Exorbitant One-off Spending Leading To Debt
Spending too much on a house, car or wedding can lead to debt.
Many people work hard and save up. They’re good at budgeting and saving. And after all this self-discipline, they allow themselves to go all out on one expensive purchase as a reward. Because money’s meant to be spent right? Some buy a luxury car, other’s a grand house and others spend it all on just one day—their wedding. But how much of a splurge is too much? Many people take it too far.
The problem with most one-off purchases is that, with the exception of a house, they are notoriously bad assets in which to keep your money. Cars depreciate at unbelievable rates due to the wear and tear of driving and the allure of a new vehicle. The accountant’s approximation for depreciating cars is 12.5% per year! And the rule of thumb is that the moment you drive your car out of the dealership it loses $2000 in value. But then there are weddings, where the only assets are those too sentimental to ever resell.
We’re not saying that you shouldn’t spend your hard-earned money on a car that you’ve always wanted or your special day, but we just recommend that you do it in moderation. It’s a difficult idea to come to terms with but it’s easier than coming to terms with the consequences later—that the meaning in a lot of these one-off purchases is more symbolic and qualitative than financial.
Weddings really are about the people, having a good time and that special person. All the rest is nice but doesn't make or break your day or your relationship. One third of Americans are going into debt due to a wedding and a similar trend is happening in Australia. What is the point of spending so much on a wedding, just to see your marriage strain due to debt? We all want that special day, but we also need to be realistic on ourselves and our partners about how much we are able to spend. Instead of going all out on your wedding, keep it within a smart budget and do the planning yourself to save money.
Many cars are valued because they are highly priced, not the other way around. If you have doubts over such a car's affordability, you should ask yourself; why do I want this vehicle? Is it to display my wealth or to drive a beautiful vehicle? If it's the former, that might not make sense if you become financially unstable. There are many cars which are fantastic to drive, look amazing and have a lower price. If you do the research you will be surprised.
The Australian housing market is a secure moderate-growth market to invest in, so why would we discourage it? We don't, but we recommend that you take a mortgage within your means. If you can't afford the repayments you can enter a debt spiral which could in the worst case cause your house to get repossessed.
Not Saving For Retirement
Always remember that you need to save for your future.
Not saving for retirement, through the means of superannuation, personal savings or other is a common oversight especially among young people, Retirement can seem almost infinitely far away for a 20 year old with the distinct 20 year old feeling that they may actually live forever. And many 50 year old's feel much the same. But retirement will happen eventually, and when it does you want to thank your younger self for starting to save early, rather than cursing them for spending it all on immediate wants.
If you open a spreadsheet and do the maths you might get a shock as to how much money it takes to retire comfortably, and how long it takes to save this much at this rate. We recommend doing the math, whether you are 20 or 50, the sooner the better. When you do the calculation, make sure that you account for interest. Interest should be a significant contributor to your retirement fund, because this is for obvious reasons the longest investment you are ever going to make, so you will access more interest in the end than in your usual investments. One of the key factors that can increase your retirement fund is compound interest. This is a feature of some investments where interest is reinvested into the fund so that it can generate its own interest.
So how much should you save for retirement? The answer that financial planners give is: as much as you can afford. Realistically, 10-15% is a good amount.
Overeducation And HECS Debt
Education fees and debts accumulated can often become hard to manage.
The modern first world has a peculiar problem;that of overeducation. It's surprising considering the massive burdens of student debt that can leave Australian students with $30,000 in debt as soon as they enter the workforce. It's also surprising considering the low employability of many of the university subjects taken by paying students. We won't name names, but generally speaking, Australian universities are slow to keep pace with the times and overly theoretical and removed from the realities of the workforce.
But it's not surprising considering if you put yourself in the shoes of an 18 year old who has just finished the HSC, now all of a sudden considering uni, who has scarce little knowledge of what to expect or the financial realities that they will face in the future and a developing frontal cortex. So they do what everyone else is doing, they go to uni. And parents, who grew up in a different era are extremely encouraging of this.
The fact of today is, many people who spend 3 years of their life at uni don't need to go at all. Many who do honours, double degrees, masters and upwards are wasting their time and money. You can get a job in many areas without these certificates. And with these certificates, you can't get a job in many places.
So if you're 18, don't just start thinking about which degree you want to do, think about if you should do a degree. Do employers value it, can you get online certification or an apprenticeship or an entry level job and work your way up (for pay, rather than the opposite).
If you're considering postgraduate study, think: is this a good financial decision accounting for the money and time invested versus simply working harder? Am I doing this for the university lifestyle which is an experience also offered by affordable holiday locations in legally progressive cities of the world?
Few people expect to end up in debt. Debt can creep up or shock you all of a sudden. It's not the bogeyman though, it can be averted in most cases by having foresight. Foresight is a difficult thing to have because often you simply do not know what to expect in the future. This article was intended to help those, young and old who want a perspective on living a prosperous, financially stable life.
You can find out more about paying off your student debt by visiting the Study Assist website here. Remember that the problem isn't occurring the debt but when you occurred the debt and are unable to pay it off or get more debt from credit cards and such.