When we bought our first house back in 1997, one of the things we chose to do was only borrow what could be paid on one wage. At the time, we were both working, so it meant we could easily afford the repayments. We had decided never to have any other debts after figuring out that repayments to a car loan meant that we paid 3 times the original amount borrowed. It didn't seem worth it when we could save that up in much less time and pay upfront.
When we had children, I stopped working and things were tight, but we always managed to stay in the black as long as I planned ahead, budgeted to put something aside each month and didn't spend on a whim. By this time we were a household of 4, two adults and two children.
In contrast, we had friends and family with much higher incomes who were always in debt. These were households of 3 and 2 bringing in almost double what we did. So what were we doing differently?
I think the biggest thing was that we avoided the debt cycle. Not entirely, due to our mortgage, but at this point we still believed that a mortgage was a good debt. It's a debt that we've always overpaid on, to try and get it cleared early. What these friends and family had in common was that all income went straight out on debt payments, meaning that they never had the chance to save anything for contingencies or even to save on interest by saving to pay for things upfront. Insurance payments would be paid monthly and accrue interest, car loan payments which went on for years until the car was ready to be replaced, with yet anther car loan. Daily expenses, Christmas and birthdays went on credit cards, building up ever increasing payments. Then something would break down and need replacing, resulting in yet another debt.
When things got to much, their parents stepped in and bailed them out.
There was a point when I wondered if maybe we were the idiots doing it wrong. Why did we go without if family could bail us out? I guess part of it is pride and not wanting to feel like we owed something to anyone, but there's also the knowledge that when something important breaks down, we have it covered and don't have to borrow other people's things while waiting on someone else to bail us out. We can choose our replacement and not be beholden to a budget placed by someone else. We can get deals by paying upfront that we couldn't if we bought on finance... but then what do deals matter if you can still have them and be bailed out?
Okay, apart from not being beholden to anyone, I'm coming up short on reasons for sacrificing to stand on our own two feet. I guess we couldn't have afforded to immigrate to Australia and support ourselves without some money behind us. Parents certainly wouldn't have helped us out there. So maybe the reason to not get into that much debt has more to do with having more freedom.
My parents' generation wouldn't have had the option to be bailed out, so I guess we were the first generation with that luxury. Our generation was the first to start thinking that the debt cycle was the normal thing to do. Our parents could bail us out because they hadn't gotten themselves into debt that couldn't be paid. They were still from a generation which was taught to budget and not spend beyond their means. Are we now a generation who are in so much debt we couldn't bail our own children out?
This actually wasn't where I was planning on going with this post. I thought I was going to be writing about responsible budgeting and spending! What do you think? Should we be responsible if we can be bailed out?