How common financial decisions like buying a house or car can go terribly wrong.
You’re not a moron…hopefully, you’re just stressed out!
Even if you’re battling financially with income and mismanage your money, you may be very capable of making sound financial decisions. Let me explain because the previous sentence may seem to make no sense to you. You see you may just be trapped in a vicious circle; the problems that come with being financially strained are more than likely affecting your judgment.
Whereby you end up progressively worse off, as you keep on making bad financial decisions.
Thinking on that, if you’re struggling financially, or know someone who is, there are three ways consumers end up throwing cash away cash when making common financial decisions, such as: buying property, purchasing a car and investing in a retirement plan. Sure you think I’m now talking nonsense but hold on a minute and listen, “yes” they’re all inevitably good financial ideas, of course, but just because you’re doing something clever, does not mean you’re doing it right.
Breaking the bank to take out a mortgage
Very few financial experts will say it’s dumb to buy property; it’s a sound investment right what can go wrong?
But experts will tell you that it’s a stupid idea buying property way too early in life, before you’re financially sound and many people also buy too big of a house.
I have seen this time and time again with newlyweds and young couples as they get swept up in the romantic notion that they need to own a home. Not a normal or small starter home, “A BIG EXPENSIVE HOME”. They don’t think to start off with a small townhouse or flat and then graduate later on to the more expensive homes, when their more financially grounded in their lives.
They go too big too quickly, only later on to regret it and end up with a beautiful home but unable to fit the bill.
Way too many people try to buy a property before they’ve learned to budget, the numbers don’t lie. These red flags should alert you to the fact that you aren’t financially ready yet:
If you don’t yet have an emergency fund saved up, you can’t save up for a sizable down payment (20 percent is standard but the more you have to put in the less your repayment installment) or you’re trying to find another way to buy a house, such as taking out a loan or accepting a high interest rate in place of having that down payment.
You need to consider that a house comes not only with a monthly bond repayment that you’ll likely be repaying for the next 20 to 30 years; but also homeowners insurance, garden service, rates & taxes, appliances and furniture to buy with the inevitable home repairs to boot.
Responsible lenders say your bond repayment shouldn’t be more than 30 percent of your Nett income. Meaning if you’re searching for a way to purchase a property that is going to be between 40 or 50 percent of your Nett income, you then need to do some serious reconsidering because you’re on the wrong track or lying to yourself completely.
Being too Fast & Furious
This is a pet hate of mine, I can’t stress how quickly a vehicle can get you into exorbitant financial trouble.
If you’re not paying attention, and most don’t because you’re too entranced listening to the salesman as he pours honey into your ears and talks nonsense about how you need electric windows and a killer sound system; that you may not realize what you’re buying is way out of your price range.
The dealerships finance manager may even suggest to you that instead of paying the vehicle off in three years, you pay it off over six, and that monthly installment for the car suddenly decreases to a “seemingly affordable” installment; obscuring the fact that you’ll end up paying far more for this vehicle in the long run. Especially if you aren’t getting a good deal on the interest rate.
Of course, it can be very easy to rush into buying a new car, especially if your current vehicle is living on borrowed time. But not only should you make use of the many car loan repayment calculators for vehicle purchases on the internet, remember to look into how your new vehicle will affect your monthly insurance payment, vehicle services and your petrol costs.
We’re certainly a nation in love with automobiles; I’m constantly amazed at the number of R300, 000.00 to R1 000,000.00 cars and SUV’s I see on the road every day. The repayments on those vehicle loans are exorbitant by even average financial standards; you can’t cook supper or shower in your fancy car. So why would you spend that kind of money on an object you can’t live in or sell for a profit later on?
It’s a fact that these cars are worth thousands of rand’s less than their original purchase price within days of buying them.
Many financial experts suggest that the car you purchase should cost no more than 1/10th of your gross annual income. So if you make R120, 000.00 a year, you shouldn’t purchase a car worth more than R10,000.“YES!” we get it seems totally unrealistic but it’s a good floor plan to try and follow.
Just take a realistic moment to think about it, six years is very long time to bind yourself into paying for a car, and it depreciates the moment you drive that car off the showroom floor. When you sell it, you’ll be lucky to get half the purchase price you spent purchasing the vehicle.
I regularly get questions from consumers about what they can do to fix their vehicle loan situation when their only three years into a six-year repayment term. Their financial circumstances have changed and they can’t afford the full car payment any longer, so what can they do they ask? Unfortunately, like in many such cases, they owe more on the loan than the vehicle is worth, so they’re often stuck. They can’t sell the car, because it won’t cover the outstanding balance and afford them to purchase a smaller vehicle so they can still get around. They can’t give the vehicle back to the bank, because they’ll still end up owing the deficit after the vehicles repossessed and liable to keep paying until it’s settled.
So their stuck, damned if you do, damned if you don’t. Hence the reason why I cannot abide the purchasing of new vehicles, it is a depreciating asset that does not contribute capital back into your bank account ever…unless your own a transport business thereby I will stand corrected.
If you feel you absolutely “must” own a new vehicle, research and review your financials with surgical precision. Be honest with yourself in terms of what you can afford and do your homework before confronting a car dealership or you will regret it like so many South Africans out there.
Taking money from your retirement fund
Look, times are tough and there’s no sigh of it getting better, but short of taking money out to save your house from being reposed by the bank or raising ransom money for a kidnapper, financial experts will tell you straight away to keep away from delving into your retirement annuity.
Remember that this is money that will take care of you until your end of days when you’re old and unable to work anymore. The more you deplete your RA, the less you’ll have to live off of and the less your monthly stipend will be due to a reduced capital balance.
Dipping into your retirement fund is a “BIG NO”, so stay away or you’re going to be in dire financial trouble when you retire one day and too old and tired to work.
OUDS is willing to assist consumers in this predicament with a free service of a financial assessment, assist the consumer to organise an affordable, realistic and structured monthly budget and debt management plan thereby providing consumers with a guideline for eliminating and remaining out of debt.