I would equate that to being an ‘informed’ financial consumer. The pitfalls I have seen again and again are when we allow someone else to make a decision for us versus making the decision that is best in our personal circumstances.
An example, buying too big of a home because you qualify for the mortgage versus ensuring the cost of owning and maintaining that the home fits your budget based on your lifestyle. Or trading in your vehicle and adding the balance of the loan to a new one, leaving you in a position where your current vehicle will not be paid off before the cost to maintain it begins rising exponentially.
The following are six ways you can be a smart financial consumer:
- Read your contracts
Too often we sign on the dotted line without knowing exactly what we are getting into. And with good reason, those contracts are wordy, and difficult to understand, and who has time to read it while you are sitting in a signing appointment.
One way around this is to ask for the documentation in advance so you can review it yourself or have someone else familiar with the wording and terminology read it. Often you can scan the headings and focus on the ones that will mean the most to you such as ‘what happens if you are unable to pay’, ‘what options you have to pay the loan off sooner’, ‘coverages for loss of job, or life’ and ‘warranty information’.
- Know your interest rates
It’s amazing to me how few people know what interest rate they are paying. Knowing and monitoring your interest rate can save you LOTS of dollars. You can make use of
online calculators to determine how long it will take to pay your debt off at the current rate and adjust the rate or the payment to determine if a re-finance makes sense or the benefit of increasing your payments each month.
Why monitoring it? Because interest rates can be adjusted without knowing it.
Take the example of Susan. She began looking at her rates to figure out a better repayment strategy. In doing so, she discovered her line of credit rate had almost doubled a year earlier because she missed two payments in a year. She brought it to the banks attention who explained what she had to do to get the rate back down. They may never had offered that advice had she not ‘been aware’.
- Look at the total cost of an item
In keeping with the advice in Number 1, taking the time to calculate what you will actually pay for an item might cause you to think twice about financing the item over the maximum time frame or financing it at all. If we actually looked at what we are paying for that $150,000 home over the 20 year mortgage, we might think twice. Or the cost to finance that car over 7 years versus 5 years. Don’t even get me started on finance company loans for consolidating debt, buying furniture etc. At 30% interest, that $5000 living room set may only cause you to pay out $161 per month but you are paying $9700 in the end! Is it worth it? Maybe and maybe not, but how can you make that decision if you don’t have all of the information.
- Consider ways to purchase without financing
Financing seems to be the auto-pilot process these days. Need a car? Finance it. Need furniture? Finance it. Need a trip? Finance it. Need car repairs, holiday gifts etc.? Finance it. It’s so easy, most of the time, that we don’t take the time to consider other options. And let’s face it, instant gratification is a first world countries default way to live. And we are paying for it. Dearly!
So next time you catch yourself thinking “I can just get a loan, take money from my line of credit, redo my mortgage”, think again. What else can you do? Can you save the money or part of it? Can you buy second hand? Can you wait a year to take that vacation so you can pay for it instead? I know that won’t be possible in all circumstances, but it will, at least, get you thinking in another direction.
- Don’t pay interest
I have a saying…if you are paying interest, you are losing the game. If you are not paying interest, you are winning the game. The credit game that is. Can you see how contrary that is to the way we are encouraged to use credit. We are encourage to use LOTS and carry a balance and pay interest. And the lenders are making a lot of money from that system. So it is in their best interest to continue to promote it.
I know it is difficult to not pay any interest, ever! The housing market would go bust if we had to pay cash for homes. As would the car industry. So I will adjust the advice by saying, “Pay as little interest as possible, keep your interest rates low, put down payments down where you can and pay your debt off as quickly as you can to avoid the high cost of interest “.
- Consciously spend
And last, but certainly not least, take the time to think about EVERY purchase you make. The absolute worst thing you can do for the health of your finances, is to go on auto-pilot and stop paying attention. So much money gets wasted and so much debt can get incurred that way.
I heard this strategy once and I thought it was a great way to look at a purchase. Let’s say you want to buy a $200 item – a tool, a piece of clothing, something for the house. Now picture that item in one hand, and the money in the other. What do you want more? The item? Or the money? This simple exercise gets you off of auto pilot and into conscious spending.
I will leave you with my favourite quote when it comes to money…
“You can afford anything. You just can’t afford everything!”
Evaluate what is important to you. Be informed, take the time to know what you are getting into. Consider the alternatives. And above all, make decisions that support you.
Wishing you happy, healthy finances.
