Do we have any real financial options or, will the consequences of the financial choices we’ve already made, lead to an inevitable, bleak financial future?
A guest post from a 40-something year old who left his retirement planning for almost-too-late. He’s now looking at his financial options and making some serious changes.
What financial choices have I made?
This morning I pulled out credit card statements for the last three months (I know, my life is very exciting). I’ve started focussing on paying down my credit-card debt with the intention of closing the account as soon as possible (I have a ten-month target for this).
Working through my statements, through those financial choices, was pretty scary. My statements reflect the consequences of many past financial choices. I quickly realized that even without using my cards (I am not going to be paying for anything on credit and only paying the debt down), the finance charges are crazy.
I did a bit of a ‘what-if’ using the numbers from one credit card account.
What if, instead of paying finance charges (the facility fees, the interest, the repayment etc.), I had made different financial choices and I was saving an amount equal to my current finance charges?
What if, from now until I am 70 I saved (and invested) the same amount of money I’m paying to the bank? With average finance charges of R750.00 a month (yes, that’s what I’ve been paying), put away (I know that could mean various things but for this exercise I am keeping things simple on purpose), with an estimated 9% growth I could have approximately R501,000.00 extra, in savings. That’s half-a-million rand. Maybe 9% growth is optimistic, but you see where I’m going with this.
Crazier still, when the card is paid off, if I continue to ‘spend’ R 2000 a month (which is what I would have continued to spend on my credit card had I not stopped the bus), I would have an additional R1,655,000.00 in savings.
If I invested that in a TFSA, there would be no tax when taking it out (and I reduce my tax bill). I didn’t want to get too complicated and do a full analysis with all tax options and investment options, I just wanted to see what a reasonable expectation would be if I was saving instead of paying debt and paying the bank charges that come with that debt.
Have you considered your financial choices?
Take a good look at your credit card statement. Have you worked out what you could add to your savings if you weren’t paying debt, with the exorbitant finance fees?
It is not so much that you won’t have the debt to pay. Getting out of debt isn’t a destination at all. Getting out of debt is only the start of a journey. I want to get myself and my family out of debt so that we can save and invest.
Have a look, do the sums. You may be amazed at what you discover.
But I don’t have enough to save!
Financial options, a quick story.
I was opening a bank account the other day, a parking place for my emergency fund (I know that there are many options, I chose this for the low cost, easy access – knowing that I will only keep my initial emergency fund here).
I asked the lady helping me if she had an emergency fund. She laughed and told me that she wasn’t paid enough to save. I hear that often as I speak to people. I decided to ask two questions:-
- Do you have a pay-TV subscription (you know what I mean)?
- How often do you buy take-away meals?
She confirmed pay- TV and approximately five take-away meals per month. When we estimated those costs they added up to approximately (and conservatively) R1,250.00 per month. From a purely self-righteous perspective I beleive that she can actually save. She is just choosing not to.
I have made similar decisions in the past. I am now very conscious of the fact that when I choose one option (spend), I am making a choice not to take the other option (save). There is only a limited amount of money and I either spend it or save it.
When people say they don’t have enough to save, I often want to know if they really want to save?
If this lady killed the pay-TV subscription and stopped the fast-food, that same money could add up to over a million rand in retirement savings! (she was younger than me)
Does that even shock you?
Probably not. We either don’t trust the numbers or, we don’t believe that a Million Rand is enough ‘future money’ to stop us spending now. But, ask any seventy-year old person if they would like a million today. I suspect you already know what their answer will be.
We’ve become used to abnormal financial practices simply because ‘everyone is doing it’. The norm becomes the norm not because it is normal, but because seemingly normal people adopt the practice. Perhaps retailers and bankers (and other industry players) have become so good at advertising and marketing, they understand the psychology of spending so well, that we are easily duped.
I have no shame in admitting that I have been duped more than once.
It does seem that consumer debt has become the norm. It shouldn’t be. I remember being shocked a few years ago, that a friend of mine would pay for his groceries on credit.
Why on earth would anyone pay for food with a credit card? You’re going to pay a 20% premium (unless you pay within the no-interest period, which doesn’t seem to be the norm) for something that will be long-gone before you finish paying for it. That seemed crazy to me, and yet, having a credit card from your ‘grocery’ store has become the norm.
I still think it’s crazy. As I claw my way out of credit card debt I will not be using a retail card to pay for groceries. I will carefully consider any type of credit-based purchase, trying to ensure that I do not incur any additional bad-debt.
What’s the point?
The point is that there is a certain amount of choice available to all of us. But, and this is important to consider, we also have to actively analyse the choices we’ve already made.
Consider these things:-
- We choose to pay for TV – rather than saving for retirement.
- We choose to eat out – instead of saving for something we need.
- Some choose to have an expensive cellphone contract – rather than saving. Rather than paying cash for a phone we can actually afford.
Fact : I chose the credit card and in making that choice, I accepted the finance charges. I don’t remember anyone forcing me into any of those decisions.
I want to see if I can reverse any of these decisions (this may be a very difficult, but absolutely necessary thing to do in some cases) or if I can ensure that going forward I refrain from making those same decisions. This includes accepting additional credit, automatically (and often thoughtlessly) renewing contracts or buying things without understanding the financial, long-term consequences.
The point is that sometimes we have, or have had, more financial options than we’re willing to admit. Sometimes we choose the luxury of spending now because we just don’t consider that we can survive without the luxury (even if it is just for a while). There are people who have no pay-TV, there are people without cellphone contracts. Sometimes we don’t take the time to consider the real financial value or consequence of our decisions.
Quick disclaimer: You may be happy with your choices and the above are simply the “easy examples”. You don’t have to change anything; this is simply my story and my views. The point to tae from my rambling is that it’s important to analyse your choices of spending and decide if you’re happy with it.
You do have financial options
I do know this, I have many financial options. I need to seriously consider the financial choices I have made because I cannot accept the status quo if I want to move forward.
Today can I encourage you to do a few things?
- Have a look at the payments you are making, the charges coming off your accounts.
- Analyse those numbers and trace them back to the decisions you’ve made.
- Think about those decisions in light of where you are now.
- Ask yourself, knowing what you know now, ‘would you make the same decisions again?’
If the answer is ‘No’ – have a look at the consequences of those decisions. Think about what you can do to reverse those decisions. Think about ways to avoid making those same, bad, irresponsible decisions again.
Don’t kid yourself, you do have choices. You probably just don’t like them!
If you need help in analysing your expenses and debt, try out this free workbook.