PRINT THIS OUT AND KEEP! I have had too many people emailing me over the past few weeks asking about budgeting and there seems to be hundreds of people searching on how to budget and how to save money etc. There seems to be a trend and people want to know how to deal with the banks. So I have decided to give away a whole chapter of an e-course I developed about a year ago that I sell on the internet to my subscribers list but I think there is a need for it and here you can have it for nothing.

Traditionally in New Zealand we have had savings banks (designed to cater mainly for the public’s everyday banking) and commercial banks (designed to handle commercial businesses and international transactions). The distinction between the banks has become almost non-existent as different banks merged and competition has meant they have to do everything.

Banks consider themselves a profit centre and so make no apologies for making a profit when looking after your money. They are very aggressive when charging fees and marketing their “add on” sales such as insurance’s and bank services. In some banks, these “add on” sales can make up 25% of their profit.

Banks are also becoming more technical utilising electronic means of paying (such as EFTPOS) and transferring money between accounts and to pay creditors (such as telephone transfers). Whichever way we look at it, banks are becoming less personal all the time and only seem interested in you if they can make money from you through fees or additional products.

Bank managers have a great deal of autonomy and how you are treated in a branch can be largely determined by the relationship you have with the key people in it. If you are getting on well with the loans officer or you have an understanding bank manager then that person is worth keeping in contact with – even if they change branches.

Within the rules laid down for business by the banks the bank manager has a great deal of discretion when it comes to applying those rules on things such as overdrafts, clearing cheques quickly or being more lenient when you are a few dollars short of making an automatic payment work.

FEES

It is not at all unusual for the average person to be faced with $240 worth of fees per annum! Check your own bank charges – you could be surprised.

So how do we avoid fees? As a rule Savings and Loans Societies and Credit Unions have less fees but offer less services.

When you conduct a transaction at a bank counter, as many as 17 people handle that piece of paper before it is finally filed and forgotten. This is why transactions by staff members are so much more expensive than using the electronic and automated systems. Here are some do’s and don’ts:

Do’s:

· Use the ATM machines whenever possible for less fees.

· Use EFTPOS transactions and get cash out while buying goods – two transactions at once saves fees.

· Use automatic payments or direct debits when possible.

· Utilise telephone transfers to move money between accounts and to get account balances.

· Use telephone transfers to pay bills.

· Ensure there is money to action all your automatic payments as the charges from the bank if you fail to leave sufficient money in your account are often $25 every time.

Don’ts:

· Make cash withdrawals at the bank.

· Make cash deposits at the bank.

· Use any teller transaction at all such as getting printouts or moving money from one account to another.

· Leave insufficient funds to cover your automatic payments and telephone transfers. This will incur fees at the bank and penalty interest on loans.

In summary, avoid using personal services whenever possible and make maximum use of electronic and automated systems.

The reality is the banks will be very hard on any small customer that does not keep their account in good order. If you talk to a bank manager they will tell you that if you bounce too many cheques or fail to let too many automatic payments fire then they will happily close your account down and see you on your way.

WHAT TYPE OF ACCOUNTS SHOULD YOU USE?

· Current / cheque accounts – the bank has designed these accounts to handle the majority of your transactions and money movements.

Fees charged are on a “per transaction” basis to reflect the high usage on the account. Interest earned on this account is usually low.

These accounts are ideally suited for telephone transfers, automatic payments, direct debits and other forms of money movement activity.

· Ordinary savings accounts – these accounts will pay more interest than a current/cheque account as they are designed for savings but they will also allow a fair amount of activity on the account e.g. telephone transfers, automatic payments, cash movements in and out.

As a result, you still get charged a reasonably hefty fee per month and possibly a higher fee per transaction to discourage you from moving your money in and out too often.

These are very useful accounts if you are saving money for things such as car repairs, house maintenance, school fees, and other short term saving goals.

· Incentive savers – these savings accounts are designed to reward you for putting money in but not taking money out. For example, if you put money in during a month but make no withdrawals they will often pay you a higher interest rate for that month. If you take your money out, you will often get far less or no interest paid that month.

Also to discourage you from moving your money, the transaction fees are highest on incentive savers while monthly account fees are often very low.

