Avoid monthly payments whenever possible.
Why? A payment is a continued obligation – a responsibility – a stress to deal with every single month. It is a tether holding back your financial freedom. If you have financial obligations (payments) you are tied to making a certain amount of money to meet your bills. They limit or even eliminate your opportunity to change careers, take a sabbatical, or roll with the punches of a struggling economy. It is also that much less money each month that you can add to your investments. Therefore, less opportunity to have your money working for you.
So, how do you do it? How do you change your thinking to eliminate monthly payments?
Salesmen know that breaking an expense down into monthly payments is one of the best ways to sell you something. “It’s only $10 a month? Pshaw – of course I can afford that – sign me up!” But we want to break the habit of living month to month or paycheck to paycheck and start building financial security and ultimately wealth. To do this, you need to start thinking about money and about payments differently.
The best move is saving your money until you can pay for it with cash. Once you have the cash you have more negotiating power with the purchase price, but you also won’t get stuck paying interest on top of the items cost – which can save you $1,000′s in the long run. Also, when you pay with cash, you are more aware of the the total price you are paying rather than getting drawn into the “It’s only $$ a month – no big deal – mentality.”
For example: You want to buy a Dyson vacuum cleaner. The salesman sees you are a nice person and wants to help you out (translation – thinks he can make a commission off of you), so offers you a monthly payment of $20 a month for two years. You think “Yes!” and go ahead and sign the contract. $20 a month doesn’t sound like that much, right? But, when all is said and done, you will have paid $480 for that vacuum cleaner – about $100 to $200 more than what you’d pay at Target depending on if it was on sale.
Calculate Annual Cost
Paying with cash is one tactic to reduce expenses; however, that only works for expenses that are purchases – expenses that will eventually be paid off and have a finite end. What about monthly services? Expenses that continue without end?
- Gym memberships
- Magazine subscriptions
- Weekly Starbuck’s habit
- Cell phone bills
To overcome the allure of a small monthly payment, I suggest that you stop thinking in terms of payments and start thinking in terms of annual expense. Calculate how much your service will cost over a year and then decide if it is worth it to you. Think how far that amount of money would go in a college account or toward retirement and decide if it’s really worth it to you to deny your investments of this additional income.
Example: You get cable TV for a discounted rate of just $45 a month. Maybe that sounds worthwhile. But calculate it out to annual expense and is it still worthwhile? $50 x 12 = $600. Imagine if you put that $600 into college savings for your child. $600 x 18 years = $10,800. Still worthwhile? For some, the answer will be yes. For others, maybe this is the first time you’ve thought of it this way.
Here’s another one that catches me more frequently than I’d like to admit.
Example 2: I hit snooze 3 times in a row and only roll out of bed at the very last minute to get out the door on time. Instead of eating breakfast at home, I swing through McDonald’s and get coffee and a sandwich. It’s only $6 – no big deal – right? Let’s say I limit myself to doing this twice a week – How much will it cost over a year? $6 x 2 x52 weeks = $624. Is it still worthwhile?
If I would just get up 10 minutes earlier twice a week, I could save $624 a month! Enough to cover that cable TV if I wanted.
What You Should Do
Take all your monthly expenses and write them down. Then calculate out the annual cost for each of them. Looking at the annual cost and your savings goals take a rational look at the cost and decide if it is worthwhile to continue paying for that service.
I’ve created a Google Spreadsheet to help you out. Here’s what it looks like:
Feel free to copy this spreadsheet and play around with the shaded cells to reflect your personal circumstances.
I'm interested to know if you choose to discontinue any services after this exercise. Please come back and let us know in the comments any revelations you have!