Sort Your Money Out. Glen James
Читать онлайн книгу.
the interest you'll pay over the loan term. In addition to that, the vehicle will decrease in value every single day. I can hear the big D (Trump), who wrote a book called The Art of the Deal (which I haven't read), saying, ‘It's a bad deal’.
Not only are you getting screwed from day one in terms of the amount you owe versus the car's depreciating value, but you've also given yourself no psychological pressure or resistance for borrowing to purchase it, which can amplify the negative financial effect.
For example, paying $18 000 upfront for a car might be a lot of money for you, but $92 per week sounds very doable. If we lived in a world that didn't have car loans, you probably couldn't stomach saving up that much money and transferring it in one transaction to an item that will immediately decrease in value, and possibly be dinged and treated like crap (I've seen how some of you look after your cars!).
You're likely to end up paying less for a car that you pay cash for due to the psychological hurt from the process of coughing up $18 000 of savings. You might decide that $10 000 is more reasonable and that you can invest the rest and make it grow.
I used to be pretty hardline with my view on car loans. When it comes to getting your habits and behaviours sorted, I would prefer that you try and change your other major money habits first rather than me insulting you and turning you off by saying you can't have a near-new or brand-new car that stinks of plastic and toxins curing (I mean, that ‘new car’ smell). I'd rather win the war with your total financial picture as opposed to losing a battle on cars.
While it might be beyond the scope of getting out of debt completely, if you ‘must’ have a ‘good, safe car’, I would use these rules of thumb.
A car that is approximately three years old with fewer than 60 000 kilometres on the clock is usually a good deal. This is because the car's value has already had a huge hit in terms of depreciation.
Ensure the car is worth no more than 50 per cent of your annual after-tax income. This is a good guide to stop you having ‘too much car’. If you have a spouse or partner, the total motor vehicle capital value combined (i.e. the total worth of the car/s owned by both of you) should be less than 50 per cent of your combined after-tax household income. To be frank, this should also include boats, motorbikes and any other toys with motors.For example, if you earn $60 000 per year, you would pay approximately $10 000 in tax, leaving you with a $50 000 annual after-tax salary. You certainly wouldn't want your car to be worth more than $25 000. This is the maximum limit and will keep you from tying up too much money in assets that are decreasing in value. You may choose to be more conservative and set a limit of spending only 25 per cent of your gross annual income. On an annual income of $60 000, 25 per cent would be $15 000.Choose whatever formula you like for your vehicle spending limit, but either way, have a rule for your life and stick to it. What if you averaged both of the above rules out? Now the car shouldn't be worth more than $20 000. I may have created a new formula for myself just now!
If you ‘must’ (!) have a car loan, I recommend not having one for more than four years (48 months) to ensure you're not paying off your car forever.Most car yards and car finance providers generally quote the weekly or monthly repayments over a five- or seven-year term. They do this because a longer loan term lowers the weekly repayment amount, making the car sound more affordable and getting you emotionally invested into buying it.
If you're thinking ‘Screw you Glen, I still want a loan for my next car’, put down a 20 per cent deposit (i.e. only borrow 80 per cent). This will generally ensure your car isn't worth less than what you owe on it because your deposit should cover the depreciation. This approach will also slow you down a little bit and ensure you don't spend too much on your car.
A final word
on car loans
Unless you have salary packaged a car, you live in your car (long commuter or sales rep) and/or it has been calculated by your accountant to show that you're able to save tax by paying for car costs pre-tax, you need to decide whether you should try to pay cash for your future cars. This will generally slow the purchasing process down while you save the amount needed and tends to result in more careful decision making and not spending as much on a car as you would if you used debt to purchase one. Psychologically, it ‘hurts’ much more to spend your own saved money than to get a loan.
If you have a mortgage and equity in your property, it's sometimes tempting to refinance the mortgage to buy a car. I still believe using your own cash will stop you overspending on a car. If you do, however, think, ‘It's all good, Glen, I got this’ … please make sure the broker sets up a separate loan for the value of the car, and pay this down over four years. You don't want to be paying the car off for the next 20+ years.
Your home mortgage
If you have a mortgage and you are also in consumer debt, I would recommend that you don't make extra repayments on your mortgage at this time — just make minimum payments until you have no consumer debt. Speak with your mortgage broker to make sure your mortgage has a competitive interest rate so that you are not blatantly getting screwed by paying additional interest. If your mortgage has not been reviewed by a professional recently, it could be a good opportunity to do this — go to the resources at the end of this chapter for information on how to contact a mortgage broker.
Here's a tip: If you're refinancing your mortgage, make sure you ask your broker to refinance it to the current term left on the loan — don't refinance it to a fresh 30-year mortgage. Refinancing to a new 30-year mortgage will mean that you end up paying more interest over the longer term. Additionally, remember my comments about debt consolidation? Refinancing your mortgage to a fresh 30-year loan follows the same concepts as debt consolidation.
Try to limit your mortgage repayments to no more than 30 per cent of your take-home household income. Repayments that are 25 per cent are great; 20 per cent or less is amazing. This recommended limit also applies to your weekly rent, for those who don't yet own a home. The more your rent or mortgage repayment is over 25 per cent, the higher the chance of you ending up in consumer debt again because you won't have as much money available for living or unexpected expenses!
My 5 steps to get out of debt
If you're still with me, you will most likely by now have assessed your debt situation, even if only in your head. If it's not looking good, it ain't no thing because I'm going to help you. I'm a bit basic and love steps, so here are my five steps for getting out of that consumer debt hole. Some of the steps might seem counterintuitive but sometimes we have to try different things to make positive changes to our lives. Remember, if you don't like my philosophy on consumer debt, you can always stay in debt
Let's look at the steps one by one.
Step 1: you must hit rock bottom
You must, must, musssttt decide and agree with yourself (and maybe your partner, if you have one) that from here on in there will be no more consumer debt in your life. You need to be resolute. Starting to get out of debt will be close to impossible if the debt is continuing to grow or if you go for a couple of weeks or months and then you're back at the checkout with your plastic or buy-now-pay-later app, ready to throw it around like in a terrible 1990s comedy movie.
The reason you must first decide that enough is enough is because it's honestly a waste of time and energy if you start trying to get out of debt and when the next flashy item appears you're straight back to using debt to make a purchase. That's because you're not disgusted enough with yourself yet (hehehe, I'm remembering myself before I was done with consumer debt!).
I like to think about