While the headline of this article may earn a 10 on the ominous scale, I chose it for good reason. Your finances will be looking fairly ominous if you overextend yourself on the three expenses that stop so many people from catapulting themselves to a better financial situation.
We all mess up sometimes. That cappuccino purchase every other day could set you back R400 a month, and getting an over-spec’d fruity phone may increase your monthly cellphone bill by R300. But these can probably be forgiven, and are tame compared to the four and possibly even five-digit rand amounts that get sucked away each month by what I term ‘The Big 3’.
Now, when I mention big expenses, I’m pretty sure the first two items that pop into your head are housing and cars. And you would be right – these two eat a large helping of most South Africans’ budget pie.
But it doesn’t end there. Housing and cars go on to directly influence a third biggie, which forms what I like to call the expense triangle of doom (the deadliest shape in all of personal finance).
It looks something like this:
Cars are one of those expenses we have a lot of control over. You can choose to get from A to B with a derriere that has been warmed to a precise temperature by a state of the art optional extra, and the knot in your lower back eased by the perfectly tuned vibrations of the massage function in your back rest.
Or you can realise that a car is merely something that meets the need to get you where you need to be. Anything that can do that reliably is going to be just fine (with plenty money left over for thermal underwear and perhaps a proper Swedish massage).
You can also choose how you decide to finance a car. Those looking to purchase a vehicle can get something they can easily afford and take a few extra months before buying it to put down a decent deposit. The other option is to go for something that quite frankly you cannot afford and commit financial suicide – a balloon finance deal and a great way to confess your undying love for your bank.
Something else that is important to realise is that the cost of an expensive car doesn’t end with an increased sticker price, additional interest payments and an oversized depreciation knock.
Expensive cars are not only more expensive to buy, they are:
- More expensive to insure
- More expensive to service,
- More expensive to maintain.
As you ratchet up the price you pay for a car, there is a whole symphony of related expenses that start playing louder and louder.
And then of course your choice of car directly drives another one of the Big 3 expenses – your cost of commuting. An expensive car costs a lot more per kilometre when you factor in all the related expenses, and this results in a more highly priced commute.
By selecting the cost-effective vehicle option, it means a decrease not only in your car expense, but also in your commuting expense.
Housing is likely the biggest line item on most people’s budgets.
With such a big portion of income going towards housing, being smart and thinking long term when it comes to how much you spend on a house can have a massive impact on how much income you leave available for other goals and priorities.
For example, buying a house for 10% less than you can afford could make you a home owner five years earlier than the usual 20 years. Buy for 20% less than you can afford, and you could own your house outright in just 12 years.
Something else that should also be seriously considered is where you choose to buy that house.
The location of your house directly influences your commute cost (and, arguably just as important, your commute time).
This is where it can get a little tricky – for example, it may actually be worth paying more for a house that is closer to your work.
This is because the cost and time saving of the shorter commute could more than compensate you for the increased house price.
And of course, it’s always worth remembering that a shorter commute contributes to increased happiness.
The backwards approach to big expenses
There is something that intrigues me about the way some people approach their expenses. With the small expenses, we are usually on top of things such as bank fees, insurance and eating out.
We are generally pretty good at reducing these types of expenses when we apply our mind and dedicate some time to it. For the smaller expenses, the approach is usually to identify the need, and then try find the most cost effective way to meet that need. That’s a pretty solid approach.
But then …
Suddenly, we seem to forget that cars and houses are also simply ways of meeting a need. When it comes to the really big stuff, we decide to flip the whole process on its head.
The approach many take is to identify the most money their budget will allow them to spend, and then find the maximum amount of car or house that meets that money.
For some reason, people seem to try maximise their car and housing expenses.
And this is most unfortunate, because while reducing the small expenses certainly does help, it is by saving on the really big expenses where massive strides can be made and financial freedom can be bought.
If we are able to approach the big expenses with even just half an eye on cost effectiveness, we can really propel our finances to the next level.
Turning the triangle of doom into a triangle of dreams
If you overspend on a car, and overspend on a house that is far away from your work, then you are depriving yourself of the opportunity to pursue some of the many other joys life has to offer (such as financial freedom or travel).
So what is the alternative? Is it possible to flip this all around?
And this is where I consider myself extremely fortunate. I have managed to turn the expense triangle of doom into an expense triangle of dreams.
Through some carefully considered decisions, I have managed to:
- Buy a house for less than we could afford
- In an area that is extremely close to my work
- While driving a very cheap scooter.
Was it a schlep to haul life from Johannesburg to Centurion? Yes, it took some effort. Did driving a scooter to get to work take some getting used to? Absolutely! Was it worth it? Oh yeah!
The fact that I have chosen to minimise the ‘Big 3’ is the only reason I am able to follow the early retirement and financial freedom dream.
The key takeaway from all this can be nicely summed up by this tweet:
– Buying TOO much house
– Buying TOO much car
– Buying your TOO much house TOO far away from your work, resulting in TOO much driving in your TOO much car
— Stealthy Wealth (@stealthy_wealth) August 15, 2019
This article was originally published on the Stealthy Wealth blog here.