There are various reasons why debt occurs. Situations such as loss of a job, sickness to yourself or a loved one, an unexpected addition to your family, or student loans are generally considered more acceptable than the alternatives: trying to keep up with the Jones’, being in denial, not knowing how to say no, having one or more addiction (to a variety of things), or simply not paying attention. Obviously, some of these situations are controllable, and some are not. To safeguard against the uncontrollable situations adding stress to your life, how should one prepare to live within their means, and create a financial crisis cushion?
A recent study from the Bank of Montreal showed that 20% of Canadians said they would be hard pressed to be able to afford their mortgage if the rates rose by only 2%! With a $350,000 dollar mortgage at 2.99% over 25years the monthly cost would be $1654.57. If rates rose by a mere 2% bringing the rate to a still low 4.99% the new monthly cost would be $2033.63; a difference of $379.06. Knowing that less than $400 per month ($100 per week) is the waver range for 20% of Canadians shows, from another angle, that people are living way to close to their financial limits.
When buying a home it is imperative that a person or couple doesn’t completely tap out their housing budget. Therefore, when buying or remortgaging it’s always smart to budget for the worst case scenario. In the above example a $350,000 mortgage at 2.99% was only $1,654.57 per month. At 4.99% (which is not the highest it could be) the difference per month was $379.06. If people were to budget for the 4.99% and go with the 2.99%, in this example, these home-buyers would be able to put a lump sum payment toward their mortgage of $4,548.72 every year that they had that rate; that’s $13,646.16 over a 3 year period. Now that is how you own your home faster! Plus, if upon renewal the lowest rate you can get is the 4.99% then you’ve already got it in your budget to make the payments.
Another area to over budget on is when purchasing a new car. Even though your interest rates won’t fluctuate, we all know that vehicles are notorious for spontaneous problems. If you take our blog’s previously used example: the Toyota Prius, it has the monthly cost of $460 just to own the vehicle, this is not taking into consideration the licensing, registration, gas, maintenance etc. A person who is learning to safeguard against debt will add 25% onto their car payment to ensure large or unexpected repairs or emergencies can be taken care of. Meaning that if someone were to want to purchase a standard package 2011 Toyota Prius they would need $575 per month in their budget; not $460. Optimally a person should be able to go 4 years without having to pay for more than regular maintenance on a new vehicle. In this example, if a person budgets for 25% more each month and went for 4 years on just regular maintenance they would be able to contribute $5,520 towards their car loan; that knocks off an entire year’s worth of payments and most importantly, a year’s worth of interest!
Safeguarding yourself specifically in just these two ways will help to ensure you’re not subject to a large life change, like losing your home, based off of a small change and ensure you don’t have surprise costs that need to go onto your credit card and put you in debt.