The Unconscious Cost

As some of you know, I am a numbers guy. I like numbers. I like having fun with numbers and in a parallel universe I may just be a mathematician. Alas, I am a business systems analyst. Below I’ve put together some not-so-hard numbers to drive home a point. I hope you enjoy them.

In our recent post, “The High Cost of the Part-Time Ownerless Society”, we talk about how too many people are unconscious about “renting” their money away. They’ve chosen to rent a nice, new apartment, lease more car than they could otherwise afford and get their cell phone via a rent-to-own plan.

What is the root of all of this? To be honest, it’s something that we suffer from on a regular basis. All of us have an unconscious desire for a better life and we often want that better life now. Who wants to wait for a new house or the new Audi A4? Not me, although I have been waiting nine years now for my Audi. (See David’s pouty face.)

Instant and short-term gratification aren’t new things. It’s what has allowed humankind to grow into the amazing and successful creatures we are today. Imagine life if we hadn’t figured out how to use tools, create the wheel or develop the microprocessor. Our desires for a better life are good. They help us improve. It’s when our desires are out of control that they wreak havoc on our finances. Ask yourself the questions below:

• What am I spending today to have the things I want right now instead of when I can afford them?
• What impact does my spending have on my future?

More often than not, the way we buy the things we want today rather than waiting until we can either afford them or more easily afford them is by unconscious borrowing. We finance a bed at zero down for five years, pay more in interest because we visited the car dealership without checking our finances and we buy a new house because we think it validates us.

I’ve done it. You’ve done it. It’s societal. Sometimes it simply takes looking at the numbers to see our mistakes. It reminds me of when John and I totaled our credit card balances and it was $51,000.

Below I present the three biggest draws on personal finance today. Each will show how much extra they cost having them today, rather than waiting until we can buy them outright.

1. Credit Cards

Servicing our credit card debt (paying interest) is a massive cost to Americans. In the image below, see how much we save by paying off our credit card debt. Once it’s paid off and we buy what we want with cash, we can save for future purchases, such as a car or house purchase. The numbers below assume that we aren’t adding debt to our credit card balance.

Below are the two Bankrate.com calculators that I used. Try them yourself and calculate how quickly you can pay off your credit card debt.

2. Cars

The average new car purchase costs $32,086. That’s a pretty big purchase. The less we saved for it, the more the banks make off of our desire to have a new car right now.

3. Houses

Our homes are one of the biggest purchases we will make in our lives and, as with any other purchase; banks are lined up to make money off of us. The less financially prepared we are, the more money banks make. It’s staggering how much money banks over thirty years when we put nothing or very little money down. This is money that we could invest in our retirement, pay for college or enjoy life more.

Conclusion

I hope I’ve shown the value in having money set aside before we make purchases. I know it isn’t easy when we want something now. When we look at a new pair of boots or a new Ford F-150, it’s hard to say, “Wait! Does this make financial sense?”

What should we do when we have the urge to buy? Below are 3 suggestions.

1. Open and regularly contribute to a dedicated spending account
2. Open and regularly contribute to a dedicated down payment account for car and home purchases
3. Look for ways to minimize long-term cost by paying as much upfront cash as possible

I don’t like waiting either, but what I do like is watching the above accounts grow. I love knowing that the eventual purchase is getting closer. If you have a hard time with waiting, make it fun. Put your account(s) where you can see them and start a countdown clock for your purchase. The anticipation makes it worthwhile. Don’t be unconscious. Be money conscious.