We live on a society that
operates on credit. Gone are the days of our grandparents who saved up
and purchased their homes, cars, and everything they needed or wanted cash.
It takes a half a lifetime to own a home now but everyone understands the
need to get on the property ladder. Home ownership goes hand in hand with
having a mortgage. If you are talking to a neighbor or friend and they
say they own their home mortgage-free, are you not shocked and wonder to
yourself "How?" But getting into to debt to own a home isn't a
negative, as long as you can afford your payments, because real estate is an
appreciating asset so the mortgage is good debt. But what about your debt
associated with everything else you own, have you thought about your bad debt?
And how much it's costing you in the end?
Let's take an example of a new LCD 46" TV that costs $1200 that you “need” for your living room to watch the upcoming hockey season. You don't have the cash right now so you put it on your credit card and make the minimum payments at a 19.5% interest rate. That TV will end up costing you $2010 with the interest and will take 75 months, which is over 6 years, to pay off.
What about your family vacation to Hawaii that costs $5000? It will end up costing you more than double - $10,300! And it will take 178 months to pay off that 2-week vacation.
It can seem that if you never use debt to get what you want, you'll never get it. But saving for those things doesn't have to be a harrowing process. Set up a savings plan that pulls the money from your account the same day you get paid so you never have access to the money - you cannot spend what you don’t have. Putting aside as little as $50 a month into a savings account that generates 1.5% will net you over $1200 in 2 years time, which is that LCD TV. This savings account is for those things you want that would otherwise rack up credit card debt. This isn't your retirement savings or your emergency fund - this is your fun fund!
At the end of the day, there may be times where you need to borrow and create bad debt, no one can be disciplined all the time, especially when it comes to larger purchases such as a buying a new vehicle, so establish a line of credit that has a lower interest rate. With good credit history, you can obtain a line of credit that costs 1/3 of the interest on your average credit card. Also, you can look at flexible mortgage option of a home-equity line of credit and get an even lower rate. Please discuss these options with your Financial Advisor including the possibility a Manulife One account.
With every debt splurge, try and keep in mind "How much is this really costing me in the end?" and then decide, "Is it worth it?"
Tags: savings debt budget