Financial decisions, big or small, can significantly impact your financial well-being, long-term stability and overall peace of mind. Here at DebtSafe, we aim to empower you by providing 10 essential questions to ask yourself before spending your hard-earned money or taking on debt, such as a loan or using credit:
1.
Do I Need This, or Do I Want It?
This foundational question helps you differentiate between essential needs and fleeting desires. Prioritise essential purchases like groceries and rent before impulsive spending.
Needs: These are essential for survival and well-being. They include food, shelter, utilities, transportation to work or school, and basic clothing.
Wants: These are things you desire but can live without. Examples include:
Sometimes, debt can be a necessary tool to fulfil essential needs. This could include a home loan to buy a house, student loans to invest in your education or a medical loan for unexpected healthcare costs. However, it’s crucial to carefully assess your ability to repay this debt before committing.
However, using debt to finance non-essential purchases will most likely spiral into financial strain. So, avoid using credit cards or loans for impulse buys or keeping up with appearances.
2.
Can I Afford It Now, and Can I Sustain These Expenses in the Future?
Looking beyond the initial cost is crucial for spending and taking on debt. Here’s how to consider affordability:
Cash Flow: Can you comfortably absorb the cost without dipping into savings or essential expenses? Track your monthly income and expenses to understand your current financial flow.
Hidden Costs: Factor in additional expenses beyond the sticker price, such as insurance, service fees, yearly or monthly maintenance, etc.
Debt-to-Income Ratio (DTI): This ratio measures your monthly debt payments compared to your gross monthly income. A high DTI (typically above 60%) can make it almost impossible to qualify for future loans and indicates over-indebtedness.
Interest Rates: Understand the interest rate associated with any debt you take on. Higher interest rates can significantly increase the total cost of the loan.
Future Expenses: Consider potential future expenses. Will your income keep pace with possible inflation in living costs and yearly rate hikes?
Emergency Fund:: Ensure you have an emergency fund to cover unexpected events without resorting to debt.
By analysing both affordability and sustainability, you can make informed choices about spending money or taking on debt that won’t jeopardise your financial future.
3.
Am I on Track with My Financial Goals?
Every financial decision should be aligned with your long-term goals. Does this financial choice contribute to your financial roadmap or derail it?
Align Spending with Goals: Saving for a vacation? Limit impulse purchases and allocate funds towards travel costs.
Using Debt as A Tool: In some cases, responsible debt can be a tool to achieve long-term goals. For example, a student loan can help you invest in your education and future earning potential. A home loan allows you to own a home, potentially building equity over time. The key is strategic debt management. Only take on debt if the potential benefits outweigh the risks, and ensure you have a clear repayment plan.
And remember, the quickest way to divert from your goal is to make Impulse Purchases with High-Interest Credit. Avoid, Avoid, Avoid!
4.
How Will This Impact My Budget?
Be realistic and honest with yourself about the impact on your monthly expenses. Can you comfortably absorb the cost without sacrificing essentials or other financial priorities?
5.
Have I Explored All the Options?
Are there more affordable alternatives that meet your needs?
Exploring Options When Spending:
Exploring Options When Taking on Debt:
6.
Am I Making This Decision Out of Emotional Distress?
Sometimes, stress, loneliness, or boredom can lead to impulsive spending. Identify the root cause of the emotion and find healthier coping mechanisms instead of making a purchase you most likely will regret later.
Identify Your Triggers: Recognise the situations or emotions that trigger your urge to spend. Feeling overwhelmed at work? Lonely on a Friday night? Understanding your triggers empowers you to develop alternative coping strategies.
Develop Healthy Alternatives: Replace unhealthy spending habits with activities that relieve stress and promote well-being. Exercise, spending time with loved ones, practicing mindfulness, or pursuing a creative hobby can all be effective coping mechanisms.
7.
Have I Discussed This with My Partner or Family?
Financial decisions can impact everyone in the household. Open communication fosters trust and avoids potential resentment. Discussing the purchase allows everyone to be on the same page and contribute their perspectives.
8.
What are the Potential Risks and Unexpected Costs?
Consider unforeseen circumstances like job loss, economic downturns, or potential repairs that could impact your ability to manage the commitment.
Remember, unforeseen/emergency costs are part of life, so if you are already scraping by, other expenses could lead to long-term financial stress. Never mind if that expense was not something you really needed!
9.
Is There a Better Use for This Money?
Consider unforeseen circumstances like job loss, economic downturns, or potential repairs that could impact your ability to manage the commitment.
Remember, unforeseen/emergency costs are part of life, so if you are already scraping by, other expenses could lead to long-term financial stress. Never mind if that expense was not something you really needed!
10.
Could I Wait and Save More?
Giving yourself time to save allows for a more manageable financial commitment.
Waiting and Saving When Spending:
Waiting and Saving When Taking on Debt:
