To preface this dilemma I will share a story. I was working on a case one time and this man was claiming that he was poor and could not afford to pay his alimony payments to his ex-wife.
The judge tasked my firm with finding out how much money this man was actually making, a typical day in the life of a forensic accountant.
As I was pouring over his bank statements, I saw numerous payments for cars, houses, extravagant vacations, clothing, etc. You name it and this guy was buying it.
With the man’s job, investments, and real estate holdings he was making somewhere around $500,000 per year.
Now, you may be reading this and saying “if I had that kind of money I would be set,” and a rational person would be just fine living off of that kind of money every year.
The thing was, this guy had so many payments he had to make every month that he could not handle it. He was drowning in debt and made half a million dollars per year! The guy had five cars he was paying off, of which two were Porsches, and he was spending money like crazy.
We presented our findings to the court and the judge ruled that he could very easily make the alimony payments if he stopped spending money like a mad man and sold a car or two.
You may wonder why I share this story, and if the title has not given it away, then I’ll share the issue this man had with money… payments!
You see, monthly payments are the way of our society.
You want the newest iPhone, make monthly payments, you want fancy appliances, make payments, and oh, you want that fancy new car, then you better start making monthly payments.
My response to that reaction is Stop!
Quit making monthly payments!
Especially ones that have interest attached to them.
Every monthly payment you sign up for eats away at your monthly cash flow. You will have less money to do what you want if you are making monthly payments on things that you do not need.
Do you really need the newest iPhone? Do you really need a car you can’t afford?
I have mentioned the big ones, but I hear of people making payments on their mattress or couch!
That is insane to me! If you are making payments on your furniture then you need to change the way you use your money.
Anyway, enough of with my ranting.
The problem with payments is twofold.
First, they mess with your cash flow, as stated above.
Second, they subliminally mess with your mind and make you think you can make payments on everything you own. Just like the guy from our example above.
Cashflow
Addressing the first issue, your cash flow will suffer if you make payments on everything.
Now, cash flow is very important when it comes to handling money.
I would say it is one of the most important, if not the most important thing.
The more money you have coming into your bank account the more you can do with what you want.
Addressing how to increase your cash flow is a different topic for a different day, but today we will talk about one way you can increase it which is by decreasing your payments.
The way you do this is by simply realizing you don’t need half of the things you are making payments on.
You can downgrade your phone, you can ask a friend or family member to share the costs of streaming services, and you can get a cheaper car.
These are just a few, but I’m sure you can think of a few payments you are making that can be done away with.
The only two payments that are necessary, in my opinion, are your house and a car, although I still cringe about some people making car payments. Everything else besides these two things is unnecessary.
Think about the saving and investing you could do if you cut your unnecessary monthly payments in half and instead, opted out of high-end items for some more affordable ones.
Nowadays there isn’t even much of a difference in the cost of something over its quality. My iPhone 6s has outlasted many of my friend’s iPhone 11.
Mindset
You may be thinking to yourself “this guy is full of crap, payments are fine as long as there is no interest on the payment.”
This is where my opinion differs from others.
The problem with making any type of payment, with or without interest, is that you limit your cash flow but that was mentioned above so we will move onto the next problem.
This problem is more centered on your habits and decisions with money.
It’s a problem that takes place in the mind.
Now, I’m not a doctor on mental health but I have seen some really sick people when it comes to people making bad decisions with their money.
The more you tell yourself you can make a payment for something, the easier it will be for you to make that same decision on another item. Pretty soon all your money is tied up in payments and you are worried about paying the rent or putting money aside for your future vacation.
You may think I am crazy, but ask the marketing geniuses at Proctor & Gamble, or any other massive corporation if I am. They will tell you otherwise. Every ad they run and every new box they come out with has subliminal messaging tied to it. They also have the data to back up the fact that it works.
In fact, subliminal messaging is banned in many countries and is well regulated here in the US and falls under federal law enforcement jurisdiction.
So, when you think about making a payment again to get something you want take a step back and think about it again. It will get easier every time you are faced with the decision and your bank account will thank you.
Conclusion
Before I go, I wanted to mention how much better it is to pay for something outright.
To know that you own it and no one can take it away from you. When you make payments on something, you do not own it.
That fancy car, or even your refrigerator is not yours until it is paid off. And if you do not make the payments, someone can take it away from you or something else you own to satisfy the payment.
But, if you pay for it all upfront, you will feel better about yourself knowing that you saved for it and now own it.
No one can take away the item or the feeling of accomplishment.
Now get out there and cut out those payments, so you can take another step toward financial freedom!
Blog post written by Garrett Fronk, financially trained mentor and trainer for the Financial Self-Mastery Program.
