Debt won’t solve your money problems
06 Feb, 2022
Recently the banking/lending industry changed the way they view lending applications in response to new government legislation and changes made to the Credit Contracts and Consumer Finance Act. The government’s changes are to protect borrowers, which sounds fair to me. However, my personal view is that banks also saw this as an opportunity to reset the expectations of some borrowers. Sorted wrote a good short piece called “Here’s what the new lending rules mean for you”.
I’ve since read many second-hand accounts via newspaper articles and news sites of Kiwis who have approached their bank to borrow money again, often asking to top up their mortgages, and low and behold, they got turned down. They are majorly affronted that right when they wanted to borrow money, their bank, whom they have been borrowing off for years, turned off the lending tap. Not only that, they added insult to injury, asking lots of probing personal questions about their lifestyle and future income; also telling them to go away and learn to budget. Ouch!
It’s often cited that first home buyers will be the ones to miss out because of these changes. Having met a lot of first home buyers, they are some of the best candidates for lending out there because of their focus on the goal of homeownership. They have been budgeting, resisting lifestyle creep, going without, and saving their butts off for so long now that as soon as they can meet their deposit requirements, the bank wants to help them into a mortgage. Their problem is house price increases, not poor financial management.
It’s not my place to comment on the people in the articles I’ve read, you only get a snapshot of their life and not enough context to make a fair judgement, plus I suspect a bit of cherry-picking of the most opinion inducing/clickbait parts of the person’s story.
I asked myself the question, though, “who else might be impacted by these changes?”
19-year-old, not overly hard-working seasonal worker
I know of a 19-year-old, a not overly hard-working seasonal worker, who already has a few buy now pay later debts to his name. Since the new lending rules came in, he has been turned down by his bank for a $10,000 loan he wanted in order to buy a car he had his eye on. He then went to a second-tier lender (with a much higher interest rate), and they also turned him down. Thanks to these tighter lending rules, that guy just dodged a financial bullet.
I also recall a conversation I had with a guy a few years back. His entire business model was based around selling or renting whiteware to people, knowing they could not afford the payments and would soon default. He then jumped on them with his other business; debt collection. With a smug smile he said, “I own the whole loop”, and he thought he was a freaking genius. I thought he was a complete freaking scumbag.
If new legislation stops this kind of practice; good!
What I’ve taken from media coverage is the commonalities of each scenario.
People seem to:
Use store cards and credit cards for emergencies
Think that buy now pay later is a good budgeting practice
Use a mortgage like a revolving door; it never ends
Need ‘urgent’ repairs to roofs, bathrooms and decks
Want to borrow for cosmetic upgrades to their home or to buy a vehicle
Fritter money on restaurants, gifts and life’s little luxuries
Feel they were good customers of their bank and that lending was a given
In each case, it seemed that the only answer to their problem was to borrow money, and when the borrower is a slave to the lender, it has always been the lender’s prerogative to say ‘NO’, which is what many are currently doing.
If this sounds like you, if your bank said “NO”, what are you going to do about it?
Are you going to go to the media and share the fact that your bank has told you that you dine out too much? Or could you instead think, “I’m a bit sick of the bank having a say in how I live my life?”
The awesome part is that you get to choose.
It’s your life.
You get to choose whether you keep supporting your lifestyle by taking on debt or start putting the steps in place to work yourself into a position where you don’t even need debt.
I think that these changes have forced banks to highlight that we are all just a little bit shit with our money, and for years, they have let us get away with our lackadaisical view of money management.
If you want something from someone else, you need to play by their rules. And they can change the rules any time they want.
If you asked to borrow $10,000 off me because you wanted to update your car, yet I saw you at the local cafe for lunch each day, Instagramming your latest mini-break and sharing your big nights out with mates on Facebook, heck no, I’m not lending you my money. Or if I did, it will have quite a few strings attached!
If you had enough money for all that stuff, you could have saved the money up yourself instead of borrowing it off me, yet you chose not to, you had different priorities, so you have to follow my rules, I’m afraid. You had the choice.
