Credit? Cut it out
Today was the day I decided that I had to cut up and get rid of my credit card. It was a liberating moment in my financial life. Though cutting the card did not rid me of my debt, it does ensure that I will not create any new debt.
Too many of us have been fooled into thinking that credit is the new cash or even that it is better than cash. Under the presumptions that you have the money to pay off your temporary debt, you are establishing good credit which could later be used to buy a home etc. While it is true that having good credit is a great thing, the facts is, most of us don’t have the discipline required to use credit properly. Instead we use the credit exactly the way the banks intended, by paying as little as possible for much longer than necessary. I would loan someone $100 if I knew I could get them to pay me $118 back, hell banks do that all the time… in fact they “Bank” on that.
The reason we like loans and credit is because we can get what we want now and pay for it later… The problem is you REALLY pay for it LATER. Lets do some simple math…
Joe wants to buy a new car for $15,000 on credit (finance). Dealer Ted sells Joe the car on a 48 month plan with 9% interest, and 0 cash down. With taxes and fees included the purchase price is 16,090. Joe agrees to the 48 month deal paying $400 a month, because he can afford $400 a month but he cant afford $15,000. Well, 48 months go by and Joe makes every payment on time. Very happy he brags to me about his purchase and all I do is face-palm.
I say to Joe, ”do you realize that you spent $19,200 on a $15,000 car?”. I follow that up with, “on top of that… lets say the bank behind your auto purchase put your payments into a savings account (assuming a 2% interest rate that compounds 4 times a year). At the end of your loan payment, they will have $20,036.76 give or take. That’s a $5,036 profit (assuming they sold the car at cost $15,000) which we know isn’t true.
Joe began to get upset and his face grew red as he explained to me “Well at least I own the car now, I didn’t have a car and now I do. I was able to afford the monthly payments so I am happy. I told Joe “Congratulations man, you paid $19,200 and were finally given the title to a car now worth $7,500. I bet if you had 12,000 in cash when you went to see Dealer Joe, you could have purchased the same car out right and kept a potential $7,200“. Joe slammed his fist down on the table and left me at the restaurant to pay both our bills.
You see Joe didn’t understand how he was really spending his money long term. He was blinded by the possibility that credit opened up for him. I too was once Joe. I purchased car rims on credit, I financed my first car. Now with all of the studying I have been doing on finance and economics, the last thing I want to have is debt of any kind. The moral of this story is, do you best to decrease debt (liabilities) and increase income (assets). Also do yourself a favor and don’t buy a brand new car. If you want a new car, get a used car that is a year or two old, after it has already had its most significant depreciation in value, that’s what most millionaires do anyway.
Posted by flip5577 
