Do The Maths First!

Personal Finance

Do The Maths First!

29th July 2009

Perhaps this economic recession has been a wake up call for many like me. The last few recessions took place either long before I was born, or I was old enough to understand just what in the world was going on. However, at age 25 I had already made some crucial financial mistakes and needed to re-organize my life on two occasions. Having come out of my own personal financial crises I realized there were many more people out there that needed help and could be saved from making the mistakes I made. The excitement of buying a new house or taking out a car loan on some new wheels sometimes makes us forget to weigh the options between saving for our new acquisition or taking on new debt. Why don't you do the maths first!

Personal Finance Behavioral finance studies have shown that people are more reluctant to draw money out of a savings account that holds in the region of $100,000 for example but will not hesitate to take on debt of $100,000 for a car loan for example. Now if you look at it, this car could cost you a monthly repayment of $1000 plus interest over a period of say 48 months. At the end of it all you could end up paying $150,000 to $180,000 dollars for the car depending on the interest rate you negotiate and manage to get.

It is true that saving to buy a car or house takes much longer than just going to take on a loan and get financing to buy the object of your desire. However, taking on debt could mean that as time goes by if interest rates rise, your monthly payment will be adjusted upward and you could possibly end up defaulting on your payments. This is quite common. This is because we adjust our lifestyles and budget according to the income we make. Now more often than not the income we make will not increase even if interest rates increase and if we don't adjust or cut down on some expenses, the obvious result is a default in payments.

This is a situation I found myself in, twice. So trust me, I know what I'm talking about and it is not pleasant for your creditors to be hounding you about late payment either. Before you go and take on a car loan or any new debt ask yourself if you can do without, save first and then buy on a cash basis, no matter how long it takes. Will your income increase in the next 12 months to be able to take on the new debt? Sit down and do the maths first!

"The only man who sticks closer to you in adversity than a friend is a creditor." - Author Unknown

Comments (7):

Fred Says: That is really true | 07.29.2009 |

Nadine Says: That's a tough one since most of us want stuff now. Thanks Kev | 07.29.2009 |

Judy Says: I never looked at it like that and I agree that it's easier to apply for a loan that to take money out of savings to buy stuff. I guess savings gives you the comfort that you can afford it | 07.29.2009 |

Tim Says: We are so used to living on credit cards that we wouldn't think twice about getting debt | 07.29.2009 |

Larry Says: The recession has taught us a thing or two about credit cards and taking loans | 07.29.2009 |

Arthur Says: We are human and as soon as the recession is over we won't think twice about taking on new debt, well most people won't anyway | 07.29.2009 |

Olga Says: Nice article Kevin. Truth is most people would rather drive the car now rather than save for two years, it's hard | 07.29.2009 |

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Do The Maths First!

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