IN the old days, when someone said, “I can’t afford to buy a shirt, a car or a home”, it meant that he did not possess the money to pay for the garment, vehicle or piece of real estate in question.
Today, such thinking appears quaint, even naive.
We live in a modern, more sophisticated day and age that allows us to immediately assuage our appetites even if we don’t have all the cash needed to pay for the goods and services we desire.
After all, who needs a lot of money when we have loads of credit?
As a species, humanity has never enjoyed such a superfluity of credit.
In case you don’t know this, our global economy is shamelessly fuelled by credit-driven consumption.
How did we reach this point?
Consumer credit is a recent human invention that saw its genesis 160 years ago, in 1856, when Singer sewing machines were first sold on an instalment plan. It was a modest start to our epoch of easy payments, which gathered momentum in 1919, when General Motors began peddling its cars through easy-payment plans.
A few decades later, this retail-baiting game accelerated and exploded beyond the shores of the United States, powered by the ease of charging purchases on credit cards.
Despite the tone of my writing, I recognise that expanding consumer credit has done far more good than harm. It has allowed regular people, like you and me, to own and enjoy high-tech gadgets, vehicles, home furnishings and even homes long before we could have set aside the full sum of money required for their purchase.
But the dark side of this boon to human comfort has been the staggering increase in the price of pretty much everything. Our concept of affordability has morphed from our once needing, up front, all the money required for a big-ticket item to merely — sometimes barely — affording the monthly payments on its instalment plan.
That evolution in what affordability meant resulted in an eruption of demand. With greater demand came greater supply, a dramatic rise in economic activity and an unstoppable ascent in the price of almost all goods and services everywhere.
There is no turning back the clock for the human race to the purported good old days, which is great because we are undoubtedly better off today through the advances and innovations of finance birthed by consumer credit.
However, is there room in your life and in your buying patterns to embrace outmoded, old-fashioned buying norms?
Would you be willing to go down an ancient road that is now less travelled by altering your personal definition of affordability?
Waiting to save all the money you need to pay for your next camera, computer or car has two huge benefits:
NO interest charges; and,
BETTER specifications.
Even if you can’t wait several years or a decade to raise the cash for a full payment, could you wait a few months (or an extra year) to save up a sizeable down payment to minimise the differential sum you will need to borrow? If you can, you’ll be exercising fiscal restraint and internal fortitude, which will, over time, strengthen your financial muscles and sinew.
Of course, common sense goes a long way in deciding when to wait and when not to.
Postponing the purchase of big-ticket items is smart if they depreciate over time. But in the case of generally appreciating assets, such as personal homes and investment real estate, buying early through the use of cheap long-term funding from banks normally works out better.
A useful guideline for financial success is to reserve your borrowing for appreciating assets. Those who do so tend to end up way ahead of those who waste credit and, thus, valuable future cash flow on time payments for things that lose value steadily, progressively and inexorably.
The writer can be reached at rajen@RajenDevadason.com and via Twitter: @RajenDevadason
Rajen Devadason is a Securities Commission-licensed financial planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com. He may be
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