How Sound is Your Financial Lifestyle?

Before you can start to build up a passive income you need to check that your financial life is in order.

If you haven’t got your finances in order- you will be fighting yourself to try and save and invest. It’s not the easiest thing to do!

Too often, I hear friends come telling me about different investment options and ideas which seem too good to be true. They have great intentions to invest in their futures. But the way they are going about it is all wrong.

You don’t want to be chasing the very high-risk investment options. What you want to do is to get your finanical life in order and invest in investments with good solid returns- not overexposing yourself to risk.

Get your finances in order. I tell everyone to work on that before they thinking about investing.

You can not have your cake and eat it too when it comes to your personal finances.

If you don’t have your finances in order you need to start there before trying to build an investment portfolio.

Now, how do you know if your finances are in order? I’ve listed a few things that will give you an indication as to whether or not you have your personal finance in order.

1. Do You Pay Your Credit Card Off in Full Every Month?

Paying your credit card off in full every month is a must. Heck, I do it weekly. Credit card debt is one of the biggest categories of bad debts! The combined credit spend in NZ on credit cards is 36 billion. Even if only 1% of that is overdue, Kiwis will loss $6 million a month in interest.

The interest rates on credit cards are around the 20% mark. If you only pay off the smallest monthly payments you will pay more than what you initially spent.

If you do have credit card debt and want to get your finances in order. Pay it off if you can, otherwise, you can refinance it to a lower interest debt- but pay as much off it as you can. Just because it is on a lower interest rate now doesn’t mean you can relax on the payment amounts.

2. Have You Paid Off All Your Bad Debt?

Pay off bad debt before you start to invest in your future financial independence.  Bad debt is working against you. The size of the debt will grow if you leave it. This is the miracle of compound interest working against you.

Credit debt is a type of bad debt, but there are others- payday loans, higher purchase loans, car loans, personal loans. Everything today can be bought through finance. Pay all your bad debt before you start to invest.

There are generally two methods in which you can do this. If you have many loans, you can focus on paying the highest interest rate loan off as fast as possible. Once you have paid that one, you can then move on to the next highest interest loan. But keep paying the minimum amount on the other loans, or you will get stung with payment penalties and fees.

Or you can pay all of them at the same time but refinancing them all into one loan and paying as much as you can. You need to get rid of the bad debt so pay as much as you can afford. No more going out for lunch, or expensive coffees until you have paid the loan off in full.

3. Do You Have All the Insurance That You Need

You need insurance- that is a given. But you don’t need all types of insurance. There are four insurances that you will need.

  •  Home or renters insurance
  •  Contents Insurance
  •  Car insurances
  •  Life Insurance

Ok, so there’s really only two that you absolutely need, Home/renters and Contents. You will need car insurance if you have a car, and life insurance if you have dependents.

All the other types of insurance are being sold to you.

You don’t need the extra warranty on new electronics- they already come with a manufacturer warranty.  You don’t need screen protection insurance for your phone- just be more careful with your things.

Insurance if for big unexpected life events- not small ones like breaking your phone. You need to be covered if a tree falls on your house. Or you accidentally crash into some CEO’s Mercedes.

You don’t need health insurance in New Zealand as the public system will look after you. But if you want to get health insurance, by all means, go ahead- just do some research first.

Also, when it comes to insurance- make sure you shop around. You will be surprised how much you could save!

4. Do You Pay Yourself First?

The technique of paying yourself first has been proven to work for millions of people around the world- and it can work for you!

It works on the basis that you don’t miss what you don’t see.

Paying yourself first is where you set up an automatic payment on the day that you get paid. These automatic payments move money for you. Into debt repayments, mortgage payments, or into investment accounts.

Automatic payments make it easier for you to reach your debt payment or savings goals. There is no way that you will miss any of your targets as you have already paid yourself first at every paycheck.

5. Do You Avoid Unnecessary Fees?

Do you avoid being charged any fees? These can be late payment fees on debt, or they can be bank fees associated with having insufficient funds. Paying yourself first can help in avoiding any fees.

But if you are still being charged insufficient fund fees or overdraft fee from the bank tries these tips. First, ring the bank and ask to have them reversed. If you plead your case the bank may be willing to reverse that $20 fee for the unarranged overdraft. It’s worked for me in the past

Secondly, ring your bank and tell them not to allow your account to get into an unarranged overdraft state. This will mean that your transaction will be declined when you don’t have money in your account- but you won’t be charged the unarranged overdraft fee.

Finally, keep your checking account above $1000 to avoid it happening in the future. This is a buffer and it is not for spending. It is an insurance against the banks charging you fees in the future.

