Money, Credit & Bills

Part 1

Find out where it actually goes

Almost everyone is wrong about their own spending, and nearly always in the same direction. Three statements tell you the truth, and the truth is the whole exercise.

1. 1

   Print three months and sort every line

   Four buckets only: fixed (rent, insurance, phone), variable-necessary (food, fuel, utilities), subscriptions, and everything else. Three months, not one — one month is always unusual for some reason.

2. 2

   Total the subscriptions

   Do this before anything else, because it is the fastest money most people ever find. Streaming, apps, gym, storage, the free trial from two years ago. Multiply each by twelve. The annual figure is what makes people cancel; the monthly figure is what made them subscribe.

3. 3

   Work out your real monthly number

   Total spending divided by three. Compare it to what comes in. If more goes out than comes in, you now know by exactly how much — and a number you can see is a problem you can work on.

4. 4

   Then budget, simply

   A common starting frame is roughly half of take-home on needs, thirty percent on wants, twenty percent on saving and debt. Treat it as a mirror rather than a rule: if your needs are seventy percent, that is the real finding, and it points at housing or transport rather than at coffee.

5. 5

   Automate the part you will not do

   Move savings on payday, automatically, before you can spend it. Willpower at the end of the month is not a plan. Every plan that depends on discipline fails eventually; the ones that depend on a standing order do not.

Part 2

What borrowing actually costs

This is the arithmetic that changes behavior. Do these sums with your own numbers once and you will never look at a minimum payment the same way.

• $5,000 on a card at 24% APR, paying only the minimum, takes well over 20 years and costs roughly as much again in interest as the original balance. The minimum payment is designed to be affordable, not to clear the debt.
• The same $5,000 at a fixed $250 a month clears in about two years for around $1,300 in interest. The only thing that changed was paying a fixed amount instead of the minimum.
• Rule of 72: divide 72 by an interest rate to get the years for money to double. At 24%, debt doubles in about three years if you pay nothing.
• APR is the yearly cost including fees. Compare loans on APR, never on the monthly payment — a longer term makes any payment look small while costing far more.
• Payday loans commonly run into triple-digit APR. A $400 loan can cost $60 for two weeks, which is around 390% annualised. This is the single most expensive money available to ordinary people.
• Rent-to-own and 'no credit check' furniture or electronics frequently cost two to three times the retail price by the end.
• Car loans over 72 or 84 months mean owing more than the car is worth for most of the term. That is called being underwater, and it traps you.
• 0% promotional offers usually carry deferred interest: miss the payoff date by one day and you owe the interest on the whole original amount, backdated. Diary the payoff date, not the minimum.

Part 3

How a credit score is actually built

Credit scoring is not a mystery and not a judgement of character. It is five weighted factors, and knowing the weights tells you exactly what to do.

1. 1

   Payment history — about 35%

   The biggest factor by far, and it is simply whether you pay on time. One payment 30 days late can drop a good score substantially and stays on the report for seven years. Automate the minimum on everything, even if you pay more manually — that single step protects the largest slice of your score.

2. 2

   Amounts owed — about 30%

   Specifically utilisation: your balance divided by your limit. Under 30% is good, under 10% is better. This resets monthly, so it is the fastest lever you have. Paying a card down before the statement date rather than the due date lowers the number that gets reported.

3. 3

   Length of history — about 15%

   Older is better. This is why closing your oldest card can lower your score — it shortens your average history and removes its limit from your utilisation. Usually better to keep it open with a small recurring charge.

4. 4

   Credit mix and new credit — about 20% combined

   A mix of card and instalment debt helps slightly. Several applications in a short window hurt, though rate-shopping for one mortgage or car loan inside a couple of weeks normally counts as a single enquiry.

5. 5

   Check your report, free, three times a year

   AnnualCreditReport.com is the federally authorised site. Stagger the three bureaus across the year. Look for accounts you never opened — that is how identity theft is caught — and dispute errors in writing. Errors are common and disputes genuinely work.

Part 4

The traps built to be hard to see

• Overdraft 'protection' can cost $35 per transaction. Opt out and let the card decline instead — a declined coffee is embarrassing for a second and free.
• Free trials requiring a card. Diary the cancellation date the day you sign up, or do not sign up.
• Extended warranties on electronics are usually poor value; many cards already extend the manufacturer warranty free.
• Buy-now-pay-later splits are debt. Several running at once is genuinely hard to track, and that is the design.
• Anything that must be decided today. Legitimate offers survive you thinking overnight.
• 'Guaranteed approval' and 'no credit check' both mean the cost is hidden somewhere else.
• Cheque-cashing services and money orders cost a percentage of your own money. A basic bank account is almost always cheaper.
• Car dealers negotiating on monthly payment rather than total price. Always negotiate the total, then discuss financing separately.

Part 5

The order that works

Not a rule, but a sequence that avoids the common failure of saving nothing while carrying expensive debt, or clearing debt with no buffer and immediately re-borrowing.

1. 1

   A small buffer first

   Around $1,000, or one month of essentials. Without it, the next car repair goes straight back onto a credit card and undoes everything. This is not investing; it is the thing that makes the plan survive contact with reality.

2. 2

   Take any employer match

   If an employer matches retirement contributions, that match is part of your pay. Not taking it is declining money. This one has no downside and is the exception to paying off debt first.

3. 3

   Kill the expensive debt

   Anything above roughly 8–10% — cards, payday loans, store cards. Clearing a 24% debt is a guaranteed 24% return, which no investment can promise.

4. 4

   Build to three to six months

   Once the expensive debt is gone, grow the buffer to cover real unemployment or illness. Keep it somewhere boring and instantly accessible, not somewhere that can fall in value.

5. 5

   Then the long term

   Beyond this point the right answer depends entirely on your circumstances, age and goals — which is exactly where a fiduciary advisor earns their fee, and where general guidance like this stops being useful.