The Wealthy Barber Returns – David Chilton
The price we are willing to pay is based on our assessment of how much value the item will bring in our lives. The problem arises when we have to make the value assessment on products we will use during an extended period of time, such a new car. Those firsts moments are worth a lot of “joy units”. However will you be as exited in three years when your chariot is showing its age? Probably not.
We usually give no thought whatsoever to declining marginal utility when we are contemplating buying something, we assume that our affection will never wane. So the next time you are tempted to make a major purchase, especially an impulsive one, step back, think a year or two out, and then ask yourself “Will I still be as pumped as I am right now?”
“Gratitude is riches. Complaint is poverty”
Dito Diderot “Regrets of Parting With My Old Dressing Gown: or a warning to those who have more taste than money”. “I was an absolute master of my old gown, but I have become a slave to my new one”. Few thing influence your spending decision today more than your spending desitons of yesterday ( like buying a brand new house, then you need new furniture, then a new car, new clothes, etc ).
I fear credit cards… … they allow us to act impulsively on our impulses ( and that is not redundant ). They also help us create those impulses by making us less sensitive to cost. Even those who fully pay their credit cards every month, many overspend.
Banks are a business, and like any other business they sell something. In their case the something is money, technically they are renting their money to us.
Your bank’s metric for debt affordability and your metric as the prospective borrower are very different, or at least they should be. All the bank calculates is whether you can make the monthly payment, based on your income and debt servicing. You on the other hand, need to determine whether you can make all your loan payments while still funding your retirement programs, perhaps doing some saving and – not unimportantly – having a life.
Your bank’s efforts to load you up with as much debt as you can service is often not in your best interest.
Too much available credit often leads to too much unaffordable spending, and stress, lots of stress.
I have friends who treat their LOC like a second income. “I’m glad our kitchen is so nice, it’s just too bad we cant afford food”.
Almost every financial planner tell us that there is a difference between good debt and bad debt: first house, good debt. Outdoor furniture, bad debt.
“Good Debt” should be defined as any money borrowed to buy an appreciating asset where the cost of servicing the loan doesn’t affect your ability to save to the appropriate level AND where the principal will be fully repaid before your retirement. Bad debt is everything else.
Cashtration: The act of buying a home, which renders the subject financially impotent for an indefinite period of time. A lot of Canadians have been cashtrated and they were their own surgeons, with the banks only too happy to pass the scalpels.
The problem with stretching to the max to buy a house is not the oversized mortgage payment. It goes way beyond that: The higher property taxes, the higher utility bills, the higher maintenance costs, also our new neighbour Diderot ( See above ).
Stretch to buy a house and you will inevitably stretch to buy your furnishings, appliances and even your driveway decorations ( ie cars ).
*** Two of the finest minds in personal finance, Charles Farrell ( your money ratios ), and Thomas Stanley ( the millionaire next door ) argue that overspending on one’s home may be the single biggest inhibitor to achieving financial independence.
Financial types like me love to focus on wise savers, but there are wise spenders out there too. They view their expenditures as investments and seek the highest available return, not measured in dollars or percents, but in joy.
The best way to be prepared for an emergency is to consistently live within your means and keep your debt levels well under control.
Judicious shoppers often “re frame” the cost of an item by figuring out how long they would have to work to earn the money, post deductions, to buy it. This also makes them more aware of an important concept: When we buy something we are really spending time, not money.
Leonardo da Vinci one wrote “Simplicity is the ultimate sophistication”. Keep it simple and get out of your own way.