To Leverage Now or Save for it Later
When it comes to your paycheck, your weekly take-home money or your monthly take-home money, the way that you philosophically look at it or value it, probably fits into one of the two following mindsets.
You spend the money you earn to first pay for the necessary costs of living, and then leverage most of the remainder as payments for additional nice “things”.
You spend the money you earn to first pay for the necessary costs of living, and then save or invest the rest for later. When you want or need “things”, you save for it first and then pay cash for the thing.
Those that are in the Leverage camp almost always appear to have more assets and nicer things, much sooner than the Saver.
Lets say for example that someone who takes home $5,000 per month ends up with $1,300 left over each month after the rent or mortgage and the other “normal” necessity costs of living expenses. The person in the Leverage camp will likely convert that remaining $1,300 into loan payments on things like…
- a new car (e.g. $500 per month)
- a new boat (e.g. $400 per month)
- the newest clothes – gadgets – toys (credit card #1, $100 per month)
- the big screen TV – home theater system – new computer (credit card #2, $100 per month)
- a nice vacation – lots of restaurants – weekend getaways (credit card #3, $150 per month)
- extra money towards a bigger loan for a bigger house
The Leverage camp folks can instantly get the “things” that they want, up to the maximum amount of excess cash available that can be leveraged into loans, and can live what appears to be a successful life with many of the latest things.
The drawback with this mindset is the fact that the full cost of ownership is much, much higher in the end, than the Saver, who for example may purchase the exact same things, but not on loan (the Saver must wait longer to purchase the things, but would also probably not purchase the same types of things due to philosophical differences).
The three credit cards in the example above are typical minimum payments of balances of $4,000, $4,000, and $6,000. The eventual interest paid out will be $19,269, assuming a typical 18 percent credit card interest rate and minimum payments.
Lets say the new car is $28,600. At 7.5 percent interest and the monthly payment of $500, the eventual interest paid out will be $7,000 over 6 years.
The new boat is $22,900. At 7.5 percent interest and a $400 payment, the interest paid out will be $5,678 over 6 years.
In the end, it will cost $32,000 more for these items than the Saver would pay for them (assuming the same things were purchased). Not only that, but the “things” will not be owned until they are entirely paid off. The Saver will own the things immediately after purchase.
Because the majority of people are apparently of the Leverage mindset, this is why so many of the fancy sky-rise buildings downtown have a bank logo attached.
Is it worth it to pay so much more for something, over time, so that it can be had right now?
Is it worth it to take a loan to have a new car, or would a decent used car do alright?
Is it worth it to always be maxed out with hardly a cushion, should something happen?
Is it worth it to keep up with the Joneses?
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