From The Straits Times    |

Staying in control of your finances is a matter of knowing where your money goes (and of course, saving money when you can!). But this is often easier said than done, what with e-payments and all making it quite easy to forget what you just spent on! But one good way to save money is knowing about the basics. These following tips and good money practices will help you successfully manage your finances.


1. Pay for large-ticket items with credit card IPP

Managing your day-to-day budget is something we’ve more or less got down, but it’s the occasional high-cost purchase that can cause us problems.

Ideally, you’d already have the savings to pay for your faulty aircon system, decade-old PC, or that new iPhone. But is it really the best move to wipe out your savings this way? What if after using up all your money you’re hit with a real emergency? What if you don’t have the cash on hand?

Whenever you need to pay for a large-ticket item, see if you can use your credit card Installment Payment Plan (IPP). This is an interest-free installment payment plan widely offered by major retailers. The repayment period is typically two to three years, and is a good way to pay for furnishings or appliances that are important but don’t require instant cash downpayment. 

When you put an IPP on your credit card, the card’s limit is lowered by that amount. This means you need to check first that you have sufficient credit limit – most banks allow you to use up to 90% of your limit this way. As you pay off your installment, your available limit will increase, so you’ll be able to use your credit card as per normal over time.

Now for the bad news. You won’t earn any rewards points, air miles or cashback on your IPP. Also, if you decide to pay back your IPP early, your bank may charge you an admin fee (usually a small percentage of the outstanding).


2. Use Balance Transfers and Personal loans to get out of debt

Two common financial products are balance transfers and personal loans. If needed, you shouldn’t hesitate to make use of them to control runaway debt. Both these tools offer low interest rates, and using them judiciously can help you restore your finances to a healthy, debt-free state. (The idea is to use them to pay off credit card balances before they drown you in interest charges).

For a balance transfer, the core characteristic is an interest-free period (typically 6 to 12 months) to pay back the amount you borrowed. You don’t have to pay a fixed amount each month, but you do have to finish paying back the entire amount by the end of the interest-free period. If you fail to do so, the outstanding amount gets converted into a balance on your credit card, and is treated as such. (Which means high interest charges).

Personal loans are more straightforward. You’ll simply make a fixed payment every month for an agreed duration until you pay back the principal, plus interest owed. The duration of your loan, monthly payment and any applicable service charges are communicated to you when you apply.

As long as you stick to your monthly payments, there’s no danger of incurring higher interest. You can confidently pay off your loan at a fixed rate. However, if you miss payments, you will be charged late fees.

Balance transfers are good if you prefer not to commit to a lengthy repayment period, but you run the risk of inheriting a balance if you do not clear the entire amount within the interest-free period. If you need more time to pay the loan back, stick with a personal loan instead.


3. Avoid using a cash advance

You may have heard of a cash advance, which is a facility included on your credit card that allows you to withdraw the available credit limit as cash, which you can then use freely. While this may seem attractive for meeting immediate needs, there are several reasons you should avoid using one.

For a start, a cash advance comes with relatively high service fees. The moment you make a withdrawal, you’ll be charged of 6% of the amount withdrawn, or a minimum of S$15. Talk about paying for the privilege of using money you don’t have.

Secondly, a cash advance is due by the next billing cycle (typically 21 to 24 days), after which you’ll be charged interest on the amount you do not pay back. This means you have a very short period of time to pay back the amount, which makes it doubly unsuitable as a loan.

Thirdly, cash advance interest charges are typically higher than your credit card rate, approaching 30% per annum in most cases. This makes a cash advance an even more urgent debt to clear than most.


4. Remember: Practice makes perfect

As with everything else, knowing how to budget and properly use financial tools come with experience. Although having a healthy respect for debt is good, knowing how to deal with it is better.

Remember, to manage your large-ticket purchases without them turning into worrisome sources of debt, simply put them on IPP, use balance transfers and personal loans, and avoid cash advances.