Money Fail: The Payment Mentality

Posted on Posted in Debt

The advertising industry has done a fantastic job of convincing everyone that payments are the new currency.  It’s now considered old-fashioned to save up for something before buying it.  Instant gratification is becoming the norm for young people.  Those who save up and pay with cash are a dying breed.

This is the third post in a series of Money Fails.

Money Fail: Broke on Thursday
Money Fail: Dead End Job
Money Fail: The Payment Mentality
Money Fail: Ignoring Unpaid Bills
Money Fail: Spending to Impress
Money Fail: Never Track Finances
Money Fail: Lenders of Last Resort

Payments Equal Profit

Installment Loan Papers
Image by KOMU News

If you walk into a car dealership and get out your checkbook to pay for a car, they are probably going to be very disappointed.  That’s because a big part of their profit from selling the car comes from the fianancing.  In fact, the National Automobile Dealers Association (NADA) estimates financing and insurance contribute over 28 percent of the profit.  That averages just under $1,000 per vehicle.  But, it costs the owner thousands in interest, by the time the payments are finished.

If you walk into a retail store, you will be solicited to sign up for their store credit card.  It doesn’t matter whether you are in a posh department store or a big-box discount store.  The sales people are trained to target customers, because the credit card increases the store’s profits.  It increases their sales volume, interest income and average price per sale.  Another little trick of the retailer is the zero interest loan.  It sounds like a great deal for the customer, unless they are late on a payment and have to back-pay the 25% interest.

Interest is a Big Expense

If you have ever looked at your mortgage statement, you quickly realize that a lot more money goes to pay the interest than to pay off the principal.  This is especially true in the first couple of years on a 30 year loan.  Many younger couples have a mortgage, car payments and student loans at the same time.  Throw in some credit card balances and the interest may be their single biggest monthly expense.

If most people invested just half of the money they paid in interest each month, it could easily make them into millionaires in their lifetime.  Instead, it becomes a steady and reliable income for their banks.  When I think of this arrangement, it kind of reminds me of the movie The Matrix.  Instead of people being farmed for their energy, they are being farmed for their income.  Yet, they are relatively unaware as they go about their daily lives.

Payments Increase Risk

The biggest problem with payments is the risk they create in people’s lives.  Any unexpected loss in income or boost in their expenses causes a panic, because they have very little discretionary income.  If they get sick or lose their job, the payments keep coming and they can’t keep up.  Their future income is already owed and allocated, even if they lose it.  This creates a lot of stress, which can cause health problems and contribute to divorce.

How to Reduce Payments

It’s virtually impossible for working-class folks to live a normal lifestyle without some form of payments.  Even if they avoid the mortgage, they are still going to have to pay rent.  However, it’s easy to avoid the worst kinds of payments, with high interest rates and little benefit to the consumer.  Here are some ideas to keep the payments down, while enjoying a prosperous lifestyle.

Things that Help

  • Work during college to reduce student loans
  • Keep cars longer and save up to replace them
  • Buy used instead of new, whenever possible
  • Buy a house that costs less than 30% of income

Things that Hurt

  • Avoid credit cards, unless they can be paid in full
  • Avoid leasing vehicles, except for business purposes
  • Avoid renting to own furniture and electronics
  • Avoid payday, cash call and other high-interest loans
  • Avoid child support from an unwanted pregnancy
  • Avoid co-signing for anyone, including family

The Bottom Line

The bottom line is that payments diminish our lifestyle.  The more people avoid payments, the more money they have available for the future.  The more they avoid interest, the more they can buy with the same level of income.

“The time to save is now. When a dog gets a bone, he doesn’t go out and make a down payment on a bigger bone. He buries the one he’s got.”

Will Rogers – Actor and Comedian

Recommended Reading

Balance Junkie – 5 Economic Trends Affecting Your Money
Out of Your Rut – 5 Reasons to buy LESS House than you can Afford
Stumble Forward – How to Pay Off High Interest Credit Cards Fast

This post was featured on the Carnival of Personal Finance over at Squirrelers.  If you aren’t familiar with the Carnival of Personal Finance, you need to check it out.  There are dozens of amazing posts.

12 thoughts on “Money Fail: The Payment Mentality

    1. Thanks Paul. I’m loving this series too.

      I started paying extra on our mortgage from the beginning. When I saw that only about $100 was going towards the principle, I started paying an extra $100 each month. It was almost like making an extra payment.
      Bret recently posted..Money Fail: Broke on ThursdayMy Profile

  1. People tend to focus on payments because they cannot afford or refuse to afford the true cost associated with obtaining an item. It is really a form of denial. I excuse payments on a house, provided that you have a plan to pay it off early.

  2. Hi Bret,
    That’s an amazing statistic. I had no idea credit was such a big part of their profits! Loved the Matrix comparison btw. Seems that people are happy to enslave themselves in credit, but when it all falls apart, they just complain that the “bank took everything away” from them like they were never in control of their own decisions.
    Ash @ Sterling Effort recently posted..RIP Dennis RitchieMy Profile

    1. I was surprised it was that high as well. I have noticed recently that Everyone is pushing credit cards at every purchase, even supermarkets. For so many companies to put so much effort into pushing credit, it must be profitable.

      As for people complaining that financial problems aren’t their fault, I believe it’s becoming a worldwide epidemic. And, I think our governments are primarily to blame.
      Bret recently posted..Money Fail: The Payment MentalityMy Profile

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