Only Buy What You Can Afford
As I said earlier, one of my favourite definitions of wealth is: The transfer of money from the impatient to the patient.
Too often we try to acquire things now that we cannot really afford. If you have paid interest on your credit card, or borrowed to buy a car, or have made purchases on an instalment plan, then this is you!
If you want to get ahead financially, you should only buy things you can afford now. It boils down to this:
If you can’t pay cash for it now, don’t buy it.
Example 1: You want to buy a car, and you have saved $1,000.
Option 1: You could use the $1,000 as a deposit on a $7,000 car. But then you have a $6,000 debt at high interest which is going to drain your cash flow for a year or two or more. Also because cars depreciate (go down in value) quickly, you will end up in a situation in a couple of years where you own a car worth $4,000 with a debt of $4,500 and your $1,000 deposit is gone. Financial suicide!
Option 2: You buy a car worth $1,000 and drive it until you have saved enough for an upgrade.
Option 3: If you can’t find a car that suits you for $1,000, take public transport until you have saved enough.
Personal example: At the end of 1997 my salary was $38,000 and my wife’s salary was $30,000. We had managed to buy four properties with a combined value of $1.2 million. However, we had very little cash, and we had one car – a 1984 Honda CRX worth $700.
Example 2: You want to buy domestic appliances and a new TV.
Option 1: You buy them all new via instalment plan. This costs you $4,000. You have to pay an upfront fee, and interest, and your cash-flow is drained for the next five years.
Option 2: You spend $600 and buy everything second-hand
Example 3: Some friends invite you to go on vacation. The cost including shopping and hotels will be $1,500.
Option 1: You pay for everything on your credit card, and it is two years before you pay it off.
Option 2: You either save the money, or you don’t go. It hurts for one year, after that you will be better off. In fact you could afford to go, and your friends on the same budget couldn’t.
Example 4: Spring Shopping Spree.
Option 1: You buy yourself some new summer clothes for $1,000. You don’t have the money now, so you put it on your credit card.
Option 2: You know you have $40 a week for clothes (because you have done your budget). You buy one item of clothing every fortnight on payday with the excess cash you have.
Option 3: Re-think your priorities. Do you really need to spend $500-$1,000 on clothes? A couple of select items and making do with what you have would be a better use of your precious cash.
If you are serious about getting ahead financially in the long run, here are my “Ensure You Are Wealthy Later” Tips:
Tip#1: Never borrow to buy a car.
Tip#2: Never take on an instalment plan (hire purchase) to buy something.
Tip#3: Never use your credit card unless you have that amount in your bank or spare in your next pay packet.
Tip#4: Cut up your credit cards if the spending power is too tempting.
Tip#5: Never get sucked in by advertisements that say “24 months to pay” or “no deposit”.
When it is okay to borrow money:
1. To buy your own property.
2. To buy something you can make a financial return on, for example a rental property.
3. To buy a business asset you can earn from, for example a computer or stock for your business.
4. Once in a decade absolute emergencies.