What leads most people into debt?Trying to catch up with people who are already there.
So how do we avoid this problem? Let’s look at some ways to prevent ever having to deal with a cash-flow crunch.
- – Setup monthly payment plans wherever possible, e.g. insurance premiums and utilities
- – Identify expenses that could blow out or potentially cause problems such as renovations or legal fees in a dispute
- – Keep a close eye on account balances. You’d be amazed how loans can creep up and how cash balances can drop just by simple, but regular, ATM withdrawals
- – Make sure you have a cash-flow buffer
Know your finances
Everyone’s cash-flow situation is different. Some of us receive a regular salary, while others have irregular income and expenses that make it much more difficult to figure out how to manage your money. The key is to have a firm grasp on your unique cash-flow challenges and have a plan in place for avoiding the dreaded cash-flow crunch. Know it in your head, check balances weekly, understand where cash is going.
Once you have a strategy in place and are now allocating resources to investment, for example an investment property, as well as your usual lifestyle expenses, take the time to ask your adviser to model it for you and recommend alternatives so that you can ensure you can afford it.
Buffer ‘insurance’
You should also allow a buffer for unexpected events. Make sure you allow for interest rate fluctuations. My suggestion is use an interest rate of 2% above the prevailing average rate at the time. That will allow for up to four interest rate rises, which is as about as much as you can plan for.
You should also allow a buffer for unexpected events. Make sure you allow for interest rate fluctuations. My suggestion is use an interest rate of 2% above the prevailing average rate at the time. That will allow for up to four interest rate rises, which is as about as much as you can plan for.
even if you have a view on interest rates, my suggestion is don’t lock it in, as the rate is usually 1-2% higher than the variable rate at the time. So for a period of time you are paying higher rates. Even if rates were to rise up to your fixed rate and you’re now par with the market, you’re still behind given you’ve been paying higher rates for a period of time. It is only when rates go up another 1-2% and stay there that you will begin to save… and these are scenarios that even professional economists get wrong – particularly a couple of years out.