Lenders always could look at every single transaction a borrower made, it’s just that now they are actually doing it. It’s time to adjust to the ‘new normal’.
The perfect spreadsheet provides a roadmap for your spending.
I recall a conversation I had with a fabulous woman called Kate a few years back. She was on my podcast, Episode #26. Kate went to her bank with a total spending and earning spreadsheet proving that she was an ideal candidate for a first (and in her case only) mortgage. She did this so that she could be sure in her mind that she could easily service this debt and could explain to the bank how she would be going about it in the years ahead. She showed how she could also absorb a rising interest rate, should it occur. Back then, it was overkill; they barely looked at what would have been a comprehensive financial plan and gave her the home loan anyway. Today, that’s exactly what the bank wants from you. They want you to take this seriously, and they want you to prove to both yourself and them that you can afford this and that you deem it serious enough to go without in other areas.
Kate got the mortgage, and then she systematically followed her plan and paid it off in full. That was her only debt, everything else that she has since done that required pūtea (money), she has paid for with cash.
Be like Kate
I understand that to buy a home, a mortgage is required by most. But what if, for everything else, you didn’t even need to borrow money? What if you, oh, I don’t know, you saved up and paid cash for that new deck, new roof, car or holiday? I don’t buy into the thought that we ‘have to’ top up our mortgage everytime we want to do something. If you applied the same level of scrutiny as Kate did to your own money, it’s highly likely that you don’t need to borrow money.
Having emailed and talked with so many people about how they manage their money, I’m 100% certain that the vast majority of people wanting to borrow more money could just budget the cost and pay cash for it.
You get to choose
Once again. It’s your life. You get to choose whether you keep supporting your lifestyle by taking on debt or putting the steps in place to work yourself into a position where you don’t even need debt. By all means, you can do some convoluted math to solidify your case for lending. Or you could just pay cash.
This is how I do it. It’s pretty easy really. Also quite boring.
I follow a roadmap
As I sit here in my studio writing this, I have this card stuck on my wall, and it’s the simple plan my whānau and I live by:
The simple plan my whānau and I live by.
Net Worth: I know ‘my number’: What I own - What I owe = Net Worth.
This becomes my line in the sand. Every month and year I track how much it grows.
Budget: I take note of all income and expenses, live on less than I earn and save up for things I want to buy (including expensive items like cars, home repairs, holidays etc.).
Emergency Fund: At all times, we have 4-6 months of expenses in a separate bank account, meaning I can immediately pay cash for any unexpected financial cost and never need to reach for a credit card or mortgage drawdown.
KiwiSaver: I never miss an opportunity to add to my fund each month and I joined the day it started.
Debt Free: I paid off all debt (consumer, student loan and mortgage debt) and no longer borrowed money. Ever. There is no such thing as ‘good’ or ‘bad’ debt; it’s all just money that you owe someone else, and you are giving up a portion of every future paycheque to pay them back.
Invest: I never miss an opportunity to invest a portion of our income in assets that grow in value so I can build our wealth over time.
You can find a more thorough version of this simple plan here: Begin at the Beginning
Pay a little bit more attention over a longer period.
I used to have a student loan, and we used to have a mortgage. We extended our mortgage to buy new cars or take a holiday. Every Friday and Saturday night, we needed to treat ourselves to a night out and act like every meal was The Last Supper! But over several years, we knocked all of this financial mismanagement on the head and became 100% debt-free. Because I follow these rules, over time, Jonny and I have worked ourselves into a position where we no longer even NEED to borrow money. That is what I want for you, and I honestly think that if we all paid a little more attention over a longer period most of us wouldn’t need to either.
It was only after my eyes got opened by talking to debt-free, financially aware people (who are everywhere, by the way), reading blogs and books, listening to podcasts and taking a good hard look at myself and my stupid spending habits, that I realised that by saying “I NEED to borrow money for this thing because it’s urgent” I had forgotten that most basic rule: Fail to Plan = Plan to Fail
I decided that there would be no more excuses and I could start planning for future expenses. Easily. I know that over time things wear out and need replacing and I’m always thinking ahead and setting money aside. And if, on the off chance something did suddenly happen that needed money urgently, I’ve got an emergency fund set aside to cover that expense, no need to whip out a buy now pay later card, credit card or extend my mortgage.