This account is excellent if you are saving for a holiday in a couple of year’s time, a deposit on a house or any long term savings project.

SETTING UP YOUR BANK ACCOUNTS

When we set up bank accounts we are trying to achieve certain things:

· To set them up in such a way that our bills are paid as a natural progression of our bank accounts and not something we have to remember all the time.

· To minimise bank fees and costs.

Banks will often ask you to have a sum of money when you open a bank account and this can be difficult to achieve sometimes. You could take your money from savings to start an account or borrow a small amount on a credit card or from a friend. The interest is minimal if you hand the money back as soon as you start the account and you can save a lot of money if you become more efficient in the way you handle your bill paying.

You could reduce all personal expenditure for a short period of time to get the money together or ask the people you owe money to for a period of grace and put that extra money aside.

1. All income should go into one savings account. Do not let yourself be paid in cash if you can possibly help it as cash in the hand is easily spent. If all the money goes to the savings account then you will minimise money “leaking” out of our system.

2. This savings account will end up holding all our money for:

· Extra expenses.

· Holidays and gift savings.

· Extra savings.

· $2000 as a minimum buffer.

All Income

			Savings Account # 1
									No ATM or EFTPOS access
		Transfers per pay period $………………………… $…………………..
	Savings Account # 2 For allowances						Cheque Account # 1 For committed expenses

Top up $………………. Top up $……………….

(comfort level) (to cover bank fees and

keep account in credit)

The reason we have this money going into a savings account is that when we take money out for our allowances and committed expenses, whatever is left will naturally start going towards savings – this makes savings a lot easier.

Note – there is no EFTPOS or ATM access on the first savings account or the cheque account to stop us taking money from the wrong place.

3. Every pay period we must transfer the right amount into our second savings account for allowances so that we cannot spend any more than we are allowed, as there simply isn’t anymore to spend. While we call this a savings account, you should find an account that costs the least amount possible to operate.

4. Every pay period we must transfer the right amount into our cheque account to cover our committed expenses. We put this amount in here to make sure no more is spent on our committed expenses than is necessary. By putting a limit on these expenses we have to make sure we stick to our budget.

5. Both the second savings account and the cheque account will need a sum of money transferred to cover things such as bank fees and to top up if we do overspend. Every pay period we must make sure we put in the extra we have planned in our budget to cover such costs.

6. In both savings account number 2 and the cheque account we need to have a minimum level of money to ensure that we never overdraw these accounts and fail to meet our commitments. If our automatic payments and commitments are not met then the extra bank fees (often as high as $25 for an automatic payment that doesn’t work) will soon make our budget very hard to achieve.

The number two savings account might have an amount of, say, $100 in it to make sure that we never run out of money and bank fees don’t overdraw the account. Use this $100 as your minimum balance and make sure you never go below this.

The Cheque account also needs an extra amount in there to cover fees, as this is the most active account we have. You will also have to make sure that there is extra in there to accommodate the fact that you may not have a full payment ready to go out once a month. For example, you might have to pay $100 a month on a hire purchase.

When we did our calculations we multiplied $100 a month x 12 to get an annual figure. In this case it is $1200.

We then divided this by 26 to find out how much of our fortnightly pay has to go into the account to meet that. In this case, it is $47.50 a fortnight.

If you only have 2 pay periods until your monthly automatic payment is due then you will have a total of $95.00 in the account – this is obviously not enough. We need to put a little more in right at the beginning to make sure that there is enough there to take into account the fact that there are 4.3 weeks in a month.

Likewise, the cost of setting up automatic payments etc. is something else the bank will deduct from the account so that if we are setting up our bank account system and we are setting up 4 or 5 automatic payments we must allow money for the bank charges. If we do not, our whole system will fail right from the beginning.

It is worth noting that automatic payments will come out in a certain order. Some banks pay the largest first. Others will pay them in the order they are loaded.

This means if you move into a new flat, for example, if you load new automatic payments for your rent, it will be the last thing paid when it should be the first. Ask the bank to rearrange the order.

It could well be necessary to calculate an amount of money that needs to be put into the accounts when you first open them, as a lump sum, to ensure that you will always be able to pay your bills on time.

