free assets. “You have to ask what’s in it for them,” he adds.

If it seems fishy do your research before committing any money to the suspect organisation. Similarly, with lenders offering easy credit with no credit checks, you can bet they’re not doing it out of the kindness of their hearts. Avoid taking out these kinds of loans as the interest rates will chain you further into debt.

Related links 

• Compare balance transfer offers
• Compare credit cards
• Compare personal loans

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