YOU’VE BEEN LIED TO YOUR ENTIRE WORKING LIFE – THIS IS THE WAKE UP CALL

How a simple financial planning exercise will reveal the truth

Let me explain…

Since you left school you’ve been chasing the dream of financial freedom.  The dream of:

  • Working hard,
  • Getting promoted,
  • Earning tons more money, and
  • Finally achieving financial freedom.

But the truth is that the system is geared to eat you up alive. The plan is to milk you for as much as they can before spitting you out on the rubbish dump of broken promises.

Don’t believe me? Spend time with some old timers.

Most of us have fallen into the trap, but hopefully this will be the red pill for you (Remember the Matrix movie?).

The first trap – cars

Nothing defines freedom better than buying your first car. No longer are you a victim of your environment. In fact, it’s addictive, which is why your well to do 50 year old drives a Porsche. And the car manufacturers know this. Once you’ve had your first fix, they know you’re hooked for life.

A tweak here and a tweak there every couple of years creates a desire for the next model. Of course the banks are in on the deal too. After all, they finance your fix.

Cost of car finance

Look at the 30 year old guy buying his first car.

  • Buys his first car for R100, 000
  • Pays it off after 5 years and the bank ‘makes’ R27, 482 out of the deal. Not sure what the dealership makes. We can only guess.
  • Career is taking off and decides to trade it in on a newer model. Gets offered R10, 000 on the trade in

Realise that this guy has invested R 117, 482 (R127, 482 – R10, 000) of his hard earned money into a depreciating liability. Why a liability? Well what does he have to show for his R117, 482 after all is said and done?

But it gets worse once he turns 35:

  • He needs a fix and buys a R250, 000 car. In his mind he argues that in order to stay in the market, he has to keep upgrading. We’re all guilty of this.
  • The bank makes R68, 705 out of the deal once again.
  • After 5 years he trades in and this time he’s offered R30, 000

He ends up investing R288, 705 without a dime to show for it.
If he trades in every 5 years between 30 and 65, we’re talking of 8 cars purchased. In the infographic example, this guy invested R4, 245, 547 over his lifetime if we ignore the last car. R4, 245, 547 with nothing to show for it!

So think of that the next time someone in their flash Porsche drives by…

Trap number two – home ownership

This is the real jackpot for the bank.

As I write this, I’m following the class action lawsuit taking place against the banks. Apparently South African banks are 5 times more likely to sell your property out under your feet than overseas banks. And 90% of the time, it’s for less than market value.

Take a look at the true cost of home ownership.

House financed with mortgage bond

Look at the family who buy a home and pay it off over 20 years:

  • They take out a bond for R500, 000 over 20 years
  • The bank offers them an interest rate of 10% per annum
  • It costs them R4, 825 every month to service the bond
  • After 20 years they would have paid the bank back R1, 158, 025

They could have bought 2 homes for the cost of just that one home.

Can you imagine defaulting on your bond in the 15th year after having paid off more than the R500, 000, and then having them then sell your home for R200, 000? Even worse is them demanding you pay in the difference between the R200, 000 they sold it for and the amount you still owe.

Can you see the irony of the situation?

No-one gives a damn about you. Government doesn’t care – not in South Africa nor any other place in the world. If we don’t buy ‘stuff’, then they can’t tax us as much as they want. Interest rates get dropped to encourage you to spend.

Banks score by agreeing to finance the “I want it now” generation, and clever marketers aren’t shy to charge you an ‘arm and a leg’ for the next piece of plastic. Take that cellphone you’ve just spent R15, 000 on. 2 years from now, no-one will offer you R2, 000 for it, but you’re already upgrading to the R25, 000 model.

What we don’t realise is that one day this will come back to bite at retirement.

And you know what?

Try getting a loan after retirement when you really need it.

So what should you do right now if you’re in this situation?

  • Get rid of debt – quick! Look at the implications over your entire lifespan.
  • Think twice before making impulse purchases
  • Always have an emergency parachute

We push a lot of life insurance articles through this site. There’s a reason for that.

Few of us take the time to realise how precarious our situations are. Take for instance the family who have just bought the R500, 000 home with a 20 year bond. Between the two breadwinners, they barely scratch through paying:

  • The R4, 825 a month bond repayment
  • The ever increasing water and lights bill (last month it was R10, 000!)
  • The R2, 000 a month (or more) school fees
  • The R4, 000 a month medical aid, and
  • The R600 a month private security company
  • And, we forgot about the groceries!

So what happens when one of those incomes falls away unexpectedly because of death, disability, or some awful disease like cancer?

Getting back to the class action lawsuit, I read somewhere that since 1994 over 100, 000 homes have been repossessed.

This is the kind of thing which happens when breadwinners pass away. Families lose their homes. Futures are shattered and people have to start all over again from scratch. Take a knock like this after 50, and you might never recover. Make sure that if someone dies, that at the very least, the bond is paid off.

And how do you do this?

Draw up a list of your assets and liabilities.

  • Grab an A4 piece of paper and draw a line almost down the middle (Leave some space on the left to write a description).
  • On the top left write the word “Assets”, and on the top right write “Liabilities”.
  • Now, to the right put in your home at the current price for homes in your area, and to the left the amount you still owe
  • Put in your car and its current value, and on the left the settlement amount (Phone the finance house if you don’t know).
  • At the bottom total up the two columns
  • Deduct the liabilities from the assets
  • The answer is your net asset value

But you don’t want to insure your net asset value.

Why not?

Because there might not be enough liquid cash in your account to settle all your debts:

  • Your home is worth R500, 000
  • Your bond is only R100, 000
  • But the bank wants the debt repaid as in tomorrow with money you don’t have lying around

The solution is only to take into consideration all your liabilities. In other words, add up the right column only and at the very least, take out life insurance for that amount.

If paper is not your thing, then hunt around on the internet for a spreadsheet version.

The important thing is to do this once a year. And if those liabilities keep growing – or stay the same – it’s telling you something is wrong.

Conclusion

Driving that brand new Ford Mustang will cause a lot of envious stares from neighbours, but at retirement, counting pennies at the till, ain’t nice. With every purchase you make, factor in the long term implications thereof.

We’ve shown in this article that no-one cares about you as much as they care about your money. You’re trading time for money, and one day soon, time is going to run out.

Have any comments? Feel free to leave them below.

Until next time.

The InsuranceFundi Team

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