• Payments vs Cost

    2 Minute Breakdown Vol 23
    I hope you watched the video above before I go into Payments vs Cost. This is a case, financially speaking, I think we have the wrong impression. If you think you can afford the payments you are not thinking in terms of wealth.

    One of the most important things when making a purchase is understanding how much the item cost. If you can't afford the cost then essentially you can't afford the item, even if you can "afford" the payments. What happens when we buy deprecating assets, a fancy way of saying items that go down in value, on loans or credit we typically pay much more because of interest.

    That's why car dealership, stores, banks, and credit card companies are so interested in loaning you money. Interest is a revenue stream for them and your credit score is a measuring tool these establishments use to gauge how well you pay money back - with interest. As you continue to buy deprecating assets with loans the item's dollar worth drops but you keep making payments with interest.

    For example if you buy a brand new $25K car with $5K down and a 5 year loan for $20K at a 4.21% APR (aka interest rate) how much do you think you'll spend at the end of the loan (5 year, 4.21% are 2019 car loan averages)? You'd pay an extra $2,213.80 on top of the $20K loan. This doesn't include sales tax or fees. 

    You also have to consider once, you drive the $25K car off the lot it's worth less than $25K; in the first year it will probably drop 20% and about 10% each year after. So over the course of the 5 year loan the car is worth about 30% of it's original value or about $7.5K. If it's time to buy a new car again, the cycle continues. There was no wealth building taking place. 

    It may be a better decision to buy a $5K car and develop a plan to save for the $25K car. If this plan fails all your stuck with is money saved not a car worth 30% of it's original value. This takes discipline and denying instant gratification, but it's worth it, because one less payment can go toward investments.

    When it comes to payments vs cost, paying a lump sum is a better financial decision in most cases. How can you expect to obtain wealth when your income is attacked by payments? Change the mindset to stop "affording" payments and start paying cash. Save for what you want buy it and repeat!

    Picture credit: here & here
  • 1 comment:

    1. years ago before I gained wisdom and knowledge that is how I thought as long as I could afford the payment I never thought about how much I actually ended up paying that interest will have you paying 2 to 3 times more. Nick keep on educating us.






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