Falling interest rates - time for a pre-Christmas spending spree?
Home owners got an early Christmas present this week. Is it time to splurge on gadgets or save for a rainy day?
Yet another interest rate cut has knocked $200 per month off the average $300,000 home loan. That makes around $600 per month since September, and it seems there's more to come next year. The cut is designed to put some spending money in your pocket and stimulate the economy, but is it time to spend or save?
My "inner spender" has big plans for that $600 per month. First stop is a PlayStation 3, adding Blu-ray capabilities to my recently overhauled lounge room. Obviously I'll need a library of Blu-ray movies to go with it. Next I might upgrade my iPhone 2G to an iPhone 3G, which will see me jump to a more expensive plan. Of course you have to share the wealth, so it might be time to buy some high tech gadgets for the wife and kids as well.
That's my $600 per month spent for the next few months - doing my part for the economy as a good little mindless consumer.
My "inner saver" says there might be smarter things to do with that money than succumb to my Silicon Lust. Perhaps the financially responsible thing to do is retire debt rather than acquire more toys.
I don't know much about finance, but I do know that being in debt costs you money. Anything you can do to pay off that debt faster will save you money. A lot of money.
A quick Google search found me a home loan calculator at yourmortgage.com.au. A $300,000 loan at 6.75 percent over 25 years will see you pay an horrific $321,000 in interest. If you put that $200 per month into the loan as extra repayments, you'll save $72,000 in interest and knock 5 years off the length of your loan. If you put all $600 per month in, you'll save $147,000 and 10 years.
You don't need to be a financial wizard to see this makes good sense. Even if you don't have a home loan you probably have a credit card or an overdraft, charging something like 13 percent interest. Using your extra $200 per month to pay off these debts will also save you a fortune in interest payments.
Financial people like to use the term disposable income, but that doesn't mean you should throw your money away. Giving in to our greed and spending money we don't have is what got us into this mess in the first place. Times are tough, be smart with your money.
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