With the ability to purchase everything on time, one of my friends doesn’t like to delay gratification and purchases what he wants when he wants. This friend, a young man without thought of budget or future plans, hands over large portions of his paycheck to the lenders every month so he can accumulate the symbols of status he values, now. My attempts at trying to convince him to wait and save for what he wants are futile, so I’ll just watch the fallout when the payments overtake the paycheck.
The concept of saving for what we want and compounding interest are simple, and yet we have become so accustomed to the idea of buying on credit and getting what we want when we want it, the lenders are more than happy to accommodate. The more we “want it now,” the more the lenders make in interest and fees. It is a win for them.
In order to stem the tide and start keeping more than you give to the lenders, you have to delay gratification for a period of time. Pay yourself for what you want by putting payments into an interest bearing account each month until you’ve saved the cash and then make the purchase. The other thing you can do, if you can’t wait is to take the loan with the shortest repayment period. The payments will be higher, but in the long run you will pay less. For example if you’re purchasing a vehicle for $18,000 over five years you will pay hundreds more in interest than you would if you paid the loan back in three years. That is money you could invest for retirement or the next new car. Careful budgeting will take care of the extra payment amount.
Similarly, when purchasing a home, offer the highest down payment and take the mortgage with the shortest repayment period possible. Lenders will try to steer you toward the 30 year fixed rate mortgage because it has a low payment, but in the end you will have paid twice as much for your home than you borrowed. With a 15 year mortgage, the payment will be higher, but by paying the most you can on the principle, you will pay thousands less in interest and you will keep more of your money in the long run.
For more on managing your finances and protecting your income, contact an AC Financial Adviser at (800) 564-3136.