Little luxuries are not your big wealth killers
A few years back the ‘Latte factor ®’ by David Bach was seen as the panacea to all personal financial woes. The idea was that if you forwent all those little luxuries (like your daily cup of Java) then you’d accumulate thousands and all your financial woes would be over. Frankly? Bunkum! It is the major decisions that will have the biggest impact on your wealth.
The biggest of these decisions is a house, specifically moving, even if you swap ‘like for like’. That one act is going to put a huge hole in your wealth, and one you may never recover from. On a R4.5m house for example, the costs are around R375,000. At R30 a latte, that is R12,500 lattes, or 2 lattes a day for 110 years – for just one move. Those costs are lost and gone forever and have not added a single cent to the value of your property. If you get itchy feet, before you go looking at show-houses and rope your spouse in on this wave of euphoria ( aka retail therapy on steroids), ask yourself why you are wanting to move house – and be honest (with yourself if not with anyone else). Keep those BS excuses of ‘better schools’, ‘safer area’, ‘more/less room’ for your friends. Don’t fool yourself with the ‘profit’ you’re going to make on the sale – where are all those other costs going to come from? That profit is a myth, most of it is just inflation. A couple of tips: Don’t fuel that want by ‘just looking’ at houses. Don’t rope in a partner who will encourage you. Think about some renovations. If you absolutely have to move, pick something you’re going to be happy with for a good 25 years if not the rest of your life. Holiday homes are a complete waste of your wealth, they are not just a dead asset but they cost you money every month. Sell it and invest in a couple of rental properties close to home.
Car repayments are probably the next biggest item in your budget. You aren’t really getting a new car because your old one is ‘out of motor-plan’ and is going to be ‘outrageously expensive’ to service, you are getting it because you want it, it makes you feel good and think that you deserve it. It is retail therapy on a much larger scale. One of the biggest favours you can do yourself and your wealth is to address that gnawing ‘want’, find tools to stop it getting out of control. A coach might be able to help you with that. If you want to make a permanent impact on your wealth, when you get the urge to indulge in some major retail therapy, ‘spoil’ yourself with something else small instead (new lipstick, new golf balls, night out or a 3-month subscription to Showmax/Netflix). Don’t go test driving and spend hours on car websites and fuel that need. Warren Buffet gets it, his car is over 10 years old, maybe he is onto something. If you absolutely have to have a car, don’t take on repayments that have a big balloon payment that will encourage you to trade it in to fund it. Once the car is paid for, divert the exact same repayment into savings and investments – your brain has probably gotten used to seeing that amount slip out of the account so should be a slam dunk.If you haven’t maxed out How about sweating the asset? Find out the kind of car you need for Uber or Taxify and get a side gig (or a job for your layabout Millenial?)
Buying kids cars. I get it, you want them to have independence and learn to become a safe driver, but over and above the cost of the car, insurance (loaded before the age of 25) and fuel youngsters under the age of 25 are inclined to think that they are invincible and have a nasty habit of getting into bad accidents. These accidents can have a huge impact on their ‘insurability’ in the future, even a small whiplash usually resulting in a complete spine exclusion on disability insurance for the rest of their life. Buy a cheap but reliable car that they can practice on sober, and in the daylight, and give them an Uber allowance for parties. ‘Designated drivers’ are usually a myth invented to placate parents. If you’re buying and insuring the car, seriously consider some sort of tracker so that you can easily check on their movements (this doesn’t need to be an expensive monthly charge if you use something like Discovery Insure). Sure, this is being a nanny, but I would rather know that a child is driving safely before an accident than afterwards (the fact that they can be financially rewarded too helps.) Fuel reward paybacks for good drivers average at around R500pm (I know, I get them myself).
Private schools: Yes, these can be hugely expensive – however, I see it as a necessity and not a luxury anymore so I do not consider this a mistake as such – but the price of private schools varies enormously. I will go as far as to say that if things really go pear-shaped there are many other things that should go first (fancy cars, golf club memberships, holiday homes). Investment in education is rarely wasted. While you can move schools, it isn’t advisable so you need to understand the long-term financial commitment.
Cashing out your pension when you leave a company is one of the worst wealth decisions you can make for your long-term wealth. After the small tax-free portion, the tax is onerous starting at 18% and going up to 36%. That tax is lost and gone forever. If you have ever done this, you’re in good company – nine out of ten people do exactly that. Nine out of 10 people cannot afford to retire today – that is ‘good company’ you don’t want to be in. If you have piles of debt that you want to payoff, read this blog HERE first.
Leaving your job before you have another one – and that includes your own business. More than 90% of new businesses fail, and more often than not because there has been inadequate planning and testing. Run your business idea as a side-gig until it is sustainable. If you are too tired to do that, then rethink your plan – your own business requires loads of stamina. Think about a ‘transition’ plan – can you do your full-time job as a side-gig? It might just suit your employer and you.
Action: Long term wealth is built brick by brick from the decisions you make every day, don’t sabotage all that by indulging your ego with huge expenses or commitments.
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Author Dawn Ridler ©