In a recent course on credit and debt, that I took in December, 2016, I was reminded of the difference between taking on debt for things and using credit for getting ahead.
The first story involves a young family trying to start a business. The family did all the due diligence that was required of them by the bank and of themselves. They had a good down payment and experience within the industry. They also lived Spartan lifestyle and a tremendous work ethic. The husband, wife and children were totally invested. They did the sales, marketing, payroll and even their own janitorial work. They were totally invested.
In the ensuing two years things did not work out for this family. In spite of their hard work and frugal lifestyle they had to shut down their business and work through the emotion of bankruptcy.
From that time to now, they hunkered down to rebuild themselves. They downsized into a rental home, found new jobs, got educated and got focused about what the future could be for them. Grandma and the extended family all supported their new dream by helping with child care, cooking and cleaning. They are now cleared of bankruptcy and are back working in professional jobs rebuilding their wealth. As a family, they have never been closer and happier!
The second story is about another family that earned excellent incomes and spent their money. As they built equity in their home, they borrowed against the cushion on things that could not appreciate in value. When the take home income was reduced by 30 per cent due to a job loss, their house of cards quickly collapsed. They could not keep up with the cost of their interest payments, income taxes and the peer pressure of their social group. Ultimately, they were forced to declare bankruptcy and are presently rebuilding their lives. To their credit, they are reworking their plans and will soon be cleared of their bankruptcy.
There are so many things that are appealing... a comfortable house, nice vehicles, vacations, jewellery, rep hockey, eating out and education to name a few things that we all desire for ourselves and our children. The challenge is to balance our wants with our needs. Most consumables are good in themselves. It’s in the excess that most families run into problems, especially when cash flow gets strapped due to a loss, (e.g. job loss) or if a cost goes awry (e.g. interest rate spike).
When creating a budget, give consideration to having regular expenditures called savings and investments included in your list of non-negotiables. In fact, I have many clients that have two non-negotiables: the first one is their charitable gift of 10% and their second is their savings/retirement payment to themselves of 10%. They live on the remainder 80%!!
The point of this encouragement is to integrate savings and invest into your life in a deliberate way. Wealth, as defined by net worth, takes time and perseverance. It starts by staying “YES” to having a big future!