The monthly payment trap is easy to fall into. I lived and breathed it for years. Analyzing whether we could afford something based upon whether we could make the monthly payment, not the actual price of whatever we were contemplating purchasing. I was reminded of this trap over the weekend when I was shopping for an iPad for my mother-in-law.
My mother-in-law has been thinking of purchasing an iPad for quite some time, and last week she finally decided to make it happen. She texted me asking if I would do the shopping for her, since I’m familiar with the technology and she trusted me to get the best value for her needs. I selected one that I thought would technologically fit her needs and asked a representative how much it cost.
The representative explained that there was two options to pay for the iPad:
- Payment plan of about $34 a month for 24 months
- $629 payment in full (which includes a $100 discount)
Tunnel Vision
Many people, including my past self, would focus on #1 thinking whether I could afford a new expense of $34 a month for the next two years. $34 isn’t a huge sum of money and it would be easy to come to the conclusion that I could afford it the item. Just a few questions to answer, a few forms to sign, and we can be on our way home with a new toy.
Value Analysis
When we fall into the monthly payment trap, we ignore the full purchase price of the item. There’s no analysis as to whether the actual cost of the item is a good value. There’s no concept of how much of our hard earned cash we are really spending.
Let’s do a fun little activity. Read and answer a few questions to yourself:
- If you have a cell phone, do you know it’s retail cost?
- Have you ever answered the question, “How much did that cost?” with something that sounded like this,”$<insert dollar amount> per month?”
If you couldn’t answer #1, and the answer to #2 was “Yes,” then you’ve fallen victim to the minimum payment trap.
Confession Time
A year ago I upgraded my cell phone from the Galaxy S4 to the Galaxy S5. I couldn’t remember what the retail cost of the phone was at the time I purchased it. I looked at my online account information and found that it was $650. But it appears on my bill as a $27 monthly charge for the phone, and that’s how I’ve always thought of it.
I think of my phone as costing me $27 a month. I’ve fallen into the monthly payment trap.
Avoiding The Monthly Payment Trap
The debate as to whether a person should make a monthly payment on anything is beyond the scope of this article, but one could make the argument that there are valid scenarios in which a person would want or need to take advantage of a monthly payment opportunity. If you find yourself in such a situation, you should always follow these steps:
- Know The Price: Don’t settle for knowing only the monthly payment amount, ask the sales person to give you the actual cost of the item. If there is interest involved, ask for the total amount you will pay for the item including interest.
- Determine Value: Using the actual cost, determine if the item provides adequate value for the price of the item. If the answer is, “No,” then DO NOT BUY IT.
- Evaluate Payment: The preferred method of payment would be immediate payment in full. But, you might find yourself in a situation where you HAVE to make monthly payments. Only after completing the first two steps should you then evaluate if your budget can contain the monthly payment.
There may be legitimate reasons for which a person may decide to make monthly payments on an item. But looking only at whether a monthly payment fits within your budget is a sure way to overpay for something, buy things you don’t need, or both.
Have you ever described the cost of something by the amount of it’s monthly payment? Have you ever fallen into the monthly payment trap?
We used to live comfortably in the “I can afford the payment” lifestyle of money management too. I remember one day shortly after we woke up and smelled the coffee talking with family members, when someone asked my uncle how much his recently purchased brand new car cost him. “I don’t know,” he said “all I know is that I can afford the payment”. I felt sick, mostly because it hadn’t been too long since we thought the same way. I”m SO glad we’ve broken that vicious, destructive cycle.
I felt a little sick realizing I fell into it again with my cell phone a YEAR AGO and didn’t even notice it, Laurie. Know the cost, determine the value, THEN decide whether to purchase!
We definitely used to decide we could afford something if we could afford the monthly payments. Not anymore though! Since we started our journey out of debt 3 and a half years ago, we’ve had two major expenses that, in the old days, we would have paid off month-by-month: a new roof in 2013 and our ongoing renovation project. For both, we saved up and had cash in hand. How great to truly be done with a purchase as soon as it’s made! The one monthly payment we still make is for braces – but I don’t think there’s any other way. Is there?
yeah…we’re dealing with braces for our daughter too. We’re looking into whether it would be worth it to bump up our dental insurance for 2016 to get ortho coverage. Other than that, we’ll be using HSA funds to pay for it.
I think phones are the worst. It’s nice that they offer 0% financing, but you still are buying a really freaking expensive piece of hardware that is virtually guaranteed to be irrelevant within 3-4 years (typically even quicker). I’m not surprised so many companies try to make it in the cell phone business – we are all hooked and perfectly okay with our monthly phone payments!
Exactly….$650…..FOR. A. PHONE! I could buy a freaking computer for that much!
We fell into the monthly payment trap with our credit cards which cause us to accumulate our big debt. We had to change our why of thinking to realize there was a better way, once we did that we have never chased a minimum payment again.
Good on you for changing your way of thinking, Brian! People tend to gravitate towards what is easiest for them at the time, and not what is best for them long term. It takes a constant and conscious effort to make it happen!!!
Monthly payments hide the true cost of everything! That’s why people end up with $30,000 cars! They keep plugging away at the monthly payment and never worry about how much they’re paying overall. I like paying cash for everything – paying cash hurts, and it should.
Excactly! The pain makes you think about what you’re really doing. Is it really worth it???
I’m not sure I described it as the actual cost, but I have definitely taken the monthly payment option thinking I had somehow scored. Rookie mistake. I think in terms now of simplifying my life. The less “payments” I have to keep track of and budget for, the better.
Oooh, I’m a big fan of life simplification! A lower monthly payment…..is STILL a monthly payment!
The words “monthly payment” is always scary to me. We did get a higher priced used car than I’d planned when our first one was totaled. That was a concession to my husband. I hated the damn payments.
Otherwise, I just don’t get breaking things up like that if you have options. What’s really scary is how HSN & QVC will break up almost ANY item’s cost. I’ve seen $33 items advertised as just $11 a month. Eesh.
With I’m sure a lovely fee to break it up into payments for you…..