Debt is unavoidable. All of us have debts. For some people, the debts are simple obligations like utility bills. For many, it would be a credit card bill. From mortgage to paying back the student loan, people have myriad types of debts. It is almost impossible to avoid debts. Even the billionaires of the world have humongous business loans to repay. They continue to persist with those debts because they are necessary and they haven’t turned into bad debts.

There is good debt and there is bad debt. You cannot and should not avoid good debt. Let us explore the simple differences between bad debt and good debt.

• A home loan or mortgage is a good debt. You have bought a house or apartment. It is a tangible asset and would offer generous returns in the future. Unless you have purchased a property that no one would buy, you will almost always make money when you choose to sell the house or apartment.
• Bad debt is any loan that is unnecessary, is hitting your finances hard and may be getting unmanageable – those debts which are liabilities rather than assets. Skyrocketing credit card debt is bad because it is not necessarily leading to tangible assets and you would be paying high rates of interest. Personal loans and unsecured loans are also bad debts if you don’t have a very reasonable purpose. Allowing utility bills and other financial obligations to build up would also qualify as bad debts. You would have to pay penalties that are avoidable and your credit history could take a hit.

 

There are grey areas when it comes to good debt and bad debt. A car loan is neither good nor bad. Since cars are depreciating assets, you are better off purchasing one with a down payment or in cash. But if you don’t have enough cash or don’t want to use it up, then you need a loan.

It is not necessary to make debts complicated. Necessary debt with reasonable interests and when it is manageable is good debt. Any debt that is needless, demands high interests and becomes a burden is bad debt.

Most of us are so accustomed with poor money habits that we don’t even pause for a while to review if we can make a substantial change. And let’s face it – old habits tend to live on, they become hard to break.

Let us explore some of these unwise money habits and how we can shun them to get on a good financial path.

• One of the most common ways we waste our hard earned money is by paying interest. The best advice – be aware of your interest payments versus capital payments, the first step to being financially savvy is knowing what your money is going toward. Some loans are unavoidable. A home loan is quintessential, so are a student loan at times and a business loan for those eligible. Also by avoiding loans unless absolutely necessary, an average person can easily save hundreds in a year. Imagine the savings over twenty or thirty years.
• Most people focus on the larger expenses every month and wonder if they can be reduced in any way. Often, it is found that the larger expenses cannot be affected much, from home loans to health insurance. But there are numerous expenses that most people indulge in that can be cut away with. Bottled water, the expensive coffees every day, the cigarettes and drinks at bars or lounges, dining at fancy restaurants more often than frequent, spending on gadgets that you wouldn’t use for long, impulsive buying at malls and stocking up on food or any stuff that will not be used. These are very normal actions that can be checked and one can save several hundred, if not thousands, in a year.
• It is necessary to review every financial liability from time to time to check if there is a way to save some money. Whether it is your contract phone or satellite television subscription, the utility provider or your landline, internet plan or car insurance, you must explore your options every few months and check for better deals without compromising on the quality or the services you get.

 

These simple changes to your money habits will not just help your immediate financial health but also pave the way for a handsome saving in a few years.

Making a household budget is quintessential to financial planning. It is rather simple to come up with a budget. You have your income, you can make a list of expenses you cannot avoid and then decide how much you wish to save every month. Accordingly, you need to cut corners somewhere, invest your money or save, try to increase your income and you should always look for smarter ways to save on unavoidable expenses. The real challenge is to adhere to a household budget. Here is how you can approach the whole daunting challenge of financial planning.

• Don’t spend money when you don’t intend to and don’t have to. Impulsive buying is the biggest threat to savings. Adhere to your grocery list, abide by the budget every time you wish to buy something and you would stick to the math.
• Be firm with your goal to save. This goal may be yearly, quarterly or monthly. But you must break it down to the least possible denominator. Put aside some money every week and that must be untouched savings.
• Limit your use of plastic money, especially credit cards. Use cash and you would naturally run out of it once you have exhausted your budget. To facilitate this, transfer the amount you wish to save from one account to another right after your pay cheque gets credited.
• Savings is a never ending exercise. You may not notice this but the little amounts you spend regularly on the mundane routinely coffee, lunch and snack outside actually end up costing you more than a thousand bucks. If you are living in a major city, then this cost would be up to two thousand and possibly more. Cut down on this expense and you could have handsome savings. Take a homemade lunch to work, avoid one cup of coffee every day or skip a few snacks or meals at fancy restaurants or expensive eateries when you can do without them.
• Avoid debts. From personal loans to credit card debt, all these commitments will cost you dearly. Do some math and check out how much you have paid extra in the last year or years as interest. This entire amount could have been your savings.
• Don’t shop on weekends. It may seem to be a daunting challenge to shop on a weekday or at a particular time on a certain day of the week but that is how you would get some amazing deals. Always try to buy in bulk. Today, most homes have large refrigerators. You may not have larger than life freezers but you can stock up at least a fortnight’s worth of food. When you buy in such bulk, you are bound to save anywhere from 10% to 30% off normal prices.

