Chances are that you often think about money in terms of monthly payments. For example, you make monthly payments on your car, house, and cell phone. It’s not your fault; we’ve been conditioned to think this way. However, the monthly payments mentality can be such a trap. If you look only at that small picture, you might end up spending money when you could have been saving it. That’s why it’s important to learn how to get out of the monthly payments mentality.
What is the Monthly Payments Mentality?
You walk into a car dealership and the salesperson says to you, “how much are you looking to spend per month?” It’s finally time for you to buy your first home, and the broker wants to know what you are able to pay monthly on your mortgage. You sign up for a new cell phone service and they try to upsell you with a bundle package that’s “only” x dollars more per month. Or to give you a better phone that you pay for in small monthly additions to your regular bill. These are all examples of the monthly payments mentality.
The monthly payments mentality means that you’re thinking entirely or primarily about how much you’re paying for something per month. Therefore, you aren’t thinking about the bigger picture. You aren’t worried so much about the total amount paid over time. You aren’t concerned with what else you could do with that money over the long haul. You’re simply looking at, “what’s the cost per month and can I afford it?”
Why is the Monthly Payments Mentality So Popular?
The monthly payments mentality is so popular, so common, that you probably didn’t even think it was weird until you started to think about it a little bit more closely. Most of us pay almost everything in monthly installments. Car loans, student loans, mortgages, credit card bills, rent-to-own furniture, video streaming services … the bills arrive monthly, so we pay them monthly, and we don’t think much else about it.
Part of the reason for this is because most of us only get paid once or twice per month. We know what we earn per paycheck (or approximately what we earn monthly as freelancers.) Therefore, we can easily tell whether or not we can afford to make a monthly payment for something. It’s a little bit harder to look at your annual income and determine what you can and can’t afford all throughout the year. After all, doing so requires some serious advance planning.
However, the main reason that the monthly payments mentality is so popular is because it benefits the sellers. They realized long ago that you’re a lot more likely to believe something is affordable if you can pay just $10 per month for one year than if they want $120 out of pocket right now. Some services offer you a discount if you pay an annual fee instead of a monthly fee, knowing that they will benefit either way (with a smaller upfront one-time payment or more money paid out over the long run.) Some businesses even offer you the first month or two “free” so that what you’re focused on is zero payments until the future. It lures you in to make impulse purchases.
Make no mistake: the monthly payments mentality is popular because it benefits a business’s bottom line. It’s not popular because it’s best for you.
What’s Wrong with the Monthly Payments Mentality?
There are four key reasons that the monthly payments mentality is a problem for individuals who are truly interested in saving money.
1. It hides the total cost of your item.
What are you paying for your cell phone over the entire lifetime of the phone? You probably don’t know. All that you know is what you pay for it monthly. Hopefully you know what your total mortgage cost is, including all of the interest accrued over time, but many people don’t even know that. They know what they pay monthly, and that’s it.
If you don’t have a true understanding of the total cost of each and every item that you’re paying for monthly then you don’t really understand your finances. And if you don’t understand your finances then you’re on a slippery slope towards financial trouble.
2. Monthly pricing makes comparison shopping challenging.
This relates back to point one. If you aren’t looking at the total cost of an item, then you aren’t able to make the best long-term decisions about the right items to purchase.
Consider, for example, if you are about to buy a new car.
- Loan #1 is for a car that costs $15,000. You pay $2000 down. Then you pay the rest in monthly installments at 6% interest rate for 84 months. You only pay $189.91 per month.
- Loan #2 is for the same car with the same down payment and the same interest rate. However, you only take out the loan for 24 months. Your monthly payment is $576.17.
If you’re only comparing your monthly payments, then of course you take the first option. But obviously, when you consider the interest rate (not to mention the fact that you’ll be saddled with Loan 1 payments for many more years than Loan 2), you should take the second option. You’ll save over $2000 by making higher monthly payments for a shorter amount of time. If you can’t afford that, then maybe you should get a less expensive car.
Oftentimes, when you’re trying to compare monthly payments, you’re working with different interest rates and other terms of the sale. It all gets confusing. That’s why it’s important to look closely at total cost, rather than monthly costs.
3. Small Loans Encourage Big Debt
When you’re trapped in the monthly payments mentality, you can easily find yourself taking on a lot of debt. As long as you can cover the monthly bills, what’s the problem? The problem is that debt comes with interest, so you’re paying more than you need to for items that you may or may not need in the first place. Moreover, if you get into financial trouble, you’ll have all of that debt to deal with.
4. If You’re Spending, Then You Aren’t Saving
The more that you shell out, the less that you have to save and invest. If you get trapped into worrying about the amount of money you can afford to spend each month, then you’re no longer thinking about all that you can save. Therefore, the monthly payments mentality encourages waste.
How to Avoid the Monthly Payments Mentality
It’s time to get out of the monthly payments mentality. It’s time to start thinking about the bigger picture. Take a long hard look at your budget and make sure that you understand the total cost, including interest, of everything that you’re currently paying out monthly.
In cases of subscriptions, or services such as cell phones and streaming services, calculate not just your monthly cost but also the annual and five-year costs. This will give you a better view of the big picture of your spending. Therefore, you’ll be better able to make choices that empower you to save and invest, rather than to spend.
Before you make any new purchases, always go in with a plan. Never disclose your “monthly allowance” to the lender. That just encourages them to upsell you to that amount. Instead, make sure that you focus on the total cost of the item over time. In many cases, if you can’t pay the total cost out of pocket now, you might not actually want to purchase the item at all. If you do decide to make the purchase, looking at the total cost will enable you to make the soundest financial decision.