Easy Monthly Payments May Lead to Financial Failure

August 20, 2014
At first, the title of this article doesn’t seem to make sense. Like with many financial rules, you have to take a second look to understand its meaning.
The idea of “easy monthly payments”, those we choose to pay because they’re low or comfortable, is tied to the concept of affordability. If something is affordable, it means we have the means to pay for it.
When we go shopping for high ticket items such as refrigerators, computers, TVs, and other similar items, we usually focus on the monthly payment after reviewing their price. Certainly there are moments in life when buying items in this manner is necessary. However, if we only think in terms of “easy monthly payments”, we will not see the real cost of what we’re buying nor be able to save for the future and the financial challenges that lay ahead.
Let’s see an example. We decide that we need a new computer because ours is running “slow”. We look for offers and we find really good prices. We visit the store and find the model we want for $500. We don’t have the $500 but the store offers low monthly payments of $27 and we think that’s something we can manage. If we decide to buy it, it will cost us the savings we could use in the future.
Let’s take a look. If we pay $27 monthly for 24 months, we will end up paying $648, not the $500 we had in mind. With the low “easy” monthly payment plan, the computer will cost $148 more, an increase of approximately 30%. This means we will not be able to save $148 for the future because we spent them and they’re gone. If we do the same thing every time we go shopping, we will be creating a financial problem.
The key question is: What shall we do? If we need to buy something, let’s do it with extreme caution. Let’s think before we buy. Let’s go back to the example of the computer. If we thought $500 was a good price to replace the slow computer we had at home, we need to confirm that $648 is still a good price.
For that difference we could use our “slow” computer for a little while longer and avoid the additional cost. If we deposit the $27 in a savings account, in one or two years down the road we could make a better purchase with the money we saved.
Knowledge can be the path to your financial success!
Kurt Schindler is the certified financial planner that leads the Finanzas en tus Manos Program. To learn more about how to manage your finances visit www.popular.com/en/finances.