Big Ticket Big Burden
Life lesson: Do not bite off more than you can chew, otherwise you might end up being what is spit out.
Small changes can make big differences in your pocket book. If that is true, the bigger items have an even larger impact. The problem here is… it is much more difficult to remedy the large items than the smaller ones.
Be modest with your money
Let’s use an example to kick this thing off. Steve is a recent college grad. Excited and happy he decides to reward himself with a brand new car. He is going to be rolling in money and taking hundred dollar bill baths soon anyway right? So he purchases a new car for $25,000 and because he doesn’t have a lengthy credit history they offer him an interest rate of 12%. Now Steve is stuck paying roughly $700 a month for a vehicle that loses value at an awfully fast speed. Let’s say Steve is one of the lucky few to land a job right away at a respectable $45,000 a year. After taxes he is bringing home around $2800 a month. The car payment is already eating up 25% of Steve’s bring home money. That means Steve has just over $2000 for housing, food, gas and any other purchases and expenses. On top just the loan he will need insurance which won’t be cheap and he will end up paying at least $100-150 a month. 6 months later and Steve has to start paying off those student loans. Steve has a modest amount of student loans sitting around $30,000 and a monthly payment of around $250. He moves in to an apartment for around $500 a month to get out of his parents house. Now Steve is looking at combined monthly payments of around $1500 which is over half of his monthly income.
Steve is still living on bare bones if we added in all other expenses he would be either spending more than he earns or hugging the line awfully close. The point is that he doesn’t need the brand new car. I am sure a $10000 car would suit his needs just fine and it would be a reliable ride. This would take his monthly down to closer to $300 a month. This gives Steve $400 more a month or so to save, redistribute or help pay off debt.
Save up for big purchases rather getting it all on credit / loans
The same can be said for other large scale items like a mortgage, boat, furniture or jewelry. A mansion would be awesome to own, but can you realistically afford it? I purchased a home just over a year ago and I thought I was making a great decision. I got the 8000 tax credit, had a decent salary and was able to scrape by without my wife working who was sure to find a job any day with her new bachelor’s degree. Well my wife looked for a job for months and barely got a nibble due to the recession and her field. At roughly six months into the mortgage we were living pretty close to paycheck by paycheck. In the end we ended up cutting back in a few areas and I found a few other small cash flows that made a small difference. The issue here is I was technically well within my means to afford this house on my own, or so said the banks. The real life truth is that even after the recession banks and realtors want to get paid and will tell you that you can afford more than you can. Take a step back and look at it on a month by month basis and add up all other expenses. Then add in all the other costs of owning a house. My guess is that you will be a little nervous about signing that loan if you are going to have to give up so much to live in that house.
The recession is clear proof that we think we need the biggest and best and we believe we can afford it. We also make the assumption that the future will always bring in more wealth than the current. I highly doubt the over 10% unemployed thought that they would be. Take some risk management and look deeply into what you are doing before you purchase an expensive item on a loan. My guess is that you will be much happier and financially healthier in a little less.