Today, all this talk of new lending restrictions, rising inflation, rising mortgage interest rates etc. wash over me. It’s irrelevant. It was not always this way; it took a mental shift to ween ourselves off using the banks money like an ATM, but it is now, and that is what I want for you.
The incredible thing about getting your finances in order is that it might have taken you a lifetime to create a complicated financial pickle for yourself (I made financial blunders year after year, not as bad as some, but mistakes nonetheless), but it only took me weeks to stop the stupidity, begin to get educated and start to tidy up my act.
All because I decided to change.
Because I sharpened up my own game, my bank has ZERO say in how I choose to spend my/our money and this is exactly what I want for the Kiwis that I keep reading about in the media.
You can educate yourself
When I read these current articles about people who find themselves trying to loan money to fix their problems, I feel for them that they may never have had the financial education even to consider fighting their financial fires with their own money. These media articles seem to reinforce our learned helplessness around money by sharing their endless bad luck stories; yet offering no solutions. When the expert opinion of a mortgage broker is sought to give some feedback and context on the person’s situation, OF COURSE, they will concur because their entire income relies on lending people money. It’s like asking a tobacco company if smoking is bad for you.
You might be reading this thinking, “Maybe join the real world Ruth! It’s easy for you to say all this, sitting in a financially sound position”. A lot of people are doing it tough; I get that. But many people need not be doing it tough; they just need to learn some new skills to manage their money better.
Don’t take financial advice off people who have no money.
That includes your mortgage broker and banker. I heartily wish that there was more kōrero about HOW you can financially educate yourself to be financially strong, instead of constantly hearing about people who are precisely the opposite. I meet plenty of people on low incomes (and high) who are exceptionally good at living within their means, but you won’t read about them in the newspaper.
These are the people I continue to seek out for my podcast because they openly share how they manage their money, and you can take that knowledge and add it to your journey.
One of the most frequent phrases I hear is, “I wish I knew how to budget and make plans for my money earlier; goodness knows how much further ahead I would be”.
A practical example
For the person in the thick of things, maybe they are looking up at their roof, which shows signs of wear and tear. That repair is most likely not urgent. But one day, it will be. So, TODAY, you begin to plan for it.
Ring a roofer and get them to come over and give you an estimate to repair your roof as it is today. Perhaps it’s $10,000. Ask their opinion as to when they think the repairs will need to be made. Perhaps it’s in two years/24 months.
$10,000/24 months = $416 per month (or $96 a week).
Set up a Sinking Fund bank account and call it “Roof Repairs”, and on the 1st of every month have an automatic transfer of $416 into that account. And don’t touch it.
Two years from now, you will have your $10,000 for your roof.
If and when it ‘suddenly needs repair’, get it requoted and just pay cash for it*.
You have managed to avert your very own financial crisis. Would you rather do it this way, funding it yourself, or would you rather make that same payment, plus interest, to your bank for the next two years?
You get to choose.
* Did you read that sentence and immediately say “BUT the roof probably costs $11,000 now?” Don’t be defeated, you managed to save up $10,000, I am sure you can save $1,000 more, or just use your emergency fund.
If you have made it right to the end of this blog post - well done, I’m well aware that I do go on a bit - and if you want to hear from people about the mistakes they have made, and more importantly, the ways they have corrected those mistakes, then start at Episode #1 of The Happy Saver Podcast and go from there. In fact, that episode is also the perfect starting point because the woman I interviewed, Bradie, I’ve since stayed in touch with. She went from being in a right financial state, feeling crippled by debt, to having a net worth close to $2,000,000 in just seven short years. Bradie decided to change. You can also decide to change.
There is not a week someone doesn’t tell me that hearing these money stories has empowered them to change their financial situation. So, if you would rather not end up pleading your case in the media, take a listen.
The choice is all yours. I’m always happy to help.
