One of the biggest problems facing the world today is our lack of patience. I am just as guilty as everyone else. It seems we are incapable of exercising patience and waiting until we can actually afford to purchase something before we pull the trigger and get it. By afford I mean actually pay cash for the object or service we desire. We want gratification and we want it now! Not next month, not next week, not tomorrow, we want it now. This requirement to be immediately gratified costs us thousands in interest and lost opportunity costs.
We make attempts to justify our impatience like how much more productive we will be with that new iPhone, or how much easier it will be to pick up the kids if we had a third row seat. In either case there is no reason why you can’t save the money up and pay cash for the iPhone or even a new car. The only obstacle in your way is time and determination. If you are determined to make the purchase and you really think your life will benefit from it then you shouldn’t have any problem socking the money away to make the purchase.
The easiest way to do this is to set a specific monthly goal amount to put aside for the purchase. If you want to have a new, well new to you anyway, car then take the estimated amount of the car and split it out into monthly payments which you make into your savings account setup specifically for this purchase. You really need a separate account so you don’t get confused or tempted to use other funds for your purchase. In this manner you are actually earning interest on your payments as opposed to paying it, you can get your car and make money in the process. Like I said the only thing standing your way is time and determination.
Lets say you want to buy a used car worth $25,000.00 that is a lot of money and you probably don’t have it right now. If you need a new car immediately get something you can afford to pay cash for and then immediately start saving for the car you actually want. Instead of making the car payments + interest and carrying the debt you will be on your way to doing something most people only dream of.
If you take the $25,000 car and assume your trade-in is worth $5,000 when you go to trade it in you are going to need $20,000 cash to pay for your car. The typical car loan runs for 5 years so you could take that $20k divided by 60 (60 months in 5 years) and you would need to make payments of $333.33 a month to get your $20k in 5 years. If you want it in 4 years it is $417 in 3 you need to pay $556 per month. Using this same scenario but getting a 36 month loan you would be paying around $2,300 in interest at 7.16%APR.
Using this method you would never have to get a car loan again. You can apply similar principles to any large purchase you plan on making in the future. If you are looking to buy a new TV but don’t have the cash, figure out how much you are willing to pay and how much the monthly payments would be and set aside that money in a savings account dedicated to that purchase.
Delaying your purchases until you can pay cash will not only save you in interest payments but could earn you interest income and reduce your stress brought on by looming debt payments.
{ 4 comments }
The easies way to do what you are talking about is rocking out ING Sub-Accounts and naming what they are for.
http://www.myjourneytomillions.com/articles/why-is-layaway-becoming-more-popular/
I do that for vacations, Car Downpayments (we lease but that is another story), TVs, Computers, etc.
Kyle, I applaud your post. I have an MBA in finance and BS in Economics and years experience in money management. This post alone, with the concept of delayed gratification and the example of how to avoid taking out a car loan is crucial knowledge for today’s consumer. In my life, I have only taken out a car loan once! We have 2 cars now, one is 6 years old and the other is 11. I am happy every time I get into those cars knowing that I can use our family’s resources on things we love, like travel, etc. because we don’t care about impressing others with new and fancy cars!!!
keep it up!
Barb
I think wanting things NOW is an extremely expensive financial trait. Often times even if we could convince ourselves to wait a week before buying something we would save a lot of money in the long term. Thanks for reminding us of the importance of delayed gratification.
Great advice Kyle.
Yesterday I discovered a website called SmartyPig.com and it would seem to be a good place to save up money for something specific, although I haven’t tried it personally.
Of course everyone hates the idea of delayed gratification, but I encourage people to give themselves a week to find a creative way to get something. I would love a big screen TV, the flat-panel kind but I’m not going to pay for one.
In the last week I have been offered two big-screen TVs for free. They are the “old” cabinet style but they are big and they are free and free is for me.
Devote a week to scouring craigslist and other resources for what you want at a lower cost. A week won’t kill you and who knows, the urge to buy it may pass.
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