Liz Parnell

Home Articles Budgeting, Economics and Finance Seeing the future
Seeing the future PDF Print E-mail
Thursday, 20 November 2008 08:12
I've written before about how our money is not our own, especially when we don't yet have it. Yesterday I talked about how "our" money is really God's anyway. Today I want to talk about seeing the future.

All of us engage in "fortune telling" or predicting the future, although few of us realise it. You see, every time you sign a contract (such as a mobile phone contract) to pay a certain amount of money each month (week, quarter, whatever!) you are predicting the future or placing a bet on the likelihood that you will have the means to pay that contract for the term of the contract. Whenever you take out debt - borrowing money you don't currently have - you are bargaining that you will be able to pay that debt - which will be many, many more times the amount of money you don't currently have, but want. When you sign a "Buy Now Pay Later" agreement, you are doing the same thing.

Here's an example. You take home your lounge, interest free. However, twelve months into the twenty-four month contract, your partner is injured at work and can no longer work. You take up a part time job cleaning your child's school or day care centre in the evenings. Your job plus sickness benefits are barely enough to cover groceries, so you stop making your monthly payments in the hope that you will be able to successfully sue your husband's company. Next thing you know, it's been a year. Not only have you not made payments on your lounge (and now have to pay it monthly, with 22% interest) but the lounge is no longer worth the amount of money you owe, so you can't even sell it to make the payments. You have racked up $10,000 in credit card debt, attempting to change as little as possible of your pre-unemployment lifestyle. The case goes to court but since the employer has since gone into receivership they will not be able to pay you anything and their insurance company is only willing to pay you a $100 a month more than sickness benefits.

How about another example. You take out a 36 month mobile phone contract to get the latest phone that does everything for you for only $99 per month. However, eighteen months after you get the phone it gets stolen and your insurance wont cover it. Not you not only have to get yourself a new phone (and now you're so used to the features on your stolen phone that you can't imagine going back to a more basic model) you still have eighteen payments of $99 left on your old phone.

One last example. You save for months, maybe even years, to put together a deposit on your dream home. You may even be prudent and have a 20% deposit together. However, to buy that dream home, you still borrow the maximum the bank will lend you, which is a little more than your budget (which is counting on a few hours of overtime a week already) allows for repayments, but you figure that you'll find that extra $50 a month somewhere - you figure interest rates will go down anyhow.. You are so excited about your new home so you go and spend a few thousand dollars on plants and paint and a few other odds and ends to make your home truly "yours". You want to show off your new home, so you invite all your friends around for dinner parties that blow your grocery budget out of the water. Then due to the economic slowdown, your husband is unable to take overtime hours. You are now short $700 a month in your budget and have somehow found yourself in $5000 credit card debt, no doubt from all those "personal touches" you've added to your home, and expensive dinner parties. Then interest rates unexpectedly go up and you're now $950 behind in the budget per month, and you can't make your credit card repayments. Fast forward another twelve months to when the bank forecloses on your mortgage and sells it for $200,000 less than you paid for it two years ago, due to the unexpected rise in interest rates and a new development that has begun down the street. You now have nowhere to live and still owe $350,000 on your mortgage (due to compound interest and defaults on past repayments) as well as $20,000 on your credit card, which is now at it's limit. You are forced to declare bankruptcy.

The truth is that none of us know what the future holds, but every one of us is gambling that the odds are in their favour that we will have the income to pay out the contract. While the odds might be good - we might believe that there is a 99.9% chance of us having that money, we can never really guarantee it.

I am not saying that no one should ever have debt. Unfortunately I think that mortgages are a "necessary evil" for most people in Western culture. However, you should never be paying the maximum you can afford in a mortgage (or any other debt) because you never know what could happen.