I can tell everything there is to know about your finances by offering to sell you a product at $X a month. If you first question is something along the lines of “How much is it if I pay for the whole thing up front?,” you are almost certainly someone who has their finances together. If you start probing me with questions about interest rates and payment terms, you might have an idea about what you are doing, but you are probably in the habit of paying interest on your credit cards, your cars, or who knows what else. If you say “That sounds reasonable,” you probably need some serious help with your finances.
There Are Two Different Ways People Can Look At The World
You can either take the short term view, or the long view. Those who take the short view, see each month’s finances as somehow independent from their overall finances. Perhaps they live month to month, or am used to living that way. In either case, it is all too easy for them to add up their total monthly obligations, and not look much further than that. From the looks of many of the TV and radio advertisements out there, this view appeals to a very broad spectrum of the population. I can’t go more than a few minutes without hearing an advertisement for something at “Only $199 a month!”. If you only look at your finances on a monthly horizon, sadly, that is all you need to know. If you take the long view, that number is completely meaningless.
The other type of person is someone who takes the long view. This doesn’t mean they are constantly worried about how their decisions will affect future generations, they just plan their finances around the foreseeable future, not just each 30 day cycle. At “$199 a month”, they want to know how many months they will be paying. They will want to know the total of the charges, and how that compares to the cost of just buying the thing. If the total cost is a huge savings over the cumulative monthly costs, they will conclude they are being given a terrible interest rate. They will then walk away or find other financing. The wisest ones will just quietly save their money, then ask for a discount for payment up front.
It is this kind of thinking that causes people to commit the financially self destructive act of paying only the minimum payment on a credit card.
How To Avoid Short Term Thinking
Not to equate credit card debt with criminal behavior, but it is well known that one of the reasons that people commit crimes is that they fail to equate the long term consequences (jail) with the short term benefits, instant gratification. Debt is analogous. We charge more on our credit cards now, and we may even feel we are being responsible if we can afford the monthly payments. It used to be a challenging calculation to determine the ultimate cost of your purchase, when interest is calculated. These days it is easier than ever to know that information as new laws require that information to be prominently displayed on every credit card statement.
The first step to avoiding the short term mindset is recognizing that it exists. Knowing that you have to look at every payment not as a mere monthly obligation, but as the cumulative total of all payments. You then need to look at the opportunity cost between the up front price and the total of the payments. Ask yourself how much would you have saved if you had just purchased the thing instead of paid it off monthly? What could you have done with that money? Is this getting particular thing now so important that you are willing to spend that extra money rather than wait? Do you really want to commit your future paychecks towards these payments, or would you rather have them available to you in the future for other purposes?
For some of you this is an academic exercise, because you are confident you don’t succumb to the monthly payment trap. For you, your task is to educate the next generation, as younger people often lack the ability to look into their own futures.
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