Temptation, thy name is fast cars on road to ruin

Debt Man column – The West Australian (Business)

Mar 4, 2011.

Bruce Brammall

Debt Man

Had a great year at work? The big bucks are finally rolling in? There’s a paypacket coming your way with a bloated bonus?

Good on you! Congratulations. You earned it.

Well … you probably earned it. Idiots tend not to be paid well. Or keep their jobs. Take Lloyd Christmas and Harry Dunne (Jim Carrey and Jeff Daniels) in “Dumb and Dumber”.

But don’t you worry. You haven’t missed your chance to prove yourself a fool. If money has recently found you – through either a big payrise or a bonus – your big chance at moron-dom has actually just arrived. (And a sequel for “Dumb and Dumber” was announced this week!)

What are you going to do with the money?

Suddenly bountiful bank balances are a temptation.

Money opens doors. Having more money allows you to do more stuff. Or better quality stuff. Or possibly less stuff. Money is nothing if not versatile.

When faced with temptation, most people will pass. They might reward themselves a bit. A modest car upgrade, a family holiday, or a bit of a splurge on the kids. But they won’t try to be the Joneses.

But every class has a dunce. Financial fools. And fools and their money are soon parted.

Scoring an A:

“The cash is nice, but this bonus will give me a tax problem this year. What can I do? Can I prepay some tax-deductible interest? Should I gear my share portfolio? Some debt recycling, perhaps, to make my investments more tax effective? Use my line of credit more effectively for investment?”

Scoring a B:

“Cool! I’ve never had the money to invest before. It’s time to start. A managed fund? Australian shares? How aggressive do I want to be? If I start now, it might help me pay down the home loan sooner.”

Scoring a C:

“This bonus is going straight to the mortgage. The home loan’s been keeping me awake at night. This might reduce the loan by a year. Debt free at 57, instead of 58.”

Scoring an A, B or a C is fine. They’re all honourable passes. (You don’t have to strive for an A – gearing isn’t for everyone.)

Want to know how you score a D? Here’s the thought process of a financial idiot.

Scoring a D – The Idiot:

“Bulging bank balance? Check. Pretty pleased with how I’m doing? Check. I deserve a reward? Check!

“People finally realise I’m a genius. I’ll never be paid peanuts again. The bonus was big this year, but it will be bigger next year and HUGE the year after. I’ll be retiring in my mid-40s. Mansion. Squillions. Everyone should know this is the year I arrived.”

The Idiot buys a status symbol – an expensive foreign car. They’ll pay somewhere between $50,000 and $250,000. They’ll finance the majority –whatever the dealer’s finance guy tells them they can afford.

The car looks hot. The friends are thinking “Man, he must earn a fortune!” And The Idiot is happy with that.

The Idiot won’t see it crumbling for a while. There’s the new car smell, the envious friends, the exhiliration of driving this stupendously flash car. That will last a year, maybe two.

They won’t even notice that the car dropped 25-30 per cent, or about $40,000 as soon as they signed for it. They’ve also forgotten the balloon repayment in five years.

But the real killer? That won’t come until next year’s bonus begins to look shaky. And then doesn’t arrive. But they’d done all their sums on earning MORE money each year, not LESS.

Turns out they weren’t a genius after all. You just had a good year in a lucky economy or a lucky year in a good economy.

Expensive, trying-to-impress cars rank higher in the “idiot” stakes than credit cards. Cars are giant wealth suckers. Status symbols? Perhaps for particularly shallow people.

And it’s a slippery slope to financial destitution. The overspending on the car will often accompany credit card debt and personal loans. Recent reports suggest the number of car financiers sending people to bankruptcy for exactly this problem is on the rise.

Understand that one good year at work doesn’t make you a genius. Wait for several years. And expensive, financed, cars are often just bankruptcy bait.

Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au .