Everyday we work with couples who have big dreams for their family, but don’t want to go down the rabbit hole of creating more stress, while they create a life they love.
It always spikes our interest when we see rising levels of debt that don’t line up with household levels of income. But we get it. Some days it can be easy to buy what you want, when you want, because there’s a lender on every corner, or computer screen, wanting to give you exactly what you’re looking for.
The problem is many of us make large mistakes with our debt decisions and wind up in a debt trap that takes twice as long to get out of and costs twice as much.
Here are the three mistakes many of us make:
- We borrow too much,
- We repay too little,
- We let the lender dictate the term.
And here are the easy ways to avoid them:
- Take control and ask this question!
The first mistake most of us make is letting the lender decide the amount. Don’t! Always remember, this your money, or more importantly, your debt to pay off. Start the whole process by understanding how much you can borrow, and make sure you’re comfortable with it. Turning up and asking a lender, how much you can borrow, is like sitting down at a restaurant and saying, ‘How much are you going to feed me?’ Both have a product to sell and it’s up to you how much you consume.To work out your maximum appetite – the most you can possibly repay – multiply your take-home household income by 30%. Your repayments should never exceed this amount, even with personal loans and credit cards combined.
- Do the sumsNow that part’s out of the way, take a moment to work out what your repayments should be based upon how much you’re going to borrow. This is where you need to customise the repayments so it suits your long-term debt goals.Take the amount you’re going to borrow and divide it by 100,000, then multiply it by 800. For example, is you’ve borrowed $300,000, divide it by 100,000 which makes three, Multiply that number by 800 which makes 2400. This is your monthly repayment ($2,400) and means that you won’t be trapped by debt for longer than you want.The maximum repayment should be the lower of points 1 & 2.
- 15 is the magic numberLastly, ignore the loan length your lender puts in front of you. The maximum term you should be looking for is 15 years.
If these repayments seem a little high for what you want, take some time out and revisit your goals. Ask yourself, ‘Do I want a pretty house or do I want a life that’s rich and full?’
Then, take as much time as you need to answer it – this can be a tough decision for many households.
If you’d like help to discover the right way forward, give us a call.