the monthly payment trap

The Monthly Payment Trap

Many of us struggle with our finances and are living paycheck to paycheck. In fact, living this way has become normal for us. It seems everyone else is making a ton of money, the economy is “booming,” yet here we are, still struggling to make ends meet.

If you have spent any amount of time reading about finances online, you know that taking out loans and using your credit cards is strictly frowned upon by the financial experts.

 

Managing Money is Easier Said Than Done

But they haven’t been in your shoes, have they? They don’t know how little you make and how many bills you pay each month. It’s easier said than done to go out and buy a car with cash instead of financing it.

In fact, perhaps most of your stuff is financed because that’s the only way you can afford it. We all need transportation to get to work and who has $30,000 or more lying around to go out and buy a vehicle?

Luckily, the car dealerships are looking out for us and we can drive a new vehicle for an average of $523 a month according to CNBC. At $523 a month, most of us can afford to drive a new vehicle that would normally cost us over $30,000 in cash. I mean really, who has that kind of cash lying around?

The problem I have with personal finance experts is they act like they are better than everyone else. They lay out a simple plan to follow and if you don’t, or can’t do it – you’re an idiot.

Full disclosure: I am a personal finance blogger who hates how the personal finance community and experts look down on others.

The truth is, those snobby personal finance experts are right. You should use cash to buy things. But before I turn you off, let me show you why and how you can do it – while realizing that we are all human.

When I first started my career, I was just like everyone else. I paid a monthly car payment and sold my vehicles when they got anywhere close to 100,000 miles. Because after 100,000 miles, the engines fall apart and it costs more to maintain them than they are actually worth.

Or so I thought.

I happily paid my monthly payment because it was much less than buying the vehicle outright. I had no idea how much I was actually paying for my vehicle, and I didn’t really care. I had a reliable mode of transportation and I thought I could afford the monthly payment.

I had fallen into the monthly payment trap.

 

Edmunds True Cost to Own Calculator

As we dive into this, I logged on to Edmunds.com to run a scenario through their True Cost To Own Calculator.

I’ve always wanted a truck so I did a search for a modest 2019 Ford F-150. Just a stock small 2 door, regular cab, four-wheel drive. The total cash price to buy this vehicle is listed at $40,411.

Yikes! Again, who has that kind of money?!

Well, Edmunds is nice enough to break everything down over a 5-year time frame to let me know exactly how much money I am paying to finance that vehicle. In addition, it tells me how much money I would have paid for my truck over a 5-year period.

The numbers were shocking. Did you know that over 5 years, I would have paid approximately $53,079 extra for my $40,000 vehicle?! Much of that was depreciation that I’ll never get back but there are other factors I didn’t consider.

Here is the breakdown of where all my money went:

  • Financing – $6,317 (the interest I paid to the bank for the loan)
  • Depreciation – $17,218 (how much less my vehicle is worth after 5 years)
  • Taxes & Fees – $5,303 over 5 years
  • Repairs – $989 (routine smaller repairs since the vehicle is new)
  • Maintenance – $6,797 (oil changes, tire rotation, other required maintenance)
  • Vehicle Insurance – $5,186
  • Fuel – $11,269 (if I drove 15k miles per year)
  • Total = $53,079! (Not counting the $40K I paid for the vehicle!)

edmunds review

Do you know what’s missing from this scenario? The $40,000 you spent on the vehicle over the life of the 5-year loan. To pay off your $40,000 loan in 5 years, your monthly payment would have been around $700-$800 a month depending on your interest rate. In reality, your $40,000 vehicle would have cost you over $93,000 after 5 years!

Are you starting to see how ridiculously expensive vehicle are? If I could sell my vehicles and only use bikes for my family  I would in a heartbeat! Vehicles are such a money pit.

In addition, by financing that vehicle instead of paying for it with cash, I wasted an additional $6,317 in interest that went straight to the bank. But I likely wouldn’t have noticed that interest because it’s broken down into small increments in my monthly payment. Again, I’d be falling for the monthly payment trap.

Now before you throw in the towel, let’s look at how we can take advantage of this situation.