Every working adult should know the financial basics. Very few people are proactively conscious of their financial wellbeing. Financial health is not just about your present income, your monthly expense and if you are living from one pay cheque to another or if you are managing to put aside a few bucks. You need to have a plan to have your financial affairs in order and in control for a predictably prosperous future. While it is difficult to perfect financial planning overnight, you have to get started somewhere. Get started with the financial basics.

• Always have your accounts organized. We aren’t talking about the bank accounts you have but a professional account of all your incomes, expenses, savings and investments. From your financial liabilities to your assets, everything should be well documented. You may consider a certain expense to be too tiny to find a mention in your account and some incomes may be deemed a surplus. Ideally, you should account for everything.
• Always keep an eye on the official cash rate. It is the standard set by the Reserve Bank determining the cost of borrowing money. In other words, this is the rate at which the central bank lends to other banks. The official cash rate is reviewed from time to time. It goes up and down and remains constant. The focus is to keep a check on inflation but the rate affects all financial products, at least within the regulated banking and finance industry.
• Your mortgage and all other secured or unsecured but conventional loans will be influenced by the official cash rate. A mortgage is an asset in the making because the money you spend, even as interest, is actually getting you a property. Credit card interests and all other secured or unsecured loans excluding business loans would also qualify as debts with no major returns. These would have an adverse impact on your financial health.
• In addition to saving money, you must consider investing your savings. Having savings parked somewhere will not multiply your money and hence you wouldn’t amass wealth. You need to invest in various types of funds or assets that will generate handsome returns. But make investment choices wisely as those too can wipe off your savings.

As always, we recommend speaking to your YFG specialist for expert guidance and assistance.

Dividends are a part of the profits that a company make in a financial year and decide to share with all its shareholders. Every share or stock has a certain dividend value which is announced at the annual general meeting or the meeting with shareholders. Usually, it is an executive decision with the entire board of directors having a vote. Companies can be generous and announce handsome dividends after a great year. They can announce no dividends for years if there isn’t enough profit or if they are incurring losses. Let us explore the dynamic concept of dividends.

• Companies have different approaches to deciding on dividends. You must understand these differences if you are to pick the most rewarding stocks. There are growth oriented companies that would hold onto the profits to finance expansion and scaling. This prevents them from paying handsome dividends. They may not pay any dividend at all, despite churning a profit. There are yield companies that have done fairly well for years, if not decades, and don’t need more funds to expand. They would happily share the spoils with the investors who have stood by them, dividends.
• As a smart investor, you must learn a bit more about dividends than just the amount being announced for a given year. There’s dividend yield ratio which is essentially the number of dividends divided by the present share price. You would typically get to know the dividend yield ratio from the press release and you can calculate the earnings you would have depending on the number of shares you own.
• Dividends aren’t necessarily paid once a year. Many large-cap companies will pay dividends once every six months, there can be interim dividends and a final dividend at the end of the financial year. Listed funds can pay quarterly and small companies usually don’t pay any dividends till they grow and amass a certain ready capital. Companies can always choose to pay special dividends to motivate investors or to retain shareholders. They can also pay special dividends when there are windfall gains. There’s another type of dividend known as franked dividends, which are essentially paid by companies after they have filed their taxes. Once the taxes on profits are paid, companies may choose to announce a certain dividend, which will also allow shareholders or investors to get a credit on the tax paid.
• Get accustomed with a few important terms, like ex-dividend date, record date, payment date and dividend reinvestment plan.

The purpose of loan applications is solely to establish your eligibility and to assure the lender that you would pay back, with interest and on time. Hence, only two things matter in loan applications: your financial health and personal profile.