7. What if you do not have a lump sum or you simply find it too difficult to calculate the extra amount that you need to make sure your bank accounts stay in order?

We can change the amount we put aside each week or fortnight towards our payments to make sure there is always a little more going in than is actually necessary. When we calculated how to work out our weekly and fortnightly payments before we used the following formula:

For weekly payments divide the annual amount by 52 – for example, $520 per annum divided by 52 = $10 per week.

For fortnightly payments we took the annual payment and divided it by 26. For example, $520 per annum divided by 26 = $20 per fortnight.

We can replace these two formulas with ones that give us a months payment every 4 weeks:

For the new weekly payment we divide the annual amount by 48. For example $520 per annum divided by 48 = $10.83 per week.

For fortnightly payments we will now divide the annual amount by 24. For example, $520 per annum divided by 24 = $21.67 a fortnight.

What this will do is make sure that you have the full months payment every four weeks. This means that you will always have enough money by the end of the month to pay all your bills. You will also build up an extra amount going into the accounts (1 month of extra bills) by the end of the year. This will help leave extra in the accounts for unexpected fees or forgotten payments and will mean that you are far less likely to miss any automated payments – why would you, you will actually have too much money in the account.

This way of calculating your weekly or fortnightly payments is an excellent way of simplifying your budget down and making if far more likely to work because of the extra amounts going into the accounts.

The problem with this way of doing things is that if your budget is so tight that every cent counts, you may well not be able to put the extra small amounts aside. You can’t move money to accounts if you simply don’t have it to move!

If you have got the extra money then this is a very good way of helping your budget stay on track and is recommended highly.

8. We have used two savings accounts and one cheque account because savings accounts have less fees and so they are more economical to run. Most banks will not let you have automatic payments coming out regularly from a savings account and so you will need one cheque account to do this.

If the bank does allow automatic payments from a savings account then you can combine savings account #1 and cheque account #1 to save more fees. This also has the advantage of increasing the amount you have in savings because every cent not spent stays in your savings account automatically.

The disadvantage of combining the two accounts is that you have to be very careful that you do not take too much of your savings out each time you withdraw money – you could be spending your automatic payment money.

People often prefer to have their income split between two different accounts (or even two different banks) to make sure the savings and/or automatic payment account is truly out of sight and out of mind. It is a good idea.

9. By setting the system up this way it doesn’t matter whether your automatic payments and hire purchase payments etc. come out monthly and you are paid fortnightly, this system will accommodate this difference.

You must remember that if you finish paying off a hire purchase or put another commitment on that you have to change the transfers from the first savings account to the cheque account to make sure that the right amount is being transferred. If you do not, you will run short of money or have too much in the wrong place.

If you succeed in paying a bill off and therefore have extra money you can start to leave extra money in the savings account or keep the money going to the cheque account and pay more off one of your other bills. Either way, you will have to remember to change the automatic payments that are in place.

10. We have all your pay going into the savings account at first because it means that every cent you don’t spend on allowances and committed expenses is saved. This is how you will eventually manage to become more financially independent.

Check your calculations every two or three months to make sure that everything is running smoothly – review your systems regularly. If you find that a regular commitment did not get paid on time – find out why because it may be an error that will happen again.

DIRECT DEBIT VERSUS AUTOMATIC PAYMENTS

An Automatic Payment is a more traditional form of making a payment automatically. Once it is set up it will keep going until an expiry date or until you cancel it.

The advantage is that you have control over it and can alter or stop it whenever you want. If you miss a payment it will often fire next attempt.

The disadvantage is that if your payment changes (for example a change in an insurance policy premium) you must remember to alter the payment or you soon fall behind on your commitments.

With a Direct Debit only the company that puts it in place can stop it – you cannot, even though it is your account. (In truth some banks will do it for you but they are not meant to!)

Organisations like Insurance Companies use direct debits because they do not need to get a new authority signed every year. This means instead of chasing clients and overdue payments they simply write you a letter and inform you of the new payment. They adjust the schedule sent to the bank and take the new amount from your account.

They can also take missed payments more easily by requesting a double payment from the bank the next month.

They usually simply send you a letter and “tell you” what they will do if you do not contact them. Most people do not bother to contact them.

