Getting off the financial treadmill.

Congratulations. You’ve paid down your mortgage and now you can afford a new kitchen/extension/holiday etcetera. Stop there. Just when your financial position starts to improve, YOU DO WHAT? You take on more debt.

What you’ve done is cranked up the incline on the treadmill just when it had got easier to run no-where.

A lot of people’s financial troubles in New Zealand are down to this financial treadmill. As soon as they get a glimmer of hope for the financial future they need (AKA decide) to upsize their house (or car, or holiday program) and the treadmill belt just keeps going around and around and around in circles.

Why?

Our need to upgrade is in part due to the chemicals in our brain. Dopamine is a chemical that gives us a natural high. In layman’s language, it’s Buyagra. It’s something that helps you shop. It’s when we get a reward – such as the new car, new bathroom and so on. You only actually need to think about the reward to get the dopamine running.

But as soon as we get the item we desire it’s suddenly not enough. That new house somehow “shrinks” and we “need” (read: want) to extend it. That’s what Buyagra is all about. Coupled with easy borrowing it becomes downright dangerous.

The scary numbers.

We use other psychological failings to convince ourselves that we’ve borrowed against the mortgage so we’re being good. We didn’t take out HP or anything bad like that, did we? People think because it’s on the mortgage that it’s “good savings”.

Add another $40,000 for a kitchen to a $400,000 mortgage with 15 years to run and you’ll pay $64,514 for that kitchen. The repayment costs on the kitchen at 6.7% are $352 a month – and interest rates may rise again, making it more painful.

A $200,000 extension could potentially cost you $317,570 over the life of that mortgage. Imagine if you’d put that into your KiwiSaver instead?

The cold hard truth is that you’re not getting ahead by “needing” a new kitchen or bathroom every ten years.

Step off the treadmill to retirement savings

One of the greatest financial learning experiences for me was being made redundant. Suddenly I had to hand my company car back and found myself using a bicycle and public transport to get around.

When I landed a new job we stepped off the treadmill by choice. We consciously decided not to buy a second car.

Even more important, we chose to be satisfied with our house just the way it is, not upgrade it just because we could. We own a nice house, not a 90 square metre box. So there wasn’t a reason to buy an even nicer house as we may have been tempted to.

It was very liberating in our house when we realised that there is a life choice to be made of being satisfied with what you’ve got.

The redundancy gave us an insight into how we could become financial stable long term and it was a blessing in an ironic way. It has transformed our retirement savings.

Living the debt-free high life.

That’s not to say that we don’t have holidays and don’t buy ourselves little luxuries. But we do it out of savings, not by extending the mortgage. A $5,000 family holiday, costs us $5,000, not $7,939 over 15 years.

My final advice is to retrain the way you think. Learn to think with your cup half full when you see your house/car/TV and other belongings. Thank your lucky stars for having them, rather than dreaming about replacing them.

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