Rage, rage against the dying of the light
Posted by Faith, 29 August 2008
When we rage against the current tough economic times or when all hope seems lost, it is time to dig deep and find a new way forward.
Right now, it may seem like everything is working against us. Mortgage interest rates are at double-digit figures, petrol and food prices keep rising and investments of all types are experiencing difficulties.
If you have a mortgage, you are probably feeling the pinch. If you are debt-free with investments, there is a chance you have seen a drop in value in the last twelve months.
There is hope, and it comes from inside you, as one of my newest clients demonstrated so powerfully last week.
Two weeks ago, I was having my scheduled catch-up meeting with Jasminder and her husband Aaron. They are in their early thirties, earning good money and had purchased their first home two years ago. One of their goals was to clear their mortgage as quickly as possible by paying more than the minimum amount each month. For the first year, Aaron and Jasminder had been very diligent with extra payments, but in the current economic climate of increasing prices, they were having trouble.
When they came in that day, I could see they were very frustrated. Jasminder was very unhappy that they seemed to be going nowhere with their finances. We talked a lot about their feelings, why they thought they were not making progress and how this was affecting their lives. Unfortunately there is never a ‘magic bullet’ to solve these problems, but we did get their problems out in the open, so they did not feel alone. We reviewed what was important to them and brainstormed some possible solutions, after which they went home to think things over.
Jasminder telephoned this week. She sounded very excited and was keen to make a time for she and Aaron to meet with me.
As soon as they arrived I could instantly see the change in them. The worry lines had gone and they had big smiles on their faces. They both looked like they’d found the secret to a good life.
“OK, I think we can put any small talk aside. It looks like you have something important to tell me.” I remarked.
“You bet we do”, chirped Jasminder. “You know how miserable and angry we were last time we saw you?”
“I remember and it was completely natural given the circumstances.”
“Regardless of how it sounded, we did get a lot of value from just voicing our concerns. We were able to see them for what they really were and work out what annoyed us the most.”
“That’s great. Sometimes just having a sounding board can be helpful.”
“Aaron and I have decided that our mortgage is dominating us too much. We feel our lives are on hold in order to cover the large interest payments and our expectation that we should be able to clear huge chunks off our principal each month.”
“That was the goal you had set for yourselves.”
“Yes, but in this market, maybe that goal is unrealistic. Our obsession with the mortgage was becoming unhealthy and was stopping us enjoying life as well.”
“While it’s good to be focussed, sometimes you do need to step back a look at the bigger picture.”
“That’s exactly what we did. After we saw you we caught up with some older friends, who are in the opposite position to us. They are debt free with large incomes. In fact, they don’t know what to spend it all on - we could certainly help them decide and of course we offered. They said that now they have lots of disposable income, they are cannier with their money than when they had a mortgage.
“Interesting, why is that?” I asked.
“They explained that they see all of their money as theirs, as it is no longer owed to the bank as a mortgage. So, they are in full control of what they spend it on.”
Aaron jumped in with, “The buck literally stops with them.”
We laughed and Jasminder continued, “Of course, they have to pay their bills like anyone else. But, for the rest of their money, they don’t fritter it away just because it is spare. Apart from a bit of weekly “pocket money”, every dollar goes into their bank account and stays there until they choose to spend it and on something they really want. They love the financial freedom this gives them.”
“I wish more people thought like that. All too often people simply just raise their expenses to meet their income when they have disposable income. This idea has obviously affected you and what does this mean for you both?”
Aaron excitedly picked up the story. “We decided to imagine we were already debt-free and we thought about how we would spend money given that choice. The process of actively choosing made us feel so much more in control than before. It was a lot more fun that sitting back and playing the victim.”
I was impressed; it was such a breath of fresh air to hear my clients take a positive approach to their mortgage rather than a negative one.
“That’s fantastic, Aaron. I really like where you are going with this. How will you make it happen though?”
Aaron explained the plan they had devised over the weekend.
“We’ve already started. On Saturday, we sat down at our computer and re-looked at our budget. It was already set out in detail, as we had been poring over it for weeks. We looked at our list of goals and set the target amounts of money to achieve for each one. At that stage we ignored the fact that we couldn’t achieve these targets in our current position.”
Aaron triumphantly slapped a piece of paper in front of me, which listed their goals and strategy:
- Repay the mortgage in ten years costing approximately $3,800 per month including interest and principal. The interest rate is now at 10% per annum and the total outstanding balance was $280,000.
- Travel every two years at a cost of $10,000, which would require saving $5,000 per annum.
- Save $300 per month into KiwiSaver for Jasminder, as she was self-employed. (Aaron’s was already coming out of his wages.)
I could see that the rest of their smaller goals were built into the monthly budget.
The total to achieve all of the bigger goals was approximately $4,550 per month. As they only had a surplus of $3,000 per month before the mortgage was deducted, I asked, “How do you feel about the deficit?”
Jasminder was ready to take over the conversation again. “Recently, we had become fixated on the negative - the fact that the shortfall was too big, which stopped us from doing everything that we wanted. With increasing prices for petrol and food, it has become much harder to save. Even though this wasn’t our fault, we blamed ourselves. But not now. Faith, what would be the usual advice from a financial planner if a client had a surplus of $3,000 before the mortgage?
“It depends on a client’s goals. However, the logical response is to pay off your mortgage, saving as much interest as possible.”
“While we agree with the logic, we want to enjoy life as well. How do you do that?”
“That’s the difficult balance anyone must find to be happy. I agree, if you only ever have a single focus, to the detriment of everything else, it is very easy to get depressed and give up. So, how did you respond to the question about surplus money?”
“We just accepted it was not currently big enough to do everything we wanted and we allocated it in a realistic way. Obviously a very large portion had go to the mortgage, otherwise we wouldn’t cover the interest.
Another bit of paper was happily waved in front of me. They had decided to apportion their funds, as follows:
- $2,700 per month to the mortgage
- $150 per month for Jasminder’s KiwiSaver
- $150 per month to a travel / holiday fund
Aaron added, “We often do other contract work outside of our normal jobs and so there will be additional lump sums along the way. Up until now, Jas and I had argued about where to put this money. Sometimes it all went on the mortgage, other times we spent it on things we needed for the house.”
Jasminder grinned, “But, there’ll be no more arguments now we have a new strategy. Can you guess, Faith?”
“I think I know where you are headed. Your everyday budget covers all the everyday things, including items for the house. When a lump sum comes in, you will just apportion it according to your new strategy. For instance, the amount allocated to your mortgage is $2,700, which is 90% of the surplus $3,000. The money for KiwiSaver and travel is 5% each. So, when a lump sum comes in 90% goes to the mortgage and 5% goes to each of the other goals. That is excellent thinking.”
Jasminder nodded. “We see there are two real advantages to all of this. Firstly, when interest rates come down, our repayments will be the same and we will clear the mortgage quicker. The second is we can see the progress on all of our goals and don’t feel deprived. As we earn more and spend less, we will take more steps towards our goals to achieve everything we want.”
“This is a great ‘set and forget’ strategy and one that will work really well for you. Thank you for sharing it with me. I am so proud of you that you have found a way through this.”
“Thank you, Faith. It was hard work, but it was time to take charge of our destiny and money.”
Afterwards I reflected on our discussion. It’s hard to stay focussed on your financial goals when the economy works against you, making your angry and frustrated. However, if difficult times are forced upon you, then you need to find another path to get what you want, even if it initially takes a little longer to get there.
In the words of the poet Dylan Thomas, amended somewhat for this situation, an alternative pathway means you will no longer need to “Rage, rage against the dying of the money light.”
---ends---
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