Managing money effectively, whether young or old, is a challenge faced by many individuals. With a wide range of monthly expenses to cover, endless temptations and difficulty with budgeting, this can make it extremely easy to fall into money traps. These can all lead to financial difficulties or even constant debt reliance. It’s crucial to be aware of these traps in order to avoid them and stay on track with your financial goals.

Why Is Owning An Expensive Home A Bad Idea?

Owning an expensive home may have many benefits if you are financially prepared for it. However, if not, managing a larger and more expensive mortgage can be financially stressful. With a more expensive home, you are likely to buy in a relatively expensive area. This means that your utility costs and monthly levies will be significantly higher than a more affordable area. With a more expensive home, it most likely will be significantly bigger, this can have a large impact on your maintenance costs. 

On top of this, buying home using all of your affordability often means you may desire better furnishings and finishing. These come at a higher premium and could also it you out of pocket.

Overextending yourself on a larger mortgage may seem like a good idea, especially if you are buying in an aspirational area, but it can place significant financial strain on yourself as well as your family. This could create a larger debt reliance to cover small and essential costs each month and force you into a debt cycle. 

Is Owning An Expensive Vehicle Worth It? 

After buying a house, purchasing a vehicle will be the second most expensive purchase a consumer will make. But should you really buy the flashy car at the top of your affordability scale? Well it depends on your monthly income, credit availability and credit score. Vehicles may be a requirement for higher level employees due to the lack of and reliability of public transport in many cities in South Africa.

Subsequently, when deciding to purchase a vehicle you should consider how much you can  afford to pay each month. This means without compromising any of your essential expenses. By doing a simple affordability calculation, you can quickly see how much you can afford to pay. Affordability = income – expenses – other debts. Your affordability is what you have leftover after all current costs. You also should never utilise your full affordability, as this will diminish all opportunities to save and invest.

Additionally, you need to remember that there are a number of additional costs that you need to take into consideration, such as:

1. Vehicle Deposit
2. Insurance (Comprehensive is the best full cover)
3. Monthly Fuel Expenses
4. Maintenance (services, tyres etc.) 
5. Balloon Payment (if you opted for one) 

All of these costs will significantly add up and can have a large impact on your monthly budget. In the ideal scenario, your monthly repayments towards your vehicle should not be more than 20-30% of your gross salary. Opt for the best, most affordable vehicle in you price bracket. You could also opt for a secondhand vehicle with low mileage for a more affordable purchase price.

Be Aware Of Banks Extending More Credit Than You Can Afford

Banks and credit providers often try to extend as much credit to you as possible. This is due to the competitive nature of the industry in South Africa. But how are they compensated for these loans? When you take out a loan or a finance option, there will always be interest and fees attached to the principal loan amount. This essentially is their income. Plus, if you miss any payments, credit providers are able to charge interest on late and missed payments as well as possible penalties.  

Before you apply for a loan, credit card or vehicle/asset finance with a bank or credit provider, always ensure that you are able to afford the monthly repayments. Next, make sure you check and understand the interest being charged. Shop around and compare and choose the most affordable provider. It’s important that you consider your current income, expenses and possible debt repayments before committing. It’s also important that you do not compromise any savings, investments or retirement savings. 

Be Aware Of High Interest Loans From Credit Providers 

Payday loans and short term loans usually have high interest rates attached due to the period of the loan. This can have a negative impact on your overall financial health as you start relying on these loans to get through the month. If you have a lower credit score, or no credit history at all, then a payday loan or short term loan may seem like the only option you have. However, these loans could trap you in a vicious cycle of debt and make your situation worse if you are unable to repay them. 

Try To Avoid Impulse Buying

According to RamseySolutions.com, “An impulse buy is anytime you purchase something you weren’t planning to. If it’s not planned for in your budget ahead of time, it’s an impulse buy”. Impulse buying can lead to you having little to no money left for the month. If you impulse buy, it can hinder your debt repayments, saving and investment opportunities. 

It’s important that you budget any possible additional expenses each month or set up a savings or emergency savings account to pay for any unexpected expenses. Additionally, if you are struggling to kick the impulse buying habit, apply the 30-day rule. This will give you 30 days to decide whether you are able to live without it. If you cannot live without it after 30 days, you can buy it. 

What Solutions Are Available That Can Help You Become Financially Free?

There are two debt consolidation options available to the South African consumers, and each option has their own advantages that can assist you if you are struggling to keep up with your monthly instalments. To find out more, contact us and one of our debt experts will assist you.