Debt Reduction

Think – Shrink – Grow – Farm

The first step in saving for your first farm is to eliminate any unnecessary consumer debt—small loans, visa cards or car loans. By putting away the credit cards and eliminating ALL unnecessary purchases including online and impulse buys, you may be pleasantly surprised how much you can really save.

One simple idea our clients have often found useful is to apply the two-step rule:

  1. Put all non-essential purchases on hold for 24 hours.
  2. Discuss the proposed purchase with your partner.

If you still really want it after 24 hours and you’re both in agreement, make the purchase. If not DON’T. This will go a long way to eliminating impulse purchases. Often when we take the time to think about what we are buying we realise we don’t actually need it.

Create a monthly surplus with your budget and work on reducing debt faster

Conventional financial wisdom is to pay the debt with the highest interest rates first. However, if you have a number of small debts it can sometimes give you more personal satisfaction by reducing the number of your debts. You can often feel more motivated by paying the smaller debts off first, as once each debt is repaid the money used to pay off the previous debt can then be applied to the next debt.

Review your credit card interest rate

Swapping your credit card to a new bank offering a reduced rate of interest on balance transfers for an introduction period can allow you to repay it faster. Some special offers reduce the interest rate from 18% to 4%, which is easier to repay.

Create an emergency cash fund

A basic financial planning rule is to have an emergency cash fund equal to three months of expenses, but be aware this is often only just sufficient. It is not advisable to have your credit card as part of your emergency fund and it should only be used as a contingency.

In the farming industry accommodation is often provided with the job, so moving jobs can carry more of a financial burden with additional costs such as rental deposits, loss of earnings in between jobs or expensive removal costs if relocating to a new region. Ideally these need to be provided for in your emergency fund.

Budget

The sorted.org.nz website is full of useful tools to enable you to plan your way out of debt and save/invest your way to your financial goals. Budgeting is your first step in the saving process.

Use the website’s Money Planner to start your budget. You can save your budget at any time for future reviews, ongoing reviews or discussion with partners, friends and advisers.

See: www.sorted.org.nz/calculators/money-planner

Banks

It is not ideal to think of the bank as your friend and a bank manager is not your business partner. It is worth remembering that each bank branch is a cost centre. Any fee the bank can add or additional product they sell you helps the branch profitability and allows the bank employees to achieve Key Performance Indicators and bonus targets. Banks are in the business of getting the largest return for the shareholder.

Reports from farmers who have lost their farms with unexpected expensive interest rate increases from this highly volatile form of borrowing have been emerging over recent times. Loyalty to your bank for 40 years is no protection. Banks have little fiduciary duty towards their clients. They simply supply the product the capital-intensive agricultural sector needs, as it grows and develops.

A useful tool for banks’ interest rate comparisons (for residential lending) is available at http://www.goodreturns.co.nz/mortgage-rates.html.

Note that lending is fairly competitive and good loans with good amounts of equity will get better investment rates than advertised

If possible, use different lenders for different properties/purposes as a way of reducing lending risk.

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