Furniture, electronics, recreational equipment, holidays, weddings. Borrowing for purchases creates a double hit because you pay for an asset that is consumed or falls in value, then continue to pay interest for years to come. Those interest or Buy Now Pay Later fee payments eat up money that could have otherwise been funnelled into goals.
The new car upgrade roundabout
Cars are one of the most common examples of where we borrow more than we need to. A posting on a Facebook group I follow summed it up. The woman and her partner had been slowly chipping away at their personal debt to get into a position to start saving for a home, when he singlehandedly decided they “needed” a brand new Ford Ranger rather than the reliable $15,000 car they had. The $70,000 vehicle at 10% interest adds up to nearly $90,000 over five years, but would get only $40,000 at trade-in.
That easily turns into an upgrade cycle, where the mindset shifts from “we’ve finally paid it off” to “we can afford the repayments” for a replacement, which again can add $10,000 a year to the cost of motoring.
Buying status and normalising lifestyle inflation
Paying for image is a good way to eat up your financial future. Luxury handbags, designer clothing, high-end watches, jewellery and the latest iPhone, laptop and tablet are seen as symbols of success.
Status purchases, along with larger car and home upgrades, often fall under the heading of lifestyle creep/inflation. That’s the tendency for lifestyle to expand as income increases.
It can also show up in smaller, everyday choices: upgrading to pricier lunches, ordering takeaways more frequently, making premium groceries or pre-prepared meals the norm, and replacing belongings while they still have life in them.
Other convenience spending that we typically increase as our income goes up includes: Uber and taxis replacing public transport or walking, and choosing food delivery instead of home-cooked meals.
Spending not investing
A common financial trap is assuming that because something improves our lifestyle, it must also improve our financial position. That’s often the excuse to buy a boat or a caravan.
But it also plays out in our houses. A classic example is the $150,000 kitchen, bathroom and extension renovation, which might deliver years of enjoyment, but most people fool themselves that they have made money on the work because they don’t do the maths.
The true cost of a new kitchen, bathroom or extension needs to include more than just the building work. It should factor in the mortgage interest paid on the borrowed money, the property’s general capital growth over the same period unrenovated, and what that money could have earned elsewhere.
Ignoring the boring stuff
People often spend hours trying to save $10 on an everyday purchase, or drive distances to get cheap petrol, while ignoring the thousands of dollars that can disappear through a poor mortgage deal, expensive insurance, uncompetitive utilities, and high fees on KiwiSaver and other investments that have no clear advantage in terms of returns.
Finally, financial advancement doesn’t just happen overnight. Yes, enjoy life. But along the way, appreciate that not all decisions deliver instant gratification. But if they lead to having more financial choices, or less money stress, making those decisions can be worth far more than the things they give up along the way.
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