These wealth destroyers or anti-wealth-builders that keep many people on the hamster wheel of financial stress come in two main varieties:
1. Living beyond our means and other actions that make us go backwards financially, such as paying interest to buy stuff on finance that we don’t need.
2. Or choices we make that limit the growth we might have otherwise made, such as sticking with a conservative KiwiSaver fund year after year rather than taking on some risk with balanced, growth or aggressive, if appropriate.
A classic living beyond your means is buying more car than you need. A car is a depreciating asset.
You might look rich owning a nice car. But you don’t get rich. “I need to upgrade my car before it starts breaking down,” is a common justification for wanting a newer car.
Even if you buy a reasonably modest $15,000 second-hand vehicle, it will be depreciating around 10% or $1500 a year. You’ll pay thousands in maintenance, insurance, Wof and registration. Maintenance isn’t always more expensive on a cheaper car.
Try buying BMW or Volvo parts. To be honest, most people buy cars on finance. At 11.50% a year over five years, the interest on that $15,000 car is $4793. Most people need a car. But they don’t necessarily need the one they convince themselves to buy.
Ditto for more home than you need. Each extra room that isn’t necessary [media room, anyone?], or used, is either eating away at wealth in the case of renting, or impacting growth potential when it’s mortgage payments on an owner-occupied home.
There is the argument the more expensive home you buy the more capital gain you’ll get. However, a more modest home with the rest of the capital ploughed into a rental property or other growth investments should build more wealth over time.
Subscriptions are a top anti-wealth builder. They suck money from your bank account every month and many don’t get used.
Conservative KiwiSaver funds are anti-wealth builders. There’s a “but” here. Sometimes conservative is the right fund for someone to be in.
Many people, including those who are auto-enrolled in default KiwiSaver funds are impeding their growth potential. Also, watch that excessive fees aren’t eating into growth, Sorted’s personal finance lead Tom Hartmann pointed out when we talked about anti-wealth-builders.
Virtually anything you buy on consumer finance reduces the amount of money you can save, invest, or use to pay down existing debt. There’s first the cost of the item you’re buying, that you may not need.
Then there’s the interest [AKA idiot tax] that you wouldn’t pay if you didn’t buy the item. A recent article I wrote about Buy Now Pay Later led to someone I know telling me she’d used it because she “needed” to buy a $3000 sofa. Need or want?
Buy Now Pay Later is lucrative for the merchants because so many people get stung with fees when they miss payments.
Spending more on education than you need, can be an anti-wealth-builder. A good education often leads to long-term higher income. Spending more years studying than you need studying, or changing tack too many times can be costly. It’s a tricky one. Getting a business degree, before going into another field such as an apprenticeship, can still pay off.
The biggest anti-wealth builder is actually the grey stuff between our ears. People talk themselves out of doing what’s right for their finances. That doesn’t mean that the old chestnut of imagining yourself being a millionaire is going to work. But it’s probably a better place to start than believing “it’s hopeless”. Limiting money beliefs work against people.
The antidote to anti-wealth builders is seven clear drivers of personal financial growth that the Office of the Retirement Commissioner is researching currently:
1. Increase saving regularly
2. Increase the amount invested
3. Increase return potential
4. Accelerate repayments on interesting-incurring debt
5. Reduce everyday borrowing
6. Meet all financial obligations to avoid consequences, and
7. Reduce financial product fees and interest paid.
