Lesson 7: Reducing debt
The big ticket items (your home and your car)
For most of us, the family home is the biggest purchase we will ever make, and the car is often the second biggest. Not surprisingly, this is where the most money can be saved or wasted.
Most people want to appear to be successful and 'making it', and because of this, many buy real estate they can't really afford (especially if interest rates go up) or a car that's too expensive for their limited budget.
If you're in a lot of debt, the car and the house are the biggest things to look at.
House
Let's look at the house first. If you live in a big and/or expensive house, consider if you can in fact afford it. If you're living below your means, then fine, but if you're getting into more debt every year, or paying the mortgage and buying your groceries on credit, perhaps you need to look seriously at buying a more modest or less expensive house. Big houses cost more to buy, more to maintain, more to heat and cool, more to furnish, and it's more work to clean and keep tidy.
Do you really need three bathrooms and five bedrooms for the four of you? I know of one family who have just that - along with a family room, a living room, and a 'rumpus' room. And they're up to their necks in debts for credit cards, and personal loans. Outwardly, they appear successful and wealthy, but I wouldn't want to be in their shoes if there's another recession, if interest rates go up to 18% again (as they did here in the 1980s), or if one of the parents becomes unemployed. Is it worth the stress?
Big houses cost more environmentally, because they use more materials to build and more resources to maintain. Do you remember the calculation you made in Lesson 1, on how many Earths there would need to be if everyone consumed at the rate you do? If you have a smaller, more modest house, your planet count goes down dramatically.
Have another look at advertising from the advertiser's point of view in the website Emotional Response Marketing. Was your decision to buy your current home a rational or an emotional one?
The average house size in the USA has more than doubled in the last fifty years. (Take another look at the All Consuming Passion website). (And this increase is in spite of the fact the number of occupants of houses has decreased.) And it's costing the Earth.
A home should be a haven, a joy to be in, and it should not be a millstone around your neck. If the mortgage is so high you're struggling with it now, what will you do if interest rates go up? What if you lose your income?
If you are renting rather than paying a mortgage, you are probably throwing money away. Saving for a deposit and buying a house is a sensible thing to do because every year you own more of the house you're buying. A house is an appreciating asset over the long term, and so a mortgage is a form of debt you can live with.
If you're about to buy a house, consider a fixed interest mortgage. You will pay a slightly higher interest rate, but it is not going to go up, and you can budget more easily.
Car
Next we'll look at the car. The first question, as mentioned in an earlier lesson, is do you really need a car at all, because a car is the biggest drain on finances. Unlike a house, the car is a depreciating asset, and is virtually a black hole for throwing money into.
If you really do need a car, think about the car you currently have, and why you have chosen the particular type and model. Do you have a big, flashy car to impress your neighbours or to make you feel good? Were you swayed by expensive advertising? If so, you're throwing money away.
Many people drive around in giant SUVs with four-wheel drive they never use, when all they really need is a small car or no car at all.
Cars are disastrous for the environment because of the fuel they use, and the pollution they produce. If you remember the calculation of your ecological footprint in Lesson 1, you will probably realise that if you have a small, economical car, your footprint will be much smaller.
If you're thinking of buying a car any time soon, consider looking at fuel economy, efficiency, and low maintenance costs as the prime considerations. If you are thinking of buying a new car rather than a second-hand car, remember you will lose thousands just by driving it out of the showroom! If you want a new car anyway, consider buying one of the new hybrid cars that use 80% less fuel than a 'normal' car. See the Hybrid Cars website. With the price of oil going up all the time, these new cars make a lot of sense for saving money and the Earth, in the long run.
As mentioned in an earlier lesson, saving money by not spending it on maintenance is false economy because a well-maintained car will last longer, and use less fuel.