• Financial health pertains to present income, assets or savings you have, financial liability and source of income or employment history. The income determines how much you can spend and your financial liabilities will determine how much you can save or have to spare. The loan amount you are applying for will be repaid in instalments, which would most likely be monthly. The lender will check if you can afford to pay that instalment every month. The general approach is deducting all existing financial liabilities including monthly expenses from the income. The result should be considerably higher than the instalment that must be re-paid.
• Source of income and employment history will be quintessential factors as that would tell the lender if an applicant has a steady income and if one has been employed long enough to consider it as a secured job or profession. Lenders are not concerned about your entire professional future. They just want to be reassured that you wouldn’t be out of job or be unable to repay the loan because of fluctuating income. If you are self-employed or have a business, then the history of your self-employment or history will be considered.
• Both financial health and personal profile are assessed relatively. The type of loan you are opting for, the loan amount you apply for, the purpose of the loan, term and the instalments that you would have to bear will be kept under consideration while assessing your financial health and personal profile. The personal profile includes everything from your professional experience to your academic qualification. Not all lenders ask for these details but high loan amounts will call for increased scrutiny.
• Your credit score will be the next checkpoint, followed by savings and investments. Your existing liabilities or loans will also be considered. Credit score obviously tells a lender if you have re-paid your past loans or have been good at repayment. Savings and investments will assure the lender that the applicant is bankable. Existing loans and other liabilities will tell the lender if you will be able to manage an additional financial obligation.

 

Lenders look for clarity, accurate details, truthful declarations and honest conversations.

There are some expenses that require a loan. Borrowing money does not have to be a bad thing, but you do need to be responsible. There are instances when borrowing money is a necessity. If you are looking to make a major purchase like a home or car, it is often unavoidable. Before you borrow money for any type of purchase, it is important that you know how to be a smart borrower. Here are the best tips for borrowing smarter:

 

Check Your Credit

It is important that you prepare before you borrow. This means that you need to check to make sure that you have a good credit score before you think about borrowing money. Having a better credit score will give you access to a lower interest rate on the money that you borrow. This means that you can borrow money for much less if you have a good credit score/ You might want to put off borrowing money until you get a higher credit rating.

 

Borrowing Can be Good

Many people assume that borrowing money is always a bad thing, but this is not the case at all. It is possible to borrow money in a way that actually benefits you. For example, if you choose to borrow money to buy a home and the value of the home increases with time, you made a wise investment and had the ability to leverage the debt to increase your own net worth. This is something that makes the most sense and is the best way to build your net worth. This means that borrowing money can sometimes be a good thing if you make the best decisions.

 

Budget

It is also important for you to budget when you are borrowing money. This is something that you need to be sure to do. It is important that you have the ability to make the monthly payments that are required for the money that you borrowed. It is even a good idea to have extra money saved so you can pay off the loan at a faster rate. You will need to create a budget so that you know how much you need to save and how much you have available to spend. This is one of the best ways to make sure that the money your borrowed does not impact your credit rating in a negative way at all.

Mortgage is the biggest financial commitment for most people around the world. Unless you are an investor or run a midsize to large business, you are unlikely to make any investment that is dearer than your mortgage.

While it is not considered to be a risky investment, there are risks associated with it. You would be making a down payment, which could be all your savings or a major chunk of it. You would be committing to repaying the mortgage, every month for fifteen, twenty, twenty-five or perhaps thirty years. That could be seen as a lifelong commitment. You can always walk out of the mortgage and that would mean you would be moving out of your home. That is why you should try to mitigate mortgage risk as much as you can.

• Never buy a property that is too costly for you. Many homebuyers think that they can manage to pay a mortgage that is 30% or more of their income, they think that they can cut corners and in any case their incomes would rise in the near or foreseeable future and that the amount paid as instalments wouldn’t pinch as much. Such approaches are unwise. Purchase a home that you can afford comfortably. If you do very well in the future and amass substantial wealth, you can always buy a much better or costlier home.
• Do not consider the exact mortgage payments as what you owe to the lender. While that would be the amount you pay for now, it may increase or decrease. Should the repayments reduce due to a cut in rates of interest, then you don’t need to worry. But what if the rates go up and you have to pay 5% or perhaps as much as 10% higher than what you pay right now? You must factor this in and see to it that your incomes conveniently allow for such a surge in financial liabilities.
• Repaying mortgage can become a daunting challenge and almost impossible if you lose your job, if you have a serious medical emergency in the family or if you are unable to work and earn a living. You can consider payment protection insurance; you can consider tenants in your home or you can have some other plan that would keep repaying your mortgage or settle it at once.

