Friday, June 12, 2009

The Monthly Trap

How much is your monthly car payment? I'll bet you know the exact amount right off the top of your head. How much do you still owe on your car loan? I'll bet you don't know! Which is the more important amount of the two? That depends on your perspective. For the sake of getting through the next month without having your car repossessed, the monthly payment may be your immediate concern. But for the sake of your long-term financial health, total debt should be your primary focus.

Don't ever fall into the trap of thinking in terms of "how much I can afford per month". Thinking that way only ensures that you will never get off of the perpetual debt slavery treadmill. Sellers of big-ticket items like cars, appliances, houses, cosmetic surgery, etc. love to pitch their products in terms of monthly payments, because it makes them seem affordable. But ultimately, you will have to pay the total cost of that item, plus whatever interest they are charging on your loan, so you're better off just facing right up to that bottom line price from the beginning.

It might not always be possible to avoid taking out a loan for certain purchases. If you're a performing musician, for example, you probably really do need to have a car, and sometimes it just might not be possible to get one without borrowing. Also, some kinds of debt, for items like real estate or education, may sometimes prove to be good investments for your future. So I'm not 100% opposed to all debt. But I am about 98% opposed to debt! In fact, I hate debt so much that I personally haven't had any outstanding loans since 1994. I just face up to the total cost of whatever it is that I want to buy, and if it's too much for me to pay in full, up front, then that means I can't afford it. That's really the bottom line.

Living debt free allows you to sleep better at night. It shrinks your monthly bills down to a size that is easier to keep up with, freeing more of your time for personal and creative pursuits. And it opens up the possibility that one day, if you save and invest and continue to stay out of debt, you might actually achieve true financial independence and not have to work at all! The alternative is to keep taking out loans and struggling to make minimum monthly payments, forever living under the shadow of your debt overlord!

One exception that I make in my staunchly anti-debt personal financial strategy is the use of credit cards as a convenient method of interest free payment. It is very important to point out here that credit card debt is one of the worst, highest interest forms of consumer debt. However, in the U.S., credit card companies are required to allow an interest free grace period for prompt payment in full every month. As long as you always pay off your total credit card bill within the grace period, you will pay no interest and benefit from the convenience of using a card to pay. And you will also be building a good credit history. For those who lack the discipline to restrain spending and always pay the full bill within the grace period, please ignore the preceding suggestion and cut up those cards instead! Debt sucks. Monthly payments are the tempting sirens that entice you into debt hell. Don't fall for it.

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