If I told you that you could have something you really wanted for $600, but you could also have it for $19 a month for three years, which one would you choose?
If you chose the latter, I invite you to reconsider.
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Rich Dad, Poor Analogy
I’ve heard it said that “rich people say ‘how much?’ while poor people say ‘how much per month?'”
Personally, I say that “all generalizations are incomplete.”*
But the point these snarky folks are trying to make, I believe, is that it is better for you financially to assess the long-term (holistic) cost of things, rather than the short-term cost. So let’s take the good idea, and remove the snark. (Actually, that alone might be a bigger lesson to take away.)
Going all in
So back to our example. $600 of $19 a month for three years. In the latter case you would spend: $19 * (12 * 3) months = $684. This is obviously more than $600, but put another way, you are paying 4.5% interest per year on this purchase. 4.5% extra per year than you would need to.
Now if you are looking only at the short term, you would see two values: $600 and $19. You may not have $600, while you might have $19. So it might be tempting to go with the latter option.
But wait! If you put $19 dollars away for 32 months (four months less than three years), you’d have your $600, and not need to spend anything extra. You will need to wait until you have the money though.
But who wants to wait even 32 months to get this thing, anyway?
So don’t. Instead, put away more than $19 a month. The more you put away, the sooner you’ll get your thing. Let the desire to own it be the driving force in your saving.
Again with the cars
Now, I’ve been talking in hypotheticals here, but insert your own desired purchase. Want to buy a car? Well, let’s assume that you see that you can buy a $10,000 car for $220 a month over five years. That could cost you over $13,000 when all is done. Or, you can put away $220 a month for less than four years and buy the $10,000 car. If you get tired of waiting and decide to put more in, $420 a month gets you enough for the car in two years!
Could we up the stakes? What about a home? Is it possible that you could save up for a home before paying for it, instead of financing it and paying more in the process? People do it.
Remember: a $600 purchase can cost $684 if you only look at the short term. A $10,000 car can cost $13,000 if you only look at the short term. And you probably don’t want to know how much extra you pay on a home over the course of a 30 year mortgage. (Spoiler: about double.)
This will require you to turn the standard purchase method on its head. Instead of buying something and then figuring out how to pay for it, you figure out how to pay for it, and then buy it.
But I will guarantee you that not only will you save money, but you’ll also appreciate the purchase more. And not having to worry about the purchase after the purchase is just bonus. And even better, doing this might just make you rich.
But enough about me. Have you ever waited to buy something until you could pay for it, when you could have had it right away?