9 January 2013

Reducing the cost of living 2

We went to see the cardiologist yesterday.  He has booked Hanno in to the local hospital next Monday for an Angiogram. We have no more news until the doctor sees the results of the Angiogram.


If you need to be convinced about the merits of paying off your mortgage early, find a mortgage calculator and enter in the details of your loan, play around with it and see how much interest you will save by paying that money back sooner. I took the liberty of entering a $300,000 loan into the ING calculator. I used the interest rate of 7.5% which is about right for Australia now. Your country will be different. On that $300,000 loan, if you take the loan out for a term of 25 years, you'll end up paying back $365,091 in interest, or $665,091 dollars in total. If you can pay that loan off earlier - say 15 years instead of 25 years, you'll pay back $200,587 in interest, or $500,587 in total. That is a difference of $164,504 that you would save if you could do it. That is $164,504 in your pocket instead of in the bank's accounts. It's worth doing it if you can. Not everyone can, but those who can do it, should. Even if you pay it off five years early, you'll save $80,064.

Some of our commenters yesterday suggested paying fortnightly instead of monthly, increasing your payments $10 a week each January and making extra payments when you have spare cash. All that has the potential of working but you have to make sure you can do those things on YOUR loan. Each bank has different rules. Check your loan details and make a plan when you know what you can do. And if you're looking for a house now, don't ask for a media room, separate bedrooms for all the kids, a pool and large entertaining area. Look instead for enough cupboard space, a kitchen that is easy to work in, insulation, water tanks, room for a vegetable garden and chooks and maybe solar panels. Or the right house to suit you at your current stage of life.

Budgeting and working to lower the cost of living is as much a psychological exercise as it is a physical one. I'm taking my time talking about the whole concept of paying off debt both yesterday and today because it's important to have the right mindset. It will help a lot if you can change your idea of what success is. When I was spending like a drunken sailor my idea of success was to have the money to buy whatever I wanted. Now it is more simple and refined - to have my family safe, happy and close, to be healthy so I can remain independent and active, to work hard and to be content with what my work brings me. It takes a while to get your head around it and to convince yourself that whatever sacrifices you have to make, are worth it. So think about your own circumstances, work out a plan that will work long-term and then put that plan into action.

I have found that having a routine helps me do my house work and having a structured plan helps reduce our cost of living. You need structure. If you take a slapdash approach you be all over the place with no real path forward and you'll give up quickly. If you haven't already done a budget, do one now. A budget was one of the things I dreaded doing in the beginning because I saw it as a restriction. Instead, it turned out to be a wonderful map for me to use. I knew how much money we had, how much we had to pay in bills, how much I'd put aside for groceries and when we had money left over, I knew we could save it and that all the bills were paid. A budget will give you a clear picture of your financial situation. If you have to guess that, you're not in the best position.

So, make up your first budget, or upgrade your existing one to make sure it's still covering all bases.  Think about what you'll get out of this new commitment to lowering your cost of living and before you get any comments or criticism from family or friends, decide this is right for you and no matter what, you're sticking with it. You have to be confident that is the right thing for you. 

Look at what you have right now that you're paying for - your phone plans, your internet plan, insurance for house, contents, car and health and look to see if you can get a better deal on your current plans. Even $5 a month is a win. Go over everything. If you have two cars, work out if you can do without one. If you can, sell the car, if you can't, try to cut the costs on your car insurance and fuel as much as you can. Look after your car/s, check the tyre pressure, don't let it run out of fuel, have it serviced on time. Check around to see if you can get a better price on the servicing. We used to go to a dealership for our services and then found an excellent local mechanic who did a first rate job for much less. Do you have pay TV? Do you need it? If not, make the call to cancel it.

If you're earning a minimal wage, work out if it's worth it for you to be working. It might make better financial sense for you to be at home, shopping for grocery bargains, cooking from scratch, making your own cleaners, growing vegetables and keeping chickens. You'll also be able to do many of the things we'll talk about in the post tomorrow.

Lower your expectations. Yes, lower them. Don't expect to live in the best house in the best street. Buy what you can afford. This obsession with looks and being better than your friends is crazy. It wasn't like that in the past and it doesn't have to be like that now. Don't listen to the advertising hype or the real estate agent. Listen to your head, work out what you can afford and stick to that amount. Living in a home you can afford is much better for your mental and physical health than worrying about paying off a show piece.

When you've taken the time to fully understand your situation and make a genuine commitment to pay down your debt, then you can start working on all the small steps you can take to save money. It will be small steps that add up, rarely do you find big savings along the way. So realise early that it will be frequent small amounts that you save and commit to doing that now and in the future. Soon it will become second nature to you.

Tomorrow we'll focus on the savings to be made in the kitchen and laundry. Let's do as much as we can to get to a good standard of living while spending as little as possible. As usual, please share your thoughts with us in the comments.  See you tomorrow.  :- )

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