There is nothing wrong with direct debits. It is simply that people do not like feeling they are not in control and do not like having others tell them how much is going to come out of their bank account.

BANK LOANS

Currently, banks are moving towards using either “blue chip” security (mortgages and term deposits) or unsecured lending. They believe that they will either give a good interest rate if the security is solid or take their chances on an unsecured loan but charge a lot more money. The difference in interest rate between a secured loan and an unsecured loan is often about 3%.

Loan Requirements

All banks have criteria that you must fulfil if you are to get a loan from them. These are:

• A good credit rating. The cleaner your credit rating is the easier it will be for you to get a loan.

• If you have had a “black mark” on your credit rating the bank will still consider your application if that credit has been paid off and this shows on a credit check. If you have been a bad risk to someone else and you still owe them money they will not consider your loan any further.

• You will be asked to explain how the bad credit rating occurred and if the story is reasonable and the loan is not too large they may well consider your application.

• Sufficient disposable income. Banks will usually use two criteria to judge whether you have enough money to pay for a loan:

Ø They will allow you 35% of your gross wage before tax towards your fixed commitments. For example, if you earn $1000 a fortnight they would allow $350 a fortnight towards fixed commitments.
A fixed commitment is an obligation you have to pay money on a regular basis and will usually be either a loan of some sort (such as a credit card, hire purchase, store card) or an obligation (such as rent). If you do not pay your fixed commitment then someone will bring it to your attention and act to obtain the money from you.
Included in this fixed commitment will be the amount that you will be paying for the loan that you are currently applying for.

Ø You must have a “net surplus” after you have paid all your fixed commitments. Banks will use an indicator such as $800 a month net surplus after all fixed commitments for an individual, $1300 per month for a couple plus $120 for every child.

For example: if Joe earns $2000 a month the bank will allow him 35% of that towards fixed commitments – this is $700 a month.

If Joe is currently paying $250 a month in board and a credit card, then $750 less $250 means the bank will allow $500 towards future loans. If Joe’s loan is $300 a month, then he will meet this requirement.

Joe must also have $800 surplus funds when we take the tax and the fixed commitments off his $2000 a month. If Joe’s tax is $400 a month and his fixed commitments are $550 ($250 board and a credit card + $300 loan) then we can see that Joe also meets this criteria. $2000 – $400 tax – $550 fixed commitments = $1150 surplus per month.

• How long you have had accounts with the bank and how you have conducted those accounts (e.g. have they been overdrawn, are you late with your payments, are they always chasing you for arrears) also play a major part in whether they will lend you the money or not.

• The security you offer can make a difference. If it is good security then it will make it easier for the bank to lend you money.

• All banks will charge a minimum fee of, say, $250 for a loan but can charge as much as 1% of the amount that you borrow.

SECURED LOANS

Banks look for mortgages and term deposits as their best form of security. They will also consider things such as shares, insurance policies and personal guarantees but they will modify the rate to accommodate for the fact that they don’t consider this class of security to be as good. As a general rule, banks will no longer use motor vehicles as security.

Advantages of a secured loan are:

• A better interest rate – probably 3% lower than unsecured lending.

• It is easier for the bank manager to lend you money if it is secured.

• If you have security in place with the bank (e.g. a mortgage) then it will also make future loans easier to obtain.

• Fees are higher and you do need to have the security.

On the whole banks are more comfortable with secured lending because they feel that if the customer has something to lose (such as a house), they are less likely to default on the loan. They will be more committed.

UNSECURED LOANS

Banks are quite happy to take the risk on unsecured lending because they charge a higher interest rate. These days it is cheaper to sue the few people who default on their loan than it is to put securities on every loan. Unsecured lending can include credit cards, overdrafts and unsecured loans.

If you are new at the bank you will often find a $200 overdraft or credit card is an automatic part of opening an account at the bank. Getting more unsecured lending will rely very heavily on how long you have been with the bank, how much money you have going into the bank and how you have conducted your accounts in the past.

A lot of bank managers will start with a smaller limit such as $500 and work up as you prove yourself but will set maximums depending on your income and the amount of money coming into the bank. For example, you may find that the bank will not lend more than 10% of your income or that they will not give you more in the way of an overdraft than you have money coming in every pay day – this means you clear your overdraft every pay day.

