Congratulations. You?ve paid down your home loan and now you can afford a new kitchen/extension/holiday etcetera.
Stop right there.
Just when your financial position starts to improve, YOU DO WHAT? You take on more debt. What you?ve done is cranked up the incline on the treadmill just when it was starting to slow down. In other words, as soon as you had a glimmer of hope for the financial future, you decide to upsize the house (or car, or holiday schedule). And thus the treadmill belt just keeps going around and around and around in circles.
Our need to upgrade is in part due to the chemicals in our brain. Dopamine is a chemical that gives us a natural high. In layman?s language, it?s “Buyagra”. It?s something that helps you shop; the thoughts of the reward (the new car, new bathroom and so on) get that dopamine running.
As soon as we get the item we desire, though, it?s suddenly not enough. That new house somehow “shrinks” and we “need” (read: want) to extend it. That?s what Buyagra is all about. Coupled with easy borrowing it becomes downright dangerous.
The scary numbers.
We use other psychological failings to convince ourselves that we?ve borrowed against the home loan, so we?re being good. After all, the interest rate on your home loan is less than a personal loan or credit card. So doesn?t that make it “good debt”?
Let?s say you add an extra $40,000 for a kitchen onto your existing $300,000 home loan that still has 15 years to run. Based on a current average home loan rate of 5.30%, that $40,000 will add around $323 per month to your home loan repayments and cost you a total of $58,000 over the 15 years. And keep in mind that interest rates may rise over that period, increasing the potential cost.
A $200,000 extension could potentially cost you $290,000 over a 15 year period – or $90,000 in interest charges. Imagine you?d put that into your superannuation instead?
The cold hard truth is that you?re not getting ahead by “needing” a new kitchen or bathroom every ten years.
Step off the treadmill to retirement savings
One of the greatest financial learning experiences for me was being made redundant. Suddenly I had to hand my company car back and found myself using a bicycle and public transport to get around.
When I landed a new job we stepped off the treadmill by choice. We consciously decided not to buy a second car.
Even more important, we chose to be satisfied with our house just the way it is, not upgrade it just because we could. We own a nice house, not a 90 square metre box. So there wasn?t a reason to buy an even nicer house as we may have been tempted to.
It was very liberating in our house when we realised that there is a life choice to be made of being satisfied with what you?ve got.
The redundancy gave us an insight into how we could become financial stable long term and it was a blessing in an ironic way. It has transformed our retirement savings.
Living the debt-free high life.
That?s not to say that we don?t have holidays and don?t buy ourselves little luxuries. But we do it out of savings, not by extending the home loan. A $5,000 family holiday, costs us $5,000, not $7,200 over 15 years.
My final advice is to retrain the way you think. Learn to think with your cup half full when you see your house/car/TV and other belongings. Thank your lucky stars for having them, rather than dreaming about replacing them.