It appears to be that time of year again. Yep, it’s the lead up to Christmas, which means it is also that time of year that all the short term money lenders start popping up on tv again. The main reason I am so aware of these ads, is because I have to physically stop myself throwing my shoe at the tv.
You see, these ads promote the exact thing that we teach our clients not to do. Here are 2 examples:
Citibank Ready Credit
Here are the facts:
- Citibank Ready Credit is a line of credit
- The interest rate is 7.9% on balance transfers for the first 2 years, after that the interest rate reverts to 19.99%
- All redraws or purchases are charged interest at 19.99%
- There is an establishment fee of $149
The ad suggest you use the Citibank Ready Credit loan to purchase a Pony, however with interest that would be one very expensive Pony.
Here are the facts:
- You can apply for $200-$2,000 loans
- You can pay them back over 10 weeks to 3 months
- There is a 20% establishment fee
- The interest charged is 4% per month
This ad suggest you borrow funds to pay bills, fix your car or upgrade your gear (iPad & headphones are pictured). At the rates above, the annual interest rate is equal to about 68% over 3 months, it equates to 32%.
Borrowing money for lifestyle costs is an expensive trap. Not only do you have to repay the borrowed amount but you also have the additional costs and interest associated with the borrowing arrangement. This is why we recommend our clients implement what we call a Bucket Strategy.
The idea of the bucket strategy is that you have access to money, when you need it, to pay your bills AND you have access to funds in the event of an emergency or an unexpected expense. The Goals/Savings account is used to save for the things you want that you cannot afford today.
This is a very disciplined approach to managing your cash flow and of course it only works if you implement it and stick to it, but it does work. This is mainly because the key to managing cash flow is being conscious of what you spend your money on. Ideally, once you implement the bucket strategy you will never need to access short term money loans at exorbitant .
For more information about managing your cash flow, bucket strategies or other financial planning questions, please contact us today.