Advantages of unsecured lending:

• Fees are often less, as you do not have to pay for things such as mortgage documentation and lawyers fees.

• You can still obtain money when you have no security to offer.

• Unsecured lending is often for a smaller amount and therefore you have less to pay back.

• If you default on the loan you will not lose any of your personal possessions – although you will have a bad credit rating and possibly be taken to the debt collectors and courts if needed.

It is not unusual for banks to insist that you have some form of risk protection such as life cover or income protection if they are doing an unsecured loan. The reason for this is that they have no car, house or term deposit to cash in should the loan fail if you were to die or become unable to work. What they do is cover themselves with life insurance policies and income protection plans.

From a legal point of view they cannot insist that you have this insurance to cover the loan. Unfortunately, most banks will not lend you the money if you decide you do not want to put this sort of cover on a loan. As a result, while they cannot legally insist that you have this cover they can decline your loan if you don’t take it.

Banks often use a point scoring system to determine how much they will lend you. They look at a number of areas such as:

– How long you have lived at your last address?

– How long you have been in your last jobs?

– Have you had loans before? How did they go?

– Are you married?

– Is your credit rating good?

They score you on each area, the less points the better. They then have a chart they rate you against and this says how much they can lend you.

For example, if you have had 3 jobs in 2 years, have moved 4 times, no stable relationship and already defaulted on a loan – you will not get much of a loan if any loan at all.

If you have held a job for 5 years, lived at the same address for over 7 and are married and your previous loans have run well, the bank will score a loan application more kindly.

Banks will lend $15,000 or more unsecured these days.

Banks often score you on a points system to see how much unsecured lending you can have. The lower the score, the better.

For example, if you are in a rental property, are an unemployed teenager with bad credit and never saved any money with the bank, you would score highly.

If you owned your own home and were happily married in your late 30’s with 2 children and had all you wages deposited along with regular savings, you obviously have a better (lower) score and will receive more credit.

If you have just changed jobs or houses but been in the previous one for a long period of time, make sure you let the bank officer know as this effects the score.

CREDIT CARDS

Credit cards have got more people into trouble then any other form of lending. They are the most expensive form of lending with interest rates often in the 20% range and they are designed to trap you into using your credit card right up to the limit and leaving it there.

In New Zealand, more than 60% of people who have a credit card always have it at the maximum limit. If you cannot control your spending then you are better to apply for overdrafts and small loans to make sure you do not over commit yourself. It can be cheaper in the long run.

If you buy goods on your credit card then you will have up to 55 days to pay the card off completely before incurring any interest. If you only pay the minimum 5% each month it can take 7 years to pay off and you will pay 3.5 times what you spent.

If you get a cash advance on your credit card then you will pay interest from the day that you took the money off your credit card. There are some advantages:

• You pay approximately $20 a year as an administration fee and you do not have a $250 up front administration fee as you do for a loan.

• Once you have a credit card limit you can use it repeatedly without having to reapply for further funds from the bank.

If you lose a credit card (or cheque book) report it straight away and you will probably not be responsible for fraudulent use (except perhaps the first $50 or so).

If you find a card missing and do not report it, you could have to pay some or all of the fraudulently taken funds.

HOW TO USE A CREDIT CARD TO YOUR BEST ADVANTAGE

Because of the lack of upfront fees, the credit card can be useful for small purchases/bills that you can pay off in a couple of pay days.

Credit cards tend to have a 55 day billing cycle. This means that you use your credit card and every 30 days you are sent a bill. You have 25 days to pay at least the minimum amount.

30 days plus 25 days + 55 days

If you clear the whole debt before the 55 days, you pay no interest. Plan your purchases so you buy on the first day of the billing cycle. This allows you the maximum time to pay the bill completely.

For example – you need to buy a $150 tyre for your car to get a warrant of fitness. Suppose your billing cycle is the 1st day of each month, then buy the tyre on the first of the month. If you are paid fortnightly you will have 3 paydays in the 55 day cycle. If you pay $50 each payday you will pay the card off before the minimum payment is due.

This means you will pay no interest because the card is paid off before the due day on day 55.

