A major way to have enough to invest is to first understand what debt traps to avoid so more is invested instead of being stuck with bad debts. In this article we talk about 2 debt traps you should avoid or minimise your exposure to, this year.
The best thing about turbulent times is the levelling of the playing field. This is where sense and long term strategy beat market hysteria and fear. Great opportunities to invest exist in times like this.
Debt Trap 1 – The Car Loan
The first debt trap is buying a brand new car.
To demonstrate why, let’s use a brand new Mazda CX5 which costs around $38,000. It’s value drops by 10% as soon as you drive it off the showroom.
It will be down 20% after 1 year and a whopping 40% at the end of 3 years.
The average person won’t pay the car dealer upfront and a majority of them take out a loan for the car. Let’s say a loan for 5 years at an interest rate of 8.99% per year.
The table below shows you the financial commitment over 5 years.
Let us change the above scenario to now purchase a 3-year-old Mazda CX 5, that looks the same, has the same specs and is in near perfect condition.
Looking at online ads, I filtered for the above and found the same cars for around $17,500. Assuming I took out a loan with the same features as the new car, the table below shows you what you’ll pay over 5 years.
The difference is a $25,000! 25k could have invested in the share market or put aside for a house.
Debt Trap 2 – The home loan
Buying an expensive house that you cannot afford is a trap. With the current interest rates in Australia and the RBA’s unwilling to raise to jeopardising the economy further, there will be more buyers in the market.
More buyers equals fewer homes and higher prices making it difficult to get good deals.
Also, when you buy a house that costs more than you can afford, one of the main repercussions is financial anxiety.
Add additional expenses like Council rates, water rates, maintenance and maybe body corp rate, easily an additional $2500 a year.
A budget already squeezed by a mortgage will cause stress. You can’t underestimate this, with facts like financial stress being one of the biggest reasons marriages fail.
Find a house in a good suburb, even if it is in an outer suburb. You’ll be surprised at what you can save.
Find a house that will not allow you to have money for investing to achieve financial freedom.
I am not saying avoid the above loans at all costs. One can do it without breaking the bank to build a bright financial future for yourself and loved ones.
On tabarr.uk, we post our share market folio live with every purchase and write in-depth analysis of companies, step by step guides and articles such as ‘5 strategies that doubled our halal investment in 2 months‘ published on AMUST.
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