 

Speak to your YFG lending specialist to guide you along in calculating the best mortgage repayment amount for you based on your specific income and expenses.

 

 

Refinancing a mortgage can be very rewarding or it can be a loss incurring exercise. Every financial decision or a financial product/service has potential pros and cons. You need to weigh the pros and cons in the right context and then make an informed decision.

While the entire spectrum of refinancing cannot be discussed in just one article, this beginner’s guide should shed some light on the essential aspects.

What is Refinancing?

Simply put, refinancing is opting for a new loan to replace your existing loan. You could do this with the same lender or with a different lender. Refinancing has some potential benefits. For instance, you can opt for a lower rate of interest than the one you are paying now, you could reduce your monthly instalments as a result or you can keep paying the same instalment and end up paying the entire loan sooner than with the existing loan. Also, you can save some money upfront by getting a cash payment because of the lower rate of interest while you stick to the same remaining repayment term and instalment. The objective is to save money using the lower rate of interest or a more favourable lender.

Overcoming the Issues with Refinancing!

Any financial product or service must be studied well to make informed decisions. There will be lenders, their representatives and brokers who would want to sell you the concept of refinancing. That is one way how they acquire new clients and earn commissions. You need to study the pros and cons.

There could be some upfront costs on your part, in the form of fees and commissions or processing charges. These shouldn’t deter you if you are actually making some savings every month and then eventually end up with substantial returns.

You need to factor in the short term and the long term goal. If there is a lower rate of interest, then you obviously have a bad mortgage and you should get the better rate or switch to another lender. But, if the rates have very little difference and don’t really affect the bottom line and if you are paying substantial amounts to make the switch, you have to do the math to make sense of refinancing in the short and long term.

Above all, you should always put refinancing in the right context. Would you be staying at the same home for five years or more, which is when you would realize the substantial benefits of refinancing? Do you need a better mortgage so you can sell your property immediately? These are certain contextual questions that beg consideration.

We always recommend that you consult with your YFG lending specialist to be able to make an informed decision.

 

Stress is defined as a state of mental or emotional strain or tension resulting from adverse or demanding circumstances.

Mortgage stress is defined as a state of mental or emotional strain or tension resulting from the onus of paying a mortgage, or instalments, that are higher than 30% of the total family income.

You can do the math and see if your mortgage consumes more than or let’s say one-third of your total family income. However, there are exemptions. High net worth individuals who aren’t really under any financial stress and whose two-third incomes would be a fortune don’t really fall into this classification. For others, the average families with ordinary homes, mortgage stress is a reality.

How do you know that you are experiencing mortgage stress?

The math alone would not be sufficient. It is very possible that despite paying more than 30% of your income towards your mortgage, you would be doing fine. It is also possible that paying 25% of your income towards your mortgage can get you severely stressed. What it boils down to eventually are the symptoms. What stresses you may not stress someone else.

Let us consider some realities.

Are you consistently thinking of the mortgage you pay? Are you perennially under duress that you have to pay the instalment? Are you compromising on a whole lot of things, perhaps including some humble purchases to continue paying your mortgage? If any of these realities are a part of your life, then you are experiencing mortgage stress.

The reason why 20% to 30% of income is considered the threshold while approving mortgages is the belief of experts over the decades that such an amount can be conveniently put aside and paid by an individual or family. What is not accounted for in such calculations are fluctuations, personal obligations or liabilities that emerge after evaluation the mortgage application when there may not be any debts or astounding financial dependence and many such possible circumstances that can squeeze every cent of the remaining income of an individual or family.

From medical problems to a growing family, professional troubles to untoward developments at home, there can be numerous factors contributing to mortgage stress. Homeowners should consider strategizing their finances to avert mortgage stress. Homebuyers should do the math properly before signing up for a mortgage which can lead to unnecessary and undesirable stress.

The mortgage industry is unlikely to work in favour of individual homebuyers or families that own homes. It is eventually upon every individual to make the right choices.

 

As always, we recommend speaking with your YFG lending specialist when determining the right amount for you to be spending on your mortgage – They are the experts after all!