Halve your debt and double your freedom

A new personal finance book – Halve your debt, and double your freedom – without the mumbo jumbo! – the credit crunch edition has just been released as another edition to the “No Mumbo Jumbo” series, authored by Nicole Pedersen-McKinnon.

Nicole is a highly respected financial editor and commentator, and a fully qualified financial adviser and stockbroker. She is the editor of the Australian Financial Review’s magazine newsstand magazine AFR Smart Investor, and also the editor of the AFR Investor published in The Sunday Age and the Sun-Herald.

We had the privilege of interviewing Nicole and getting a bit more insight in to the book and asked her to share some of her valuable tips and advice to help you better manage and reduce your debt.

Nicole, What inspired you to write ‘Halve your debt and Double your freedom – without the mumbo jumbo’?

A few years ago, I wrote my first book: Double your wealth and Halve your worries without the mumbo jumbo. And I was struck by the fact that the very best way to build wealth was actually to repay debt. Think about it: money you use to pay down debt effectively earns the interest rate on that debt, whether it’s 5%, 10% or 15%. Guaranteed. Your ‘returns’ are also tax-free because you’re saving the money rather than making it. In fact, for a higher rate taxpayer to be better off investing money than simply paying off an 8% debt, they would need to earn 15% plus. And you can’t do that without taking on significant risk. For a risk-free, tax-free return, you can’t go past paying off debt.

How do you feel Australians have responded to the credit crisis? Has it changed our spending behaviours?

The hangover from our debt binge has been significant and it’s been great to watch people realise the dangers, curb their spending and take steps to get themselves back in the black. This is really smart because it means they will never be so vulnerable again. And, bizarrely, the credit crunch has made it easier than ever to ‘bust out of debt’.

Why do you feel there is an opportunity to save money now in our current economic climate?

Act quickly and the credit crunch could actually set you up for life. Ordinarily Australians pay almost $300,000 in interest most of which is their home loan. But that’s at an average 8 per cent rate. At just 5 per cent, the figure almost halves to $166,000. However you can do better.’Keep your repayments at the level they were and you’ll save a further $69,000.

So from donating almost $300,000 to your bank for the privilege of using their money, your bill has just plunged to less than $100,000.

The more you can shovel onto your mortgage while rates are low, the more of these savings you will secure. There has quite simply never been a better time to put extra money on your mortgage.

But what if money is tight and finding that extra money is hard?

If extra repayments are a pipe dream,’the humble offset account, used cleverly, is a debt-busting secret weapon that lets you use every dollar twice.’It dramatically slashes your interest bill, ensuring a much larger portion of your minimum repayments goes to you, rather than to your bank.

How it works is that a savings account is connected to your mortgage and any money you hold in it is “offset” against what you owe; so if your loan is $100,000 but you have $10,000 in an offset, you will pay interest only on $90,000. If you keep any savings you have for emergencies, holidays, school fees and the like in such an account, and you also have your salary paid into it and live off a credit card for the month, you will slash your interest bill by a fortune. Ten thousand dollars in an offset alongside a loan of $220,000 will save an incredible $55,000 (at 8 per cent). And remember, that’s not cost you a penny.

Financial comparison websites such as Credit Card Finder® provide users with access to deals offered to new customers on credit cards and other financial products. How many Australians do you feel are not as savvy with their finances as they should be?

It’s not that Australians aren’t savvy on the whole I believe we are very money smart but many people still don’t realise just how much they stand to save by making a few small changes to their finances.

Financial providers (and companies all the way through to your telco) routinely use existing customers to subsidise discounts to entice new ones. And that goes double when times are tight. So just by doing a bit of financial housekeeping and becoming a new customer yourself, you could reap significant savings. It will take a few phone calls and then a little effort to shift your business­ but afterwards you’ll be instantly more flush.

And put this new-found money towards a debt such as your mortgage, and you will turn it into vastly more!

The chapter Conjuring cash – magic money savers offers some truly practical money-saving tips. What is your favourite “money hack”?

I have a friend who, to make ends meet at university, lived on Maggi noodles and vitamin tablets. Now that’s a bit extreme! I do like the idea of ‘cocooning’ though recreating the experience of restaurants and bars at home. Spread the cost by having a cocktail evening and asking everyone to bring a bottle or having a dinner party and asking everyone to bring their most impressive dish. Chances are you’ll all get so involved you’ll even enjoy it more than going out.

The book takes a holistic approach to debt repayment. What are the key types of debt your book focuses on?

My book tackles debt across the board after all, any form of debt can seem like a noose around your neck. It’s vital to attack your debt in the right order though – highest interest rate to lowest so that you spend as little as possible repaying it and break free in double-quick time.

How much money could the average Australian potentially save by using the money saving and debt repayment system outlined in your book?

You could take your interest bill from almost $300,000 to less than $100,000. But you have to act right now as there is already talk of interest rate rises that will cut these potential savings.

From our research, less than 30% of Australians are aware of balance transfer offers and don’t fully understand how they work. Your book describes balance transfer credit cards as a “get out of jail free” credit card – can you please explain this analogy to our readers and how they can use balance transfer credit cards?

Credit card providers have been playing silly buggers with their interest rates cutting them by an average of only 1.2 per cent since September when the RBA has cut rates 4.25 per cent. But you don’t need to put up with it because by transferring to a provider that offers a 0 per cent interest rate, you can clear your debt fast.

As you would guess, these cards come with their tricks. Firstly, any new spending attracts what is probably a punitive interest rate and usually no interest-free period applies. Not that that really matters because you will pay that punitive interest rate until you clear your entire transferred balance anyway. This is, of course, how providers can afford to offer such too-good-to-be-true deals.

But this also means beating them at their own game is as easy as never using the card and clearing what you transfer before you will start to pay interest. Balance transfer credit cards are a tremendous opportunity.

What are your top credit card tips you can share with our readers to help them better manage their credit cards?

Firstly, it’s vital to know how ‘interest-free’ days work to avoid getting stung.

• The advertised number of interest-free days is actually the top end of the spectrum only if you buy something the day after your statement closes off will you get this number. So know when that is.
• If you don’t clear your balance in full each month, you will probably lose your interest-free days until you do.
• There is no interest-free period on cash advances and the interest rate is often higher than regular purchases.

Then to avoid racking up debt, try the following:

• Swap a credit card for a debit card you can only spend what you have.
• Re-embrace that long-lost friend lay-by. What better way to force yourself to quickly amass the money than not to take possession of the item until you do?
• Make like Isla Fisher in Confessions of a Shopaholic and freeze your credit card in a bowl of water. Just don’t be tempted to bust it out of retirement with a stiletto!

To purchase Halve your debt and Double your freedom without the mumbo jumbo, the Credit Crunch edition, go to www.nomumbojumbo.com.au

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