For the first time in my career as a financial advisor, I am now seeing the actual pitfalls of being financially over geared. We all fall prey to this when we buy cars, houses, businesses and second properties at over inflated prices, pushing our monthly expenses to the maximum, in the expectation that our incomes will obviously grow each year at the same rate. What a wake up call a lot of the so called high flyers have had this year, as cash flows have been knocked, future contracts have been postponed and businesses have failed. I am personally witnessing the lives of many affluent people being dramatically changed as cash flows contract and they cannot keep up with the monthly payments on all the properties, cars and businesses they have bought. They can’t sell them either, because they owe more than they are worth. It is not a nice situation to be in, so what now?

Besides the obvious routes of debt counseling and or liquidation, I think we all need to learn a big lesson from the current market down turn, and that is to always leave room in your budget for unforeseen expenses and never borrow more than 80% of the value of the property at date of purchase. The banks won’t let you anymore anyway, but who knows in the future again. Rather down scale on the size of the property or area, and live within your means. Pride and Status often cloud your judgment, but in times like this, those that have managed their money this way are definitely sleeping easy at night.

As a rule, build your budget first with your current essential expenses and entertainment spending, before you buy anything on credit. And in that budget, add in a 20% of Salary expense to allow for investing in an emergency cash type fund and also for room to allow for the expansion of variable expenses due to inflation. Once this is done, see what is left over, and use this figure to determine the amount you can spend. This will give you piece of mind that you haven’t over committed.

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