How to avoid life-changing financial mistakes

The media love to report on what’s happening in the economy and draw conclusions about how these events will affect individual New Zealanders. For example, a news story about rising interest rates becomes a discussion about Kiwis who can no longer afford their houses, and will thus be forced to sell.

This is understandable because public events do have personal consequences. The reporters will always be able to find some individuals who fit the bill.

But this conceals a far more important truth:

The biggest factor in whether or not you keep your home is your ability to make well-considered decisions.

So let’s explore what that means.

Mistake 1. Not changing your plans when circumstances change

People who are good with money understand that things change throughout a lifetime. As the years go by, you will accumulate experience. You can use this to adjust your lifestyle as circumstances change.

A classic example would be buying a house when there are two income earners in the family. The bank looks at your loan application, runs the numbers, and tells you the mortgage is affordable. You go ahead and buy the house you want.

A few years down the track, one partner has taken an extended break from the workforce to focus on raising children. A larger house is on the cards but circumstances have changed. Since there’s now only one income, the bank’s previous calculations no longer count. You will need a different approach if a new loan is required.

It’s no good assuming the bank will wave through a new loan because you’re a good customer with a good credit record. The numbers will need to re-done from scratch.

To avoid disappointment you’ll need to be pro-active – and be prepared to make changes before the bank says you no longer meet its criteria. (Pro tip: Talk to us at least six months before you think you’ll be in the market for a new loan.)

Mistake 2. Not foreseeing the consequences of decisions

This is all about seeing the big picture. It means understanding that a seemingly innocuous financial decision can trigger a chain of events that lead to a stressful situation.

One classic example might be taking out a loan for the new car you’ve always wanted. You’ve worked hard and you deserve it, after all. But then interest rates jump, the rates bill arrives, you don’t get that pay rise you counted on, and unwelcome envelopes start to land in your letterbox. A couple of years down the track you’re not sleeping and your health is suffering.

The lesson here is not ‘don’t treat yourself to nice things.’ It’s ‘pause and think about your overall financial position before you take on big financial commitments.’

Of course, you might game out things in advance – and still be blindsided by something unexpected. None of us have 20/20 vision of the future. But when you’re faced with financial stress, make sure you look at the big picture and take a reasonable decision that reflects your new reality.

In the example above, you might reach out to the finance company that paid for your new car. Most lenders will work with a borrower who is struggling to make payments because they want to help find a solution that doesn’t involve repossessing the car.

But if you panic and hide your head in the sand they will have no alternative.

Mistake 3. Not sharing a problem with someone who might be able to help

This is a big one. We all have times in our lives when we need advice, or even just an outside perspective on our finances. But all too often, I see people slipping deeper into debt because they don’t want to seek help (or are too scared or too embarrassed to do so).

This is a critical moment. A problem shared may be a problem on the way to being overcome.

Most of us have a solid friend or family member who is good with money. Or maybe you’re that person yourself. In which case, you can be available for a low-key chat with those who need a fresh perspective on their financial situation. Reach out!

(I have found that many people who are good with money enjoy mentoring others. They feel good about being able to help their friends make smart decisions.)

Your ‘money buddy’ doesn’t have to be a friend or family member. The trusted family doctor might be good person for a chat if you’re finding that money stress is affecting your wellbeing. They’ve seen it all and can often point you towards help that’s available in the community.

Last but not least, there are some great resources and organisations to help tackle money problems.

A problem-solving toolkit for Kiwis

To get a grip on ‘money in versus money out’, you can create a budget. Sorted has a great online budgeting tool.

The government has put together a great webpage with links to community services, financial resources, support group and calculators. Check out what you can get.

For free, face-to-face budgeting advice, there’s the Citizens Advice Bureau, which has offices around the country.

At the end of the day, banks and government ministers will make decisions that affect the economy. This is just the world we live in.

But in the long term, whether or not we thrive in this world largely comes down to our own decisions.

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