One of the hardest parts of learning to being fiscally responsible is breaking free from the payment mentality. Becoming mired down in monthly payments creates a cycle seems almost impossible to break free from. Because you always have a payment to make, you are never able to save up enough money to pay cash for your next big purchase. Then, when the time comes that you have to make a large purchase, you are forced to finance it and begin the whole cycle again.
How many times have you decided if you could afford something based solely upon whether or not you could afford its monthly payment? You didn’t stop and evaluate whether or not you could afford to spend $2,000 on a new television. Instead you considered the $50 payment. “I can do that,” you thought to yourself. Never mind the fact that you’ll be making that $50 payment for the next four or five years.
To help you learn to get away from the payments mentality here are a few things you should consider before you finance any purchase:
You should never finance something for a longer length of time than you will use it. If you typically like to change cars every four or five years, you shouldn’t take out an auto loan that extends into six years. Likewise, you shouldn’t finance the purchase of a new computer in a way that will make the payment stick around longer than the computer’s technology.
Determine how much you can afford to pay for an item without regard to the cost of its monthly payment. Everything sounds affordable when you break it up into tiny monthly payments. When shopping for a large purchase, don’t be tempted by the payment amount. Know how much you can afford to pay for the item and resolve to stay under that amount.
Financing yet another item will require you to wait even longer to rid yourself of those pesky payments. Imagine this scenario for a moment. After struggling for a year to pay off all of your debt, you’ve finally made some progress. You only have one monthly payment left. Then, in a moment of weakness, you succumb to temptation and finance the purchase of a new range. You could have bought a slightly less flashy model and paid cash, but you decided to go all out and buy the latest and greatest version of range. Now, you’re locked into another three years of payments. You’ve just derailed an entire year’s hard work.
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Buying a TV or new Car are excellent examples. I love not having a car payment, and enjoy using the money saved on a monthly payment to apply towards our emergency account. So many ways to save, if we defer having new toys. It’s not easy, but very rewarding.
I couldn’t agree more that its a good idea to get rid of payments. But what about interest free payments?
Lets say I saved up $800 for a new Whatchmacallit (which costs $800). I go to the store and they are offering interest free payments for purchases over $500. Should I pay in full, or should I stretch it out?
I’ll confess that the last 3 times I had this option, I chose to spread the payments out.