What You Earn Is Not What You Are Worth
Earning money and having money is not long term security or wealth creation, it’s about how much you keep that creates wealth.
We are already going into the second quarter of 2008, so maybe it’s time for a few financial reminders.
Wealth creation is about looking after your personal finances, and making well thought out financial decisions, preferably before you complete the transaction. You are the Chief Executive Officer of your finances, are you behaving accordingly?
Let’s take a look at someone who earns a reasonable income, who believes they are making sound financial decisions; and then let’s take a look at the true cost or the impact of the decisions on their wealth creation.
Example: An income of $90,000 per annum which is a net income of $5,300.
The decision to make a few purchases, and use credit options to do so:
1. A car loan $15,000, at 11% interest on a 3 year term = $491 per month.
2. A credit card, owe $6,000 – a repayment figure of 3% of the limit = $180, If you choose to pay the card off over 3 years the repayment would be $222 per month.
3. A personal loan of $12,000, at 15% interest on a 3 year term = $416 per month
Each item either individually or combined could be deemed quite affordable as the total repayments are only $1,087 per month.
But what is the real impact of the above decision:
1. The total interest bill is over $7,500
2. The total payments principal owing and interest is $40,681over 3 years, the equivalent of 8 months net earnings!
3. If you saved the $40,680 and then invested it in the bank at 8% rate of return you would accumulate $51,000 in 5 years.
4. Your borrowing affordability for a home loan would reduce from $450,000 (with no debt) to $340,000 with this debt.
It is so easy to get caught up in “life” and “spending” especially with all the credit freely given by retailers, but it’s time to take another look at your finances. If you already have debt, and suddenly realize the true impact you need to organize a debt repayment plan, one that is achievable and fits with your goals and lifestyle.
What are the traits of a good Chief Executive Officer of your own finances?
1. Do not make impulse decisions regarding your large purchases, as you can see you should look into the impact of that decision before you purchase.
2. Do not make impulse decisions regarding the small purchases. Many clients think $100.00 here or there is nothing but over a month it could be $1,00.00
3. Have goals, try to write them down. If you know what you are aiming for it is easier to stay focused. For example, you want to buy a new top for $150.00, you can easily ask “is this getting me closer to my goal?” if not it can make the decision whether to buy or not a lot easier.
4. Know how to achieve the goals, saying “I want to own a house in 1 year” is great, but have a plan as to how this is actually going to be achieved.
5. Set up a “budget”, I know this word can make you turn and run in the other direction, but at least have a guide as to your money flow; what is coming in versus going out.
6. Once you set your money flow, keep an eye on it each month, there is no point setting up a plan if you don’t implement it.
Have you seen it yet? Your finances are a business, you have objectives, an implementation plan, and you assess it monthly. If you don’t know how to do this you need to take action and employ someone with experience to do it. Build your professional team; they will be worth their weight in gold.
The first quarter of the year is over… have you achieved or are you on the path to achieve your financial resolutions? Take action!
TRACEY MUNNS is a mortgage advisor and owner of Connect Mortgage Services Ltd.
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