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Seven Money Secrets Experts Swear By

  01/12/10 08:54, by Len, Categories: Personal Financial Management, Budgeting, Debt Management, Saving

Source: Article by My Debt

1. Compound interest
These two words are extremely powerful. They refer to interest earned on interest over time, a passive way to growing money exponentially. The way it works is simple. If you start with R100 in an investment, which offers 10 percent interest, you’ll earn R10 interest and the base amount will increase to R110. The next time interest is earned, it will be calculated as 10 percent of R110, so a further R11 will be added to the base amount, and so forth. Imagine the kind of growth your investment can achieve over the long term if you don’t take money out prematurely. So take advantage of the power of compound interest! This is a powerful reason not to put your money under a mattress or in a low interest account.

2. Beat inflation
Another reason to ditch the mattress idea is that in a few years time R100 won’t be able to buy you the same things as it can today. Over the long term, unless you invest in inflation-beating assets, you won’t be able to maintain your standard of living. Generally, these would be investments in equities (shares) and property. Speak to a financial adviser who can advise which suits your needs.

3. Put more money into your bond
Over a twenty year period, the amount of interest you pay the bank for your home loan often exceeds the purchase price of your house. If you’ve ever taken a look at your bond statement, you’ll notice that initially most of the money you pay towards your home loan goes towards paying the interest and very little towards actually paying off the debt. If you increase the amount of money you pay on your bond each month, you’ll pay more toward the debt and less toward the interest. By doing it once, you get the benefits over the full loan period – and if you pay in extra monthly, you will significantly cut down the payment period by a few years and potentially save thousands in interest.

4. Be smart with vehicle finance
Avoid having a balloon payment at the end of your payment term and try to finance your vehicle over as short a time as possible. Even though the monthly payment is lower, the interest portion of each payment is more and it just means you pay more interest in the long term. If you can’t afford the car without a balloon payment, buy a reliable, but cheaper vehicle. Similarly, if you have to finance a vehicle over a longer term to make the monthly increment affordable for you, it means you probably can’t actually afford it.

5. Evaluate your own affordability
The way most people purchase big assets, like a house, is to find the item, put in an offer to purchase, and then follow a process by which the bank will check affordability. A better way to go about this is to check what your real affordability levels are by accurately and honestly assessing your personal financial situation. Ensure you understand all the costs associated with the purchase of these assets. For example, when purchasing property, how much do you need for a deposit, will you need to sell one house to buy another, agent commission, transfer costs, conveyance fees – work all of this into your budget considerations. If you can’t afford your dream home right now, buy a smaller property, wait a while longer and save up for a bigger deposit, find a mortgage originator who can negotiate with banks.

6. Preserve your pension
When you change jobs, it’s easy to get excited about the pot of money that you’ve accumulated in a pension fund. Don’t spend it, preserve it – you’ll thank yourself when you reach retirement age. This pot of money can be transferred to a new employer if they have a pension fund, it can be transferred to a preservation fund which is a specific vehicle in which your money will grow with investment returns until your retire or you can put it into a retirement annuity.

7. Deal with debt right now
If you have debt, start by getting financial advice immediately. Then make a list of everyone you owe money to and implement a plan to pay off the debt with the highest interest first. If you notice that you will start to run into arrears with debt repayments, phone your creditors and tell them about your difficult financial situation and renegotiate payment terms. They’ll be willing to listen, because they’d rather renegotiate payment terms than not get paid at all. If all else fails, there are more formal processes, such as debt counseling services and debt review. Cut down on expenses, but don’t skimp on your retirement or insurance.

Start now and start small. Even saving or investing small amounts of money contribute to a growing pool of money. And the key is consistency, because the money accumulates. As money accumulates, and earns compound interest, the amount really starts adding up. Financial health is a journey not a destination. And you don’t have to do it alone. There are many professionals out there who are available to help. Start by calling one today.

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