The Most Asked Money Questions of 2010

Around this time each year I declare bankruptcy – on my emails. The only way I can hope to clear my creditors is by wading through my overstuffed inbox and pulling out three of the most common questions I’ve been asked this year. Here they are:

The top three money questions of 2010

Help, we can’t keep up with our costs!

Hi Scott, my name is Sarah,* and I’m super duper stressed. My husband and I bought a home about eighteen months ago, and since then I’ve had a child and left full-time work. So we’re down to one income.

“The cost of everything seems to be going up – from my power bill, to groceries – even our car insurance went up this year by eighty bucks!

“I’ve been reading in the newspapers that prices are going up even more next year – but we are already stretched as far as we can go.

“We’re true Barefooters so we don’t have a credit card, but I’m considering getting one just in case. Is there any other option?”

Sarah, you’re not alone – a number of surveys suggest that the rising cost of living will be our number one money worry for 2011.

Now I could advise you to flush the toot only every second time, walk around the house naked to cut down on air-conditioning costs, or any number of tightwad tips that you’re not going to follow.

While it’s become politically popular to punch the power companies – and pollies are playing the blame game to win votes – in reality there’s not a lot than anyone can do. It’s simply the sting in the tail of our economic success.

China’s demand for resources is one reason the cost of powering our homes is forecast to keep increasing – and those rising prices are contributing to flooding our resource-rich economy, putting pressure on interest rates.

The real problem is that Australian households have too much debt. When prices rise, there’s not enough fat in the budget – which sounds like the situation your family finds itself in.
So, here’s what to do:

First, start spending less than you earn, and make it your number one goal to squirrel away $2,000 as quickly as you can into your Mojo (high interest savings) account.

Second, use the momentum you build up to start paying off any of your personal credit (store loans, personal loans) you have. They’re the easiest way to go broke.

Finally, when you’ve paid them all off, your next savings goal should be to get at least three months’ living expenses in your fund. Having money set aside gives you peace of mind!

Should I buy gold?

“Hi Scott, it’s Dean* here. I started getting interested in finance around the Global Financial Crisis, and all I’ve read leads me to the conclusion that the paper money system is in long-term decline and I’d be better off investing in gold. What say you?”

Deano, buying gold for your wife is always a good investment, but whether buying it in the midst of a gold boom is a good idea I’m not so sure.

Gold is the ultimate store of value, and with governments around the world showing no signs of slowing their printing presses, and more European bailouts on the horizon, the yellow metal could go higher. (Any goldbug will tell you that, if you adjust for inflation, gold’s peak in 1980 was $US2,200 an ounce – so there could be plenty of room to grow.)

Yet I’d be wary of investing too much of your portfolio in gold. It’s the equivalent of buying a block of land without a house on it to rent out. There’s no real way of drawing an income from it – the only way you make money is the price increasing.

Pay off the home or invest?

“Hey Barefoot, I’d like to get your advice on something I’ve been fighting about with my missus. We bought our home about eight years ago for $330,000, and it’s now worth about $550,000.”

“We still owe about $240,000 (which for us is a lot), and I’ve been thinking that instead of putting extra into the home loan we should invest it into some properties or shares. What do you think? Thanks, Corey.”

Hi Corey, I get asked this all the time.

The act of investing means forgoing money now so you can have more in the future, and the key to money management – and motivation – is figuring out what you’ll need that money for in the future.

While I’m a big believer in getting your banker off your back as quickly as possible, you shouldn’t do it at the expense of all your other financial goals.

The reason is that, unless you specifically plan early for those big financial costs, chances are you won’t be able to afford them when they roll around, so it’s good to take a leaf out of Paul Kelly’s playbook and understand that ‘from little things big things grow’.

Once you’ve got your mortgage under control (meaning you can comfortably meet a number of rate rises), you should focus on what’s on your ‘bucket list’ and begin shovelling money into your goals.

One money bucket could be labelled ‘save for your kids’ education’, which will require perhaps a couple of hundred dollars a month in an investment bond (but not the Australian Scholarships Group (ASG), which doesn’t pay much interest).

Another bucket could be ‘save for a new car’, or a family holiday, which should be saved in a high-interest online savings account.

Regardless of your goals, one money bucket you need to fill sooner than later is a three months emergency fund – the people who have one don’t tend to have a lot of emergencies!

Tread Your Own Path!

* All names have been changed.

Photo: http://www.flickr.com/photos/the-maestros/352417169/