External debt levels across the globe are at all time highs and far exceed the economic output in many developed countries. It is time that consumers take control of their finances, use effective credit card debt management and once again live within a budget. Find out how to establish good household budgeting practices with this easy step by step guide:
Step 1: Find the Best Saving Accounts
With a vast array of financial institutions now offering online banking products for savings and loans, it is easier than ever to research and compare, fee structures and interest rates. Furthermore, with the ability to make transfers online, all accounts do not necessarily need to be kept at the same institution.
For household banking, the following accounts are recommended:
1. Transaction account(s) for everyday expenses
a. Ensure transaction and account fees are kept to a minimum. Smaller credit unions often offer fee free transaction accounts.
b. An access card with a pin is essential.
c. Consumers and investors may choose to keep separate transaction accounts for expenses such as petrol, groceries and other everyday items. If there are no account fees, this is recommended.
d. It may be worth keeping the account into which a regular pay check is received as a separate transaction account. This is like a staging account from which all transfers are made and restricts the urge or ability to spend outside the budget.
2. Savings account(s) for monthly, quarterly and annual bills or expenses
a. Ensure the funds in these accounts can be accessed via an electronic bill paying facility such as Bpay, or even set up a direct debit arrangement with the bill payee so bills are paid on time and with cash rather than on credit.
b. Internet savings accounts or online savings accounts which are easy to obtain, fee free and offer a higher interest rate are appropriate for this need provided they cannot be accessed with a card or any other method.
c. These accounts should earn some interest, but remember to find accounts with minimal transaction and account fees so separate accounts can be used for different bills such as car, utilities, birthday and Christmas presents, for example.
3. High interest savings account for medium term spending
a. These accounts are useful to save for home deposits, holidays, cars, larger items which may be required or desired within the next one to two years.
b. Again an internet savings account or online savings account which is fee free, inaccessible other than by the internet and offers a high interest rate is appropriate for this purpose.
c. If the funds are not required in the next few months and a term deposit offers a better rate, then link the account to a term deposit. Remember that when investing in term deposits, the rate is fixed, whereas when leaving the funds in an at call account such as an internet only savings account, the interest rate may change. In times of rising interest rates, it would be preferable to invest in term deposits of a shorter duration to take advantage of rising rates.
Step 2: Consolidate Debt
- Research all credit card facilities and personal finance options so that all debt can be reduced.
- Select a product which restricts additional credit card spending, but offers an affordable repayment structure from a reputable financial institution.
- Keep just 1 credit card for emergencies but reduce the limit to a level which could be repaid in full within one or two pay check cycles.
Step 3: Work out a Budget and Set Up Transfers Between Accounts
- Calculate how much should be set aside from each pay packet to meet all bills, expenses, savings goals and credit repayments.
- Set up automatic transfers from the staging account into which the pay packet is deposited to each credit facility, transaction and high interest savings accounts.
Step 4: Finally- Stick to the Plan
Ensure strict adherence to the budget. Wealth creation for most consumers and investors is like running a marathon, not a 100m sprint. It won’t happen overnight but after 12 months, those who follow this step by step plan will find that bills are getting paid on time, without the use of credit and that family holiday may start to look like an enjoyable possibility!
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