I hear it time and time again, “Oh, that car is $200 a month, I can afford that” or “Man, just picked up the new iPad, only $50 a month”. It may seem odd that someone who bases their entire budgeting philosophy around a monthly budget is criticizing the idea of thinking in things in monthly terms. But what my real problem is the idea of financing.
We love instant gratification. When Apple announces a new Macbook we want to be the first on the block to have the shiny new thing. The funny thing is, people really don’t like the idea of plunking out $2,000 at once, and retail knows this. That’s why they are all too happy to offer financing, and why it’s so easy to get credit cards. If you are like most people you probably think “Ok, I make $4,000 a month, my rent is $1,000, my car is $300, etc ” until you get to what’s left for spending. This is how you decide if you can afford something or not. If the computer is $100 per month, and you have $200 per month available, you figure you can afford it. I know people that have the money in savings, but still want to pay for something monthly!
One of my biggest suggestions to you if you want to be financially secure is to realize that the reason it seems painful to plunk out $2,000 at once is because it is!
By financing something over a few months, you may have tricked your brain but:
- You still are spending the $2,000
- You most likely are spending a lot more! Probably more like $3,000.
When you start living a “pay for it in cash” lifestyle, you’ll have two epiphanies.
The first epiphany is that you can no longer get instant gratification, without a high cost. This helps you think about a purchase longer. Maybe that new Macbook isn’t such an upgrade after all.
The second epiphany is that all this extra money not spent on finances charges starts to really add up. Your $200 a month you had free for spending before starts to become $300, then $400, then $1000.
Right now when you get an extra $100 in your paycheck you start thinking where that can be spent. But once you embrace the concept of paying for large purchases in cash and the thrill of being a little frugal, you no longer WANT to spend that money so quickly.
Is Monthly Ever OK?
I’ve heard some people argue that getting things on a monthly basis is the smart thing financially to do, especially if you can get 0% financing etc After all, businesses operate like this!
The big difference between a business and a household is that very few of our purchases are to help our income grow. The few that are assets, I’m ok with being monthly. It’s probably smarter financially to buy a house and mortgage it then save up cash for 30 years and try to buy in cash. A car on the other hand, I would try to buy in cash, or at least with a large down payment (the big difference is appreciating or depreciating assets, an advanced topic for another time). But in general, if you can buy something with cash instead of financing it, do it that way, and in the end you’ll have much more to spend!
