Everywhere consumers go they are bombarded with the opportunity for low monthly payments, rent to own, and promises that their credit will not be checked. Due to such promotion, many people decide to forgo delaying certain purchases in order to acquire nicer, newer things.
The problem with this is that “low monthly payments” with credit cards, deferred interest deals, and other forms of financing are a hindrance to one’s financial prosperity. The result is that while one has new things like furniture, a shed, and Starbuck’s coffee, they are also committing money they’ve yet to earn to the payment of these debts.
The Real Effect of Low Monthly Payments
The Bukowski family is an average household of four people. Both children are under 10-years-old and dad just received his MBA. His advanced degree will bring the family more money, which will be needed badly since he financed his entire education so as to avoid leaving the family in a situation where they would have to go without.
The Bukowskis have some other debt as well. In total, their required monthly payments are:
- Student Loan: $388
- Auto Loan: $375
- MasterCard: $81
- Discover: $66
Overall, the total of these low monthly payments is $910. Mr. Bukowski cannot use this money to plan for retirement, take the family on a vacation, or pay down his house because it is called for as soon as he receives his pay of $7,000 every month of which he takes home approximately $4,300 after taxes and 401(k) contributions.
If Mr. Bukowski paid off these accounts he would essentially give himself a pay raise.
More Money Without Increasing income
When a person states his or her income, the number noted is often gross income. This is the salary he receives from his employer before taxes are excised, and other money is taken out to handle insurance and retirement planning.
With the exception of many military members, a person’s net income is often less than this. Mr. Bukowski, for example, earns $7,000 every month but only takes home a little more than 60% of that. After the money he’s obligated to pay creditors, the percentage for his house payment, groceries, and disposable income is even lower. When he pays off his Discover credit card he will have $66 more dollars of which he can either use on his family, or to pay down his other debts faster using the snowball method.
When a person pays off his creditors and avoids acquiring new low monthly payments, he or she is essentially gaining a pay raise. For the family above, it is $910 that would likely have more value growing for them than to be used on a loan that is growing against them.