Buy the tyre ($150)					30th			Payment due
1st		Payday $50		Payday $50		Payday $50		55th day

This is the best way to use your card. If you have some money still owing on the 55th day you will usually only pay interest on the outstanding balance. But watch out if you do not clear the whole card – read their rules carefully.

WHAT ABOUT CAR LOANS?

Most banks are interested in doing small, unsecured loans (up to $5000) or large long term loans (such as mortgages) – they are not particularly interested in things such as car finance.

It is usual for banks to have a relationship with an established finance company that caters for the loans between $5000 and $25000 that are most common for car loans. For example, Westpac Bank owns AGC Finance: BNZ Bank has created BNZ Finance and National Bank has a working relationship with UDC Finance.

In this way, their clients are able to obtain car loans but they do not have to be party to an area of lending they do not want to be involved in. Banks rarely use cars for loans any more.

GUARANTORS

If someone acts as a guarantor on your behalf they have an equal amount of responsibility for the payment of the loan. It is very important that you make a guarantor aware of their responsibilities.

If you do not pay your loan and your guarantor has far more substantial assets (such as a house, car etc.) then the bank has the right to pursue the guarantor instead of you if they feel they have more chance of getting their money back.

Most banks will not take a guarantors unsecured signature and will require some sort of security from the guarantor to use on the loan.

A bank usually uses personal guarantees when a well-established customer asks the bank to allow a less established customer a loan facility.

For example, if mum and dad have been at a bank for 20 years and they ask the bank manager to help their son with a car loan, the bank may ask the parents to go guarantor on this first loan. The bank manager usually entertains this as a favour to the parents as he might not normally do this loan for a newcomer to the bank.

The majority of guarantor secured loans are not successful – if the bank will not lend you the money there could be a good reason. Many people who act as a guarantor swear they will never do so again!

PERSONAL GUARANTEES

Be very careful when a bank asks you to sign a personal guarantee. This is one of the most all-encompassing documents that you are ever likely to see!

On the front of a personal guarantee a bank normally puts a waiver that you are required to sign. This waiver says that you have foregone the opportunity to take that guarantee to your lawyer and have them look at it and give you advice. The reason this is here is because the guarantee is so complete that they are required to suggest you get legal advice.

It’s probably a good idea!

A bank will often ask a director of a company to sign a personal guarantee over the company’s undertakings. If the director does this, then they have no more protection from having a limited liability company.

A personal guarantee will not just guarantee the transaction that you signed it for (for example, the purchase of a car) but will mean that you have personally guaranteed every transaction and every loan on all your accounts from that point onwards – not just that first transaction. You could now be responsible for every overdraft, bounced cheque, or other loans, etc.

Not only that, but personal guarantees live on after your death. This means the bank has the right to pursue your estate for any money owing.

If you must sign a personal guarantee then ensure you get a letter from the bank saying that you can have that guarantee released upon the successful payment of the loan that they used it for. It is far too powerful and gives the bank too much control to just let it keep going.

Ideally, never sign them in the first place!

WHAT TO DO IF YOU LOSE A CHEQUE BOOK OR CARD

It is important to let the bank know as soon as you realise that your chequebook, credit card or ATM card have been lost or stolen.

Look up the bank in the phone book and ring their 0800 number (you can do this whether you have a telephone service or not) and report the loss.

If you report it straight away you will not be responsible for any fraudulent spending or use. This is because you have told them as soon as you know. This means that you have acted in the best way possible and done what you can to minimize the bank’s loss.

If you delay then you could well be responsible for any card usage or cheques written after you know about it.

For example, suppose you notice that you have lost your cheque book on the 10^th, but do not ring the bank straight away thinking you might have it in the car or at home. Having looked, you ring the bank on the 12^th. You could be responsible for any spending between the 10^th and 12^th because you are meant to ring them straight away so they can cancel the card or cheque book to minimise the loss.

The bank will ask you when you noticed the loss – It is important NOT to admit it was a couple of days ago. Always say that you have just noticed.

Thieves can be clever. They may do something like steal just your credit card but leave the rest of your wallet where they found it. This means they have the time between stealing your card and you noticing it to spend on it – it could be weeks before you notice!

BE CAREFUL

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