‘It really comes down to balancing today versus tomorrow’
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In an ongoing series, the Financial Post explores personal finance questions tied to life’s big milestones, from getting married to retirement.
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If you’ve ditched your Honda for a Ferrari, or quit your job to buy an RV and tour Canada, you may be living your best life, or you could be having a mid-life crisis.
The term “mid-life crisis” was coined by Canadian psychoanalyst Elliott Jaques in the 1960s to describe patients in their mid-30s who were experiencing depressive periods after realizing their life was half over. Today, it’s broadly used to describe middle-aged people (typically between 40 and 60) who suddenly quit their jobs, change their surroundings or splurge on nice-to-haves even if they can’t afford it.
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Triggered by extra income as the kids move out — or, more recently, the need to have more fun after pandemic uncertainties — some people opt to splurge on non-essentials, even at the cost of future retirement plans or investment goals.
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Financial adviser and money coach Wendy Brookhouse, founder of Black Star Wealth in Halifax, said she always reminds clients that the cost versus price of such a splurge is “vastly different.” For example, if you’re angling for an RV, don’t be lured by common financing tactics that promote a nominal weekly payment plan over an extended time period.
“When you really look at those prices and do the math, you’ll end up buying it two times over just on the interest,” she said. “And then four or five years later, depending on how things are structured on the financing side, you may have something you can’t possibly sell for how much you still owe on it.”
If you have to finance that purchase mid-life, maybe it’s not the best thing for you
Donna Carson
The first step for anyone looking at purchasing a “big-ticket item,” said Donna Carson, senior vice-president at MNP Ltd. in Calgary and a licensed insolvency trustee for almost 25 years, is to write down the pros and cons and think it through.
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“Even if it’s just a $5,000 hot tub, how much chemicals do I have to buy in a year, what’s my average maintenance cost going to be, and what will that maintenance be like in year five or 10 are some of the questions to ask yourself, and if you’re prepared for that, go for it,” she said. “But if you have to finance that purchase mid-life, maybe it’s not the best thing for you.”
Buying a vacation property may seem like a good mid-life idea, Carson said, but it’s still important to ask some longer-term questions, such as how often you will realistically visit it, will you be able to rent it, and would it be better to invest the purchase price into a whole lot of vacations instead.
During budgeting sessions with clients, Carson advises them to put aside the money they’d need to maintain a big-ticket item every month, or the amount they’d have to save to buy it outright, and reassess their needs six months later.
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“You’ll get a sense of what it will look like going forward if you’d bought the item or had to pay monthly fees towards financing it,” she said. “If it meant struggling for six months and having no room left for emergency money, then I think you have to step back again and look at whether that purchase is the right thing.”
Maybe your goal isn’t your partner’s goal
Donna Carson
Carson said it’s also important to talk any non-essential purchases through with spouses and partners. At least a third of clients who come to her office seeking advice around insolvencies tell stories about their relationships breaking down because of a lack of knowledge around shared finances.
“Maybe your goal isn’t your partner’s goal and then consider what (purchasing that item) will do going forward for your shared goals,” she said.
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As a financial planner, Brookhouse said it’s not her job to judge clients on what they choose to spend money on, but rather show them how it could impact their future goals.
“Maybe their debt-repayment plan is going to be stretched out another two years, or they’re not going to be able to make investments into their retirement plan, so it will be a few extra years before they retire,” she said. “When they have data that shows them how a new purchase may affect the holistic part of their plan, they can decide if it’s really worth it.”
Brookhouse recalls one couple who decided to build a two-car garage, but then one of them lost their job and they eventually went bankrupt.
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“Part of that is because they used up all their reserves and incurred additional debt, so it was much harder for them to weather a shock to their financial system,” she said. “They didn’t look at (that decision) all the way through.”
Whenever possible, Brookhouse also advises clients to try before they buy.
“You could rent a cottage for a season and see how many times you went up and how it felt to have a second home,” she said. “I think we imagine things are going to be an ideal situation, but until we test it out, we don’t really know.”
On the other hand, if the mortgage is paid off, the emergency fund is topped up and there are no unsecured debt balances (such as lines of credit, credit-card debt) to deal with, people have a lot more flexibility to spend as they wish.
“It really comes down to balancing today versus tomorrow,” Brookhouse said. “If you’re doing all the right things already and this is going to make you happy, go for it.”
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