Frugal February: number crunching

Last week, I had a great chat on the podcast with savvy finance guru Effie Zahos about her latest book: Ditch the Debt and Get Rich.

I like Effie’s writing. She is smart and has a lot of knowledge to share. She also does the maths. There is a lot of number crunching in her latest book, which is presented in an easy to understand and absorb way. Basically, she’s done the work so you don’t have to.

Why the maths is important

With nearly any investment, it’s easy to get carried away with the potential/dream/vision of it.

A good example is property. Real estate agents will present you with glossy pamphlets and professionally taken photos (maybe even videos that include drone footage). Increasingly, homes are professionally styled prior to sale. What many people are often buying is the dream of a certain lifestyle – a better life for them and their family. They fall in love with the colour scheme or the promise of being in the right neighbourhood. And property always goes up, especially when you buy into a good neighbourhood so the ancillary costs of getting there aren’t really important, right? Sadly, this isn’t always the case.

What potential buyers rarely do is look at the numbers. If a property is an investment property, this is especially important. In my recent podcast with property legend Bushy Martin he talks about how property is actually a game of numbers. We might be buying a nice new townhouse in a nice leafy suburb with a nice modern kitchen and expertly styled interiors. But what we really need to be looking at is things like the vacancy rate in that area, the projected rental yield, the management fees of property managers, whether or not to pay Lender’s Mortgage Insurance and the cost of a mortgage (not just the interest rate but also any application fees, account fees and charges).

And it’s not just property where we can get carried away without checking fees or charges. The same holds true for other investment classes. Superannuation, for instance, is an investment where fees and charges really count. Many people stick with the super fund that their employer sets up for them not realising that there is vast different between the fees and charges levied by different funds. Simply put, if you are paying more than other funds in account keeping costs, it’s going to affect the growth of your fund overall.

How should I pay down debt?

A key thing for many people to consider is how to prioritise paying down debt. For some people, a discussion about debt is about tackling crippling consumer debt. While overall our credit card balances are (surprisingly) lower during COVID, for many people it’s been a rocky and difficult time. And it’s not smooth sailing yet.

For other people, it’s a different discussion. They are considering whether it’s better to say pay off a mortgage quickly (at low-interest rates) or invest in other higher-yielding investments such as shares. Some people are also wondering whether to prioritise paying off HECS debts or other debts such as car loans.

I won’t spoil the maths in Effie’s latest book, but basically, with everything it’s a mix between the numbers and the psychology. In my own experience, one reason property investing works for many people is because usually they will people commit to paying their mortgage; they may or may not commit to making regular large investments in shares or other investments. But it’s important to run the maths on everything when it comes to loans and repayments. I love the calculators on the MoneySmart website – especially the mortgage repayment calculators. For me, nothing is as motivating as seeing how small, regular additional repayments make a huge dent on the projected repayment time. Try it and you will see what I mean.

Frugal February Finance

February is the month for frugalistas to focus on spending less and saving more. Are you doing #frugalfebruary? If so, how is it going?

You can save hundreds of dollars – even thousands – by reducing things like food waste. But just think: how much are your investments costing you? If you are scrimping on your food budget and eating baked beans and sardines (both of which I really like btw) in order to save $20, $30 or even $50 – have you considered whether you are leaking that amount through fees and charges on investments or other financial products? When did you last run the maths? You might be able to afford a big steak or salmon (or even a night out) with the savings you could find from auditing your finances. (Or you could invest the money into your super, paying down your mortgage or into micro investing platform or ETFs – and then you could eat steak and salmon every day instead. Just a thought.)

How much could you save?

This reluctance to shop around for a better deal, including on financial products, is called a lazy tax. And each year it costs Australians around $3.7 billion.

How much lazy tax could you reduce? Try examining the following.

  • Bank accounts. Are you paying bank fees? How much interest are you earning? Could you get a better deal?
  • Superannuation. What are the fees being charged on your account? Do you have more than one account, and if so, are you therefore paying double fees? Could you change to a lower-cost fund?
  • Financial products. How much are you paying on managed funds? Have you considered investing in lower-fee products such as index funds and their stock exchange traded sibling, Exchange Traded Funds?
  • Share trading platforms. How much are you paying per trade? Could you save money on a cheaper platform? (Note: I’m an investor with Pearler, who have low trades and even no fees on certain ETF purchases. Use the code joyfulfrugalistabeta to jump the queue and start investing.)
  • Insurances. Do you just pay the yearly notice when it comes around or do you negotiate? How many hundreds could you save?

Compare, compare, compare

Effie is editor-at-large at Canstar, a comparison website. That’s a good place to start when it comes to number crunching different financial products. Every dollar counts, and it’s important not to overlook the dollars and cents when we are caught up in the long term promise of investment success..

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