 

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Take Advantage of Depreciation

After 5 years the truck lost $17,218 to depreciation. After 5 years, the value of the truck would only be $22,782. Do you see where I’m going with this?

Buying new vehicles is for rich people and suckers. Buying used is the way to go! A 5-year-old vehicle still has 10+ years left in it at least.

If you don’t believe me, come take a test drive in my 12-year-old Nissan Sentra with 189,000 miles or my 13-year-old Toyota Sequoia with 160,000 miles. Both are still running like champs!

Understanding the amount of money we pay for new things is the first step towards changing our financial direction. That monthly payment is there to hide the true cost of what we are paying for.

By looking at used options and saving up cash, we can avoid massive depreciation and interest payments.

Paying Monthly For That Cell Phone

The trick that most companies pull is the push for a monthly payment. If you were paying cash for a new phone, paying $999 for that new iPhone would hurt much more than spending $400 on last years model. The idea is to get you to pay more money in the long run by packaging it as “a small monthly payment.”

The monthly payment trap.

 

Paying Monthly For a Cell Phone is Expensive

If you are paying monthly for your cell phone, you absolutely need to add insurance to your phone which will cost $7 to $36 extra a month. If you don’t and your cell phone breaks, you are on the hook for the total amount for the phone before you can get into another contract.

In addition to your insurance, if your phone breaks, you will also face a deductible for a new phone that will range from $29 – $225 a month. Can you see how quickly these fees add up?

If you slowly saved up cash for an older model or used phone, you would save a substantial amount of money each month. You would not be paying for your phone and the additional insurance payment on a monthly basis.

 

You’re Wasting So Much Money With Monthly Payments

The truth is, you may have a nice TV from a Rent-To-Own store with a nice new vehicle in your driveway. You may have the newest phone and some other new items in your house that most people can’t afford.

Unfortunately, each month you are throwing away substantial amounts of money due to all the interest and insurance you are paying to borrow these items until you one day own them.

However, most people do not ever own the items they pay for each month. The usual pattern is to trade in the older item that was not paid off to upgrade to a newer item. If the older vehicle or phone is not paid off, the remaining balance is then rolled into your new monthly payment.

In this case you get stuck in a never ending monthly payment cycle. You become so used to making that payment that it becomes a part of your life.

 

Don’t Be a Frog

Over time, your monthly payments will slowly increase until you are unable to get out from under your debt. It’s similar to a frog in boiling water. If the temperature is slowly turned up, the frog doesn’t notice until it’s too late.

Don’t be like the frog!

Don’t Fall for the Monthly Payment Trap

Your monthly payments are keeping you from getting out of debt and living the life you deserve. Monthly payments are expensive and laden with fees and payments to other people. Stop giving your money away, you work too hard to be this broke.

Focus on changing your mindset from the monthly payment trap and break free from the chains of debt. The more monthly payments you eliminate, the more cash on hand you will have to save up for those items in cash.

It’s not about depriving you, but telling your money where to go in order to stop making other people rich with your money.

 

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Put Your Money Towards Things That Add Value to Your Life

Would that truck really bring me $90,000 + worth of value to my life? No way! I could think of 100 different things I could spend $90,000 on that would add more value to my life.

When you break it down into monthly payments, it’s easy to hide the true cost of the products we are sold. Start to look at things from a base price and ignore the marketing schemes that sucker you into monthly payments.

I encourage you to start a budget and really examine where your money is going. When you write it all down, you will quickly see who is robbing you each month. Put an end to the bleeding and get your finances under control. You owe it to yourself.

Escape the monthly payment trap.

 

the monthly payment trap

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Ryan Luke

Ryan Luke is a father of three, a husband, a finance blogger, and a full-time police officer. Through proper budgeting and money management, they have been able to live off one income and build wealth at the same time. As an active member of the personal finance community, his goal is to educate and help people get out of debt and build wealth.

1 thought on “The Monthly Payment Trap”

  1. Totally agree the monthly payment trap is a big problem. Your paycheck disappears one small payment at a time until you have nothing left to invest or save. I also agree that used cars are the best, using depreciation to your advantage. Great post.

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