6. Do You Have a Cash Buffer?

Life happens. And there are always unforeseen events where you need cash quickly. Build up a stockpile of cash so that you can cover these events.

The rule of thumb is to save 6 months worth of expenses so that if you lose your job you can survive for 6 months.  This may seem like a lot of money, but you can build it up over time.

Not all of it needs to be accessible instantly, but if the time comes you need to be able to access it in a few business days. So some of it can be put into a liquid investment.

Your $1000 checkings account buffer can add to this fund.

Figure out what is right for you.

Is your Financial lifestyle in order?

  • Do you pay your credit card off in full?
  • Have you paid off all your bad debt?
  • Do you only have insurance that you need
  • Do you pay yourself first?
  • Do you avoid fees?
  • Do you have a cash buffer?

If you answered yes to all questions, congratulations, your financial life is in order.

You can now look into investing for the future. Building up your investment portfolio, generate passive income and become financially independent.

If you answered no- make a plan to turn it around to a yes before you start investing. Follow the 10 steps to reach financial independence in New Zealand.


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10 thoughts on “How Sound is Your Financial Lifestyle?”

  1. Pay yourself first is such an easy thing to understand but so many people struggle to actually do this.

    I think income protection insurance is worth considering for some and can be very important for many young people, as they still have a lot of years of work remaining, and a lot of income still to earn. If you suffer a serious injury or disability, yes our healthcare system MAY take care of the costs of the injury, but it won’t cover your future income needs. If we can’t earn any income we may find ourselves in trouble

    Reply
    • Thanks Nick. Yes I can see the benefits of income insurance. And to be honest I am coming around to the idea. Especially if I end up with some dependents. I haven’t really looked into the price of it yet. But I definitely think you don’t need the extra insurance or extended warranties on items.

      Reply
  2. I know a lot of big names like Dave Ramsey try to shun credit card use (says with credit cards it allows you to spend more and easier) and he suggests the money envelope budgeting method.

    I personally am like you in that I use credit cards but make sure I pay them off each month fully. Then you can actually get reward points or cash back as well and not get dinged with interest charges so it’s a win win.

    I ended up paying the card off completely coinciding with each of my bi-monthly paychecks. That way no matter when the amount is reported for the credit score agencies it is usually low.

    Reply
    • There is defiantly a stigma around credit cards, but I do think they have their place. I mean the travel hacking community loves using them.

      I agree they can be a burden for some. but if you can pay them off every month the are a tool. Personally, I don’t go out and spend much anyway.

      I also switch mine about every two years and sign up for a new one with no fees for the first year, or other deals of the like. Current card has two years no fees and $250 cash back.

      Reply
  3. Your post reminded me that people first need to have a solid financial foundation. Without a solid foundation, you will be placing the cart in front of the horse. Take care of the basics before you worry about receiving a high ROI. It is a better long term approach.

    Reply
    • Couldn’t agree more! The basics often get overlooked because they aren’t really that exciting. I enjoy looking into different investing options rather than making sure the basics are in order.

      Reply
  4. Let’s see if I got these down.

    Do you pay your credit card off in full?

    I always pay at least the statement balance and avoid any interest. I like to keep as much money in my savings to earn a few more pennies, although my credit score might improve if I paid the entire balance.

    Have you paid off all your bad debt?

    No credit card debt (see previous question). I do have some student loans I’m working hard to get rid of.

    Do you only have insurance that you need?

    Yep.

    Do you pay yourself first?

    Yes. I don’t have automatic payments per se – I don’t really like auto payments. What I do is setup my direct deposit to go into directly into my retirement accounts (Roth IRA here in the USA) plus, of course, my employer-sponsored plan.

    Do you avoid fees?

    Yes. If by chance I do get bank fees, I’m not afraid about asking to have them waived.

    Do you have a cash buffer?

    Yes, but not in physical cash. Although my wife likes to keep a few twenties hidden for emergencies.

    Reply
    • Nice work! Thanks for the comment Joe. I know many of these points may seem obvious to some people. Yet there are others who can benefit from them. And I don’t know anyone with a physical cash buffer. I don’t and maybe I should of made that more clear.

      Reply
  5. I like your style to be honest. It’s very easy to understand and if implemented gives an individual some direction.

    I personally don’t use credit cards myself. I know there are benefits to it though, such as building a credit rating and building up points. I’m like an old man, Don’t spend money that you don’t have.

    Reply
    • I use Credit cards for convenience mainly. I’m like you in a way and don’t like to spend what I don’t have so every two weeks when I get paid I pay the credit cards off. When I was younger I got stung with some credit card interest and wowed for that never to happen again!

      Reply

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