Getting your budget back on track

  • Repayment numbers: the longer you take to pay off a credit card bill, the more it costs. In this example, where the annual interest rate is 18 per cent, it would take 94 months to pay off $5,000 by making the minimum monthly payment of $100, and the total cost would be $9,311

    Repayment numbers: the longer you take to pay off a credit card bill, the more it costs. In this example, where the annual interest rate is 18 per cent, it would take 94 months to pay off $5,000 by making the minimum monthly payment of $100, and the total cost would be $9,311


Over the past few weeks we’ve all been busy preparing for the holidays, shopping for the holidays, experiencing the warmth of the holidays. Now that it is all over and the new year is here, it is back to reality. And with it comes the usual monthly bills with credit card statements covering the holiday period.

If you planned for all your purchases then you know exactly what you spent. If you didn’t because you just got caught up in the wonderful spirit of the season, even though you told yourself not to go overboard, there may be unexpected surprises. And by that, I mean your credit card bill is looming large in your mail stack.

Will this higher-than-planned bill balance torpedo your careful budget? It might, but do not panic. You need to remind yourself that you are a responsible person with an understanding family. You can solve this problem without endless hand-wringing stress.

If the above scenario sounds a bit contrived, it is not.

This transition from holiday euphoria to reality one month later happens to many of us — including yours truly. Christmas celebrations generally make us feel good about ourselves, our family, our lifestyles, and our giving patterns. We become emotionally, pridefully consumption-driven, and for a few weeks abandon the cold logic of what we can and cannot afford.

Here is a three step basic debt-payment plan to get yourself back on track. You will need access to a computer, or a smart phone.

Step One. Add up your debt. Review your credit card statements, and any other debts. How much do you owe in the short term, that is 30 to 60 days, and how much in the long term, that is over a number of years?

Hopefully, your answer is a good one: very little in short-term debt, but probably quite a bit more in long-term debt. That answer would be fine, but what if it isn’t? Say, your debt ratio is skewed to lots of short-term debt and very little or no long-term debt.

What did you buy or gift? Let’s categorise what you (and the bank) have bought by incurring debt. Are we talking appreciating assets, depreciating assets, ordinary necessities, or mindless consumption that have no lasting value whatsoever?

Appreciating assets, such as a home purchase, generally grow in value over the long-term. Plus, your payments are building equity ownership and a roof over your head, an incredibly right financial reason to make that your long-term borrowing plan.

What about the other three categories? Designer bags, watches, electronics, antiques, meeting friends, takeout lunches, groceries. If you need to sell these purchases — be honest now — will you get more than you paid for them? Obviously, you can not normally resell food, etc. But can you name any other assets that you want to (or have) purchased that will increase in value? Well, entertainment might have value since you may carry the memories of a wonderful time for ever, along with the credit card balance.

Reality is that none of those three will ever appreciate in value and by charging them on credit, the eventual cost to repay may be far more than the original price tag.

Step Two. Now, tout up all your monthly household expenses. You will need to, at least, pay the credit card minimum payment, but ideally any surplus over regular monthly expenses should be used to pay down that credit card principal debt (not interest). Be very alert to this difference. Here’s why.

See the calculator. Credit card balance is $5,000 with 18 per cent interest compounded a year. So, 5,000 multiplied by 18 (per cent) equals $5,900 in a year, which is 20 per cent more than your purchases’ original costs. A $100-a-month repayment will take eight years plus with a huge amount of interest. The repayment will be more than $9,311. Painfully, you will have literally paid twice over.

Whatever your personal credit card balance, take the time to run your numbers using various monthly payments to see how long (or how short) a time it will take to reduce your balance due. Then build those payments into your budget.

Here are two useful websites:

5 Best Credit Card Payoff Calculators by LaToya Irby. https://tinyurl.com/y9lj9av4.

360Financial Literacy. https://tinyurl.com/y9lhgw62

Step Three. Your goal for this year is to decide how you are going to control your impulse purchases in a manageable fashion. Such as by:

• saving consistently,

• using debit instead of credit cards,

• creating (and using) a realistic budget that works for you, and

• just simply saying no! I want to own my own home, and payoff the mortgage for real financial security.

There, you have it. Not too long, not too preachy, and a basic game plan to get your family budget back on track.

As an extra resource, check out The Royal Gazette<./i> article about the potential permanent damage caused by using credit cards. This article, published on August 23, 2014, is particularly relevant because it demonstrates how credit card balances increase when the family does not pay the entire balance due. These debts can last for years. Your impulse holiday gifts, make-yourself-feel-good impulse treats, lunch or entertainment night — the final cost could be three to five times more than the original cost.

The two questions to always ask before you hand off that card:

1. Is this purchase an appreciating asset — can I sell it and if so will I get all my money back?

2. Can I pay the total balance due at the end of the month?

You can find the above mentioned article at https://tinyurl.com/p62xfu3.

Additionally, “The Bermuda Credit Card Landscape” article on August 30, 2014 has a chart of descriptions, terms, interest rates, and various bank credit card offerings in Bermuda. This article can be found at https://tinyurl.com/nry4zzm.

Finally, please write to me. I welcome all your questions, thoughts and ideas. I will answer them, confidentially, of course.

Next week we delve back into more of the new things such as blockchain, bitcoin, and bubbles.

Martha Harris Myron CPA CFP JSM: Masters of Law — international tax and financial services. Pondstraddler Life, financial perspectives for Bermuda islanders with multinational families and international connections on the Great Atlantic Pond. Contact: martha@pondstraddler.com

See Related Media for credit card repayment graph details<./i>

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Published Jan 6, 2018 at 8:00 am (Updated Jan 5, 2018 at 11:12 pm)

Getting your budget back on track

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