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Big spends curbing your financial future?
By Jill Kerby, Personal Finance Journalist
Have you ever been tempted to buy a new car that costs the same as a house deposit? Or toyed with the ‘invite every cousin’ wedding that lasts for days and ends with an expensive honeymoon on the other side of the world?
I drive an older car and was married in a registry office, but that’s not to say I settled for less. I’m happy with my pre-loved wheels and our wedding day was beautiful. But, my spending priorities have always been to remain debt-free, own an affordable house and have a big pension fund. So, I made choices.
To the delight of retailers everywhere, particularly car dealers and wedding planners, extravagant consumer spending is on the rise again, despite a tightening housing market, rising rents and the paying down of Celtic Tiger debt. To be clear, I don’t see a problem with spending lavishly on the things you want - provided you’re using your own income or savings to do it.
Where, I think, people let themselves down financially, is thinking that because you have access to a generous line of credit, you might as well use it - instead of stopping to weigh up the real cost, before hitting the shops or showrooms. It’s what our economist friends like to call an ‘opportunity cost and benefit’ analysis.
Buyers regret anyone?
If you can’t confidently stand over any big-ticket purchases you’ve made in the last couple of years, whether you’ve used your own money or borrowed it. You might be suffering from ‘buyer’s regret’ – a nagging feeling that’s easily avoided by crunching the numbers properly upfront. Let’s start with the new car.
Everyone loves the look, smell and the smooth drive of a new car. The Irish government certainly appreciates our admiration, because it imposes some of the highest new vehicle excise taxes in the EU. Most of the mid-range 2017 or 2018 cars I’d like to drive cost almost as much as I paid for my first house in 1986, but it’s not even the price tag that makes me wince most. What too many infatuated new car buyers choose to ignore, is the seriously depreciating liability in Ireland. I’d argue it’s worth considering what you could do with the depreciation value alone, if you opted for a two or three-year-old model with an extended warranty.
According to Whatcar.com most new cars lose between 50%-60% of their value in the first three years of ownership.Source: Whatcar.com Depreciation: What is it and how to avoid it. August 2016
That’s a loss of up to €15,000 on a new car costing €25,000, a significant lump sum that could be invested for your future. As a professional number cruncher, I know which one I’d choose.
For richer and for poorer
Meanwhile, back at the wedding fair, a survey carried out by Confetti.ie in May 2017 reported the average spend for a white wedding with 172 guests and a dress priced over €5,000, to come in at €24,556.
And that’s before the honeymoon.
The results also showed six in 10 couples funded their wedding with savings or a combination of savings and loans, and took an average of nine months to plan the big day.
A true Celtic Tiger style wedding could (and did for many) involve borrowing up to €25,000.
A five-year, fixed rate loan at 6.9% APR (Annual Percentage Rate) would cost the happy couple €491.39 a month in repayments, long after the wedding dress is packed away and the honeymoon selfies have been deleted.
They’d pay a total of €29,483.40 back and the financial commitment itself is sure to put limits on their spending for years down the line.Source: Ulster Bank Personal Loan/Bonkers.ie 25/01/2018
Crunch the numbers and consider the true cost
My question to couples considering that kind of spend on a party is this: If you’re capable of repaying that level of debt at €491.39 a month, isn’t it worth considering a less expensive wedding and putting that money to work for you, instead of against you? Married life begins after the celebration and before you know it, your priorities will change again and an investment plan could help fund things like the costs of starting a family, taking a career break, working part-time or upgrading to a bigger house. I’m confident, in time; all of these things will feel like much more sensible spends, than the pricey wedding favours everyone left behind.
Still sitting on the fence?
Why not talk to a financial advisor who can help you look at your personal finances and weight up the pros and cons of big ticket spends that are guaranteed to impact your financial future?
It might also help to talk to someone you know who bought a new car, or friends who are still paying off their wedding loan and ask if they would do anything different if they had to do it all again. Armed with all the facts, you should be better placed to save, invest, plan the wedding or buy the flash car (if you must), having crunched the numbers first.