The other day, I sat and listened to a friend talking about taking a loan to pay for a holiday. She has no debt, not even a mortgage at present, and yet is looking to create around £5000 of it simply to go on holiday... I asked where she was going that was going to cost this much - as this seemed a lot for a fortnight away, and she explained that the holiday they want (note the word "want") was 'only' £3000, but the other 2k "Will come in useful". I felt like telling her not to be so mad - that to create this level of debt - which she will be paying off for the next three years - was simply madness - and to create a full two thousand pounds of it just because "it will come in useful" was even madder! Another friend was talking about refinancing a car - a car that her family currently own outright, and yet she is looking into creating a debt on it. The thing in common with both these situations is the time factor - in both cases, another of the same thing as that around which the debt is being created, will be wanted within the time that the loans are still being paid off. There is no way that friend A will not go on holiday next year and the year after, and the year after that, in spite of still paying for this one, and friend B changes her car more often than some folk change their socks, so there will be further finance created there in due course, too!
|(I freely acknowledge that I have no relevant photos for this post....the macro lens has been out, though!)|
We all go through spells of wanting "stuff" - cars and holidays are on the larger end of the scale, but shoes and new lipsticks might ring a bell, or a new game for the XBox...or an XBox come to that! My last "want" was an iPad- I "wanted" it for ages, and eventually gave in and bought it - but the point that I bought it combined neatly with the point that I had saved up the money to pay for it. Having been "wanting" it for around a year previously, I was also confident that I wasn't going to regret the purchase straight afterwards - another major factor when buying something from your "want" list. I know, the word "want" is getting stressed quite a lot here, isn't it - how often have you bought something - maybe that lipstick or new shoes, and told yourself that you "needed" them? You know what though, I bet you didn't - I bet you had several more lipsticks of a similar shade, or pairs of shoes that would do the same job as the pair you were looking at. The item you were considering was not actually needed at all - not in the same way as a bag of apples or pint of milk might be for example. Once you can differentiate between the two states, you are heading in the right direction to be able to make informed decisions about how you spend your disposable cash. It's not wrong to "want" things, not at all, after all the Frugal Friday series is about enjoying life while still paying off our mortgage ahead of time, not making life miserable and lecturing others about every last penny spent on something non-essential - there are other places you can go to read about those sort of sacrifices - so we definitely allow ourselves the odd "want" - but only when we have saved and budgeted for them.
That brings us on to point two, quite neatly. If you want to manage your money better, then the key to this is ensuring that so far as possible you use your own money for things, not somebody elses. Martin Lewis splits debt up into "good debt" - a mortgage for example, or a loan for education, and "bad debt" - which would be a loan for something that is wanted, but not actually needed. That holiday, then, perhaps? Better by far to save up your own money and pay for that holiday of a lifetime in two years (Something that Friend A would have no difficulty in doing) rather than being beholden to the bank for the next three, and paying interest, to boot! With the uncertainty in the financial climate at present, very few of us can feel totally secure in our employment, which is another good reason for not creating debt unnecessarily - what happens if you lose your income and are unable to service the payments? (County court judgements and a decimated credit rating, is what). The money mantra comes into play again - "Do I need it?, Can I afford it?, Can I get it cheaper anywhere else?" - the answer to the first question can be no, but only so long as the answer to the second is "Yes, and without getting a loan to pay for it!"