Often, a huge part of getting out debt and achieving financial security is removing the option of purchasing with payments and credit from our brains. See, payments set you up to stay in debt and spend more then you can afford. We end up looking at purchases through a short term lens rather then thinking about the long term impact. Breaking things down into small conquerable pieces is a great strategy for achieving goals that seem too big, but when we do that with purchases we are remove ourselves to far from the real impact of the decision.
The drawbacks of credit purchases in our lives are quite numerous, but I wanted to highlight a few.
- Payments give salesman more room to create profit for themselves. We become so focused on the monthly payment that we miss the fact the loan car note was extended to 6 years, or 9% interest. Salesman would rather deal with payment people, rather than cash people.
- Payments often mask the fact that we can’t afford what we are buying. $20,000 or $380 a month, which one sounds more feasible?
- The items purchased with credit often go down in value faster than the principal on the loan. Negative equity is an ugly road, that isn’t going anywhere but towards disaster.
- With the exception of 0% loans, payments mean you are spending money on interest. To put this into perspective, consider that on a $25,000 car loan at 6% you will pay about $30,000 for the car over five years. A $200,000 30 year mortgage @ 6% will cost you $231,667 just in interest.
- Payments add stress and rob you of freedom. There was a correlation between the number of payments I had and the amount of stress that my finances caused me. Also, things like moving, changing jobs, moving to a profession you love, and spending more time with your family all become harder and more complicated. Shackles!
- You don’t actually own the item you have payments on.
- Each new payment makes the next one easier. You want more, because you can spread the pain out over years. In reality you can only diffuse the pain until the house of cards crumbles, or you wake up at 50 only to realize you don’t own anything.
- It is quite depressing to know that the money you are earning now isn’t yours, it MUST go to someone else. Cash flow is one amazing benefits of being debt free. Think about the things you could do if you actually controlled your money and not financing companies.
I really could go on, but that is quite a list already! So, next time your discipline is wavering and you want to use credit, come back to this list and use it to renew your strength.
What problems have payments caused you over the years that I missed?