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How Financing Big Purchases Undermines Your
Best Investing

Investing | 2021-11-26

Making the right choices when it comes to your money, is hard enough without invisible forces working against you. And while it’s considered extremely normal to finance large purchases like cars and homes, but some people even finance smaller purchases like electronics and furniture, this common behavior is undermining your best intentions.

Behavior

Making the right choices when it comes to your money, is hard enough without invisible forces working against you. And while it’s considered extremely normal to finance large purchases like cars and homes, but some people even finance smaller purchases like electronics and furniture, this common behavior is undermining your best intentions.

Accidental Self-Sabotage

When a customer doesn’t have the cash to cover the full purchase but is too impatient to wait and save their income, financing seems like a great solution. The customer is immediately rewarded with possession of the new item and begins enjoying their new purchase on the spot, which counterintuitively reinforces that buying things on credit is acceptable, fun, and easy.

Opportunities to finance purchases only fuels the fire of immediate gratification, creating a cycle of dependency upon credit and forcing the buyer into a life of minimum payment requirements and paycheck to paycheck desperation.

When you finance a purchase, no matter how big or small, you are agreeing to pay money you haven’t yet earned, plus risk paying extra value (in fees and interest) for the item now and for years into the future.

How do you know what you’ll be able to afford a year (or a few years) from now? And what is the likelihood that you can afford the maintenance or repairs when an issue arises if you didn’t have money for the purchase in the first place? In this way, financing purchases sabotages your future since you have no way to know what your actual financial future looks like.

Double Crossed

In addition to the blind commitment of your future cash, the time value of money becomes a consideration. Over the years, inflation, interest rates, and market increases raise the value of each Rupee. Which means each Rs1000 today has a higher future amount. If in 10 years your current Rs1000 were to be valued like an Rs2000, would you treat it differently?

Over a period of 15 years, with an interest rate of 8%, money can double or triple its value. When consumers sign a financing agreement, they are looking at the value in today’s Rupees. When the consumer makes a payment toward that agreement for years to come, not only are they spending the future value of money, but they’ve discarded any ability to invest that money and earn interest from it. In this way, any interest or fees paid toward credit or a loan are costing the consumer more than double the known value.

With this thought in mind, would you still make a purchase today if the cost were double? When you begin to have this mindset and decide that financing is not an option, you’ll automatically become a more cautious consumer.

Your Best Behavior

A consumer who can’t control themselves enough to save and live inside their means exhibits ill-disciplined financial behavior (likely in more than one area), which is the complete opposite of how a wealth-building, financially savvy investor behaves.

Committed investors make consistent, incremental contributions toward their accounts. If you’re serious about creating a bright future for yourself and your family, you’re investing a set percentage of today’s income (money you earned recently) toward retirement and other investments.

Outside of investing, the way to ensure you’re getting the most value from every Rupee you earn is to only purchase what you can afford without resorting to financing options. By practicing this intentional behavior, you’ll always be retaining and investing as much as possible without risk of paying double to the bank.

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