Article: Iona Minton from True Love
Image: Getty Images

An action in one area will cause a domino effect in others. For example, let's say you decide to buy a new car and the repayment is R4 000 per month for 60 months, and your old car has been paid off. Obviously you would have done some calculations to assess whether you could afford the purchase, or did you really? This decision will have the following impact on your finances.

1. Your insurance premium would probably increase by at least R200 per month to accommodate the higher value.

2. You would have to install a tracking device at R100 per month.

3. You may have to increase your life cover to accommodate the extra debt.

4. You would have R4 000 less in your budget so you would become more conservative in your spending.

5. The R170 000 you spent on your car means that you will have paid R78 999 in interest charges.

6. If interest rates went up by two percent then you would have to find an additional R182 per month to pay for the car.

7. If you have a bond of about R800 000, this interest hike would mean an extra R1 181 out of your budget. In other words (aside from the direct increases with the new car purchase), if interest rates increased, the R4 000 per month you decided you could afford, could turn into R4 182 per month, which could be manageable, but the extra R1 180 on your bond may push you into financial crisis.

If, on the other hand, you had rather spent a little money on the maintenance of your old car, taken that R4 000 per month and invested it over five years at 10 percent interest you would have accumulated R312 329. If you continued to save this for another five years it would grow to R826 206 and R4 000 per month invested for 20 years would reach a staggeringR3 062 787.

Yet, in five years' time your R170 000 vehicle would be worth less than R70 000. So your decision to buy a new car would have conservatively cost you R3 million in lost investment opportunity. And this is just one purchase.

The other good news is, in five years' time your salary would have probably increased to the point where you could afford to buy a new car. Granted, inflation would have an impact on the R3 million because it would only be worth around R400 000 in today's money but this could be prevented by growing your investment savings each year by the rate of inflation.

As you can see, the impact of just one financial decision has profound implications, and this is why you need to get a bird’s eye view of the world of money.

Here is another example. You are getting married and you want a big wedding that will roughly cost R150 000. You don’t have the cash so you could do one of two things – take it out of your home bond or cash in some of your investments. If you take it out of your home bond at the current interest rate, it will add R1 975 per month to your repayments, and over the 20-year period it will amount to R475 000. That’s a lot of money to host a lavish wedding for one day. If you cash in investments that are growing at 10 percent per year, then the lost investment opportunity cost will be about R1 099 210 over 20 years.

These are only two possible scenarios and literally millions of rand are at stake. So, the next time you decide to spend money, take a moment to calculate how much that decision is going to cost you and whether it's worth it. The good news is, if you can be smart about your buying decisions you have the potential to create substantial wealth. All it takes is a little planning.