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An opinion piece by Glen James – Making wise choices

Making wise choices

It always amazes me how far we have come in the past 50 years.  I mean, I’m not even 50 years old yet, but it seems the world has developed at such an incredible rate.  The question I ask is, for what reason?  Do us humans seem to think there is a race for something possibly?  I’d say at the rate we are going it would be a race to the end.

I was brought up in a small country community that I often joke is so small I could have been the result of inbreeding.  I, however, do know that my parents do not share the same family tree.

While growing up, we lived well and planned for the “things” we needed in life.  We didn’t have all the “cool” things, we simply got by as we always did.  We also couldn’t afford them, and we were happy with what we had.

I know this is often country living at its best. You have a garden, chooks, a few animals and you live off the land where you can, and you also learn how to do everything, and I mean everything.  If anything, mechanical was required or electrical, or plumbing, vet etc. you did it yourself.  It was hands-on growing up where we as a family had jobs to do, and we didn’t argue back.  It was good as it taught me skills that I still use today.

How that has changed. We, now more than ever, live in a massive consumers world, where everything around us is marketed to us as the “must-haves” in life and why we must have the latest of everything.  A phone (what an expense), latest car, clothes, travel, must be seen to be eating out or drinking somewhere and a coffee in hand several times a day even.  Life is fashionable, and we must be seen with the latest things in every location.  So much financial pressures that come at a considerable cost that can be avoided.

How much does a single coffee a day cost? $5 per coffee x 5 days a week = 260 days = $1 300 and 260 cups towards the landfill, that’s just a single person and one example.

Many of us would love to own our own home but can’t seem to get onto the property ladder due to the high deposit needed and the high-priced housing market.  If we genuinely want to live within our financial means, we can then save and achieve incredible things for our future.

Interest rates on property have never been so low – this means you can pay off your mortgage faster if you choose too.  I try to teach my boys and others that some purchases in life can be a waste of money.  Let me explain by using the following example of how a house is a significant asset that will grow very fast in value. 

I got the following info from Westpac Bank. Let’s say you buy a house for 500K and have a 100K deposit and a 400K mortgage, set on a 25-year loan.  The current interest rate on your loan is 3.75%, (it has never ever been so low before).  If you and your partner can put an extra $140 per fortnight on your $400k loan from the $5 coffee each per day, then you will save yourself $46,495 in interest alone! And you will be debt-free in four years and ten months faster.  This is just one area we can save and get one step closer to financial freedom.

We all have to pay to live – food, clothes, transport, accommodation etc. and many of us say we don’t get paid enough for life’s expenses, and this can be true to a point as well.  It is great to have nice things in life, and you do deserve them as you work hard for it.

In my view, money in the bank is only useful if you are saving it for a purpose, but if you have debt, then your money needs to go towards that as you are only paying interest on top.  Interest rates are about 3% for term deposits and yet, the annual inflation rate is about 2%+. Money is best on an asset like a property or something that will gain value.  Your 100K will get you a mortgage on a property for 500K, and after ten years your loan could be as low as $250k, but your property is now worth possibly closer to $850K+. 

I like to talk about this one.  Let’s say you borrow $500K for a house and pay interest only for 25 years, so after 25 years you have paid of zero of your loan.  Sounds ludicrous right?  That’s because it is.  But your 500K mortgage is still $500K. However, your house has more than doubled its value in this 25-year term. So, you have paid the interest as required, but you have also gained a property that has potentially doubled in value, and you might have roughly $500k in equity on your property.

If you also at that same time put $500K in the bank, with the interest rate at 3% and the inflation rate at 2%, I would struggle to see how it can be a good idea.  I’m in no way a financial advisor, but I have watched this work for people, and I also put this into practice myself.

There is debt, and there is good debt.  My philosophy is, buy what you have the funds for, and only borrow money for an asset that will increase in value.  Live within your means, and you will have more control over your life and your future.  This is not everyone’s ideal situation or guideline, but it is one I try my best to live by.  If I can’t afford it or don’t need it, then I won’t buy it. 

Take care,

Glen

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