If you’re like the majority of Americans, you’re carrying some debt. I’m not going to sit here and yell at you about that, it’s so ingrained in our culture that we don’t even think about it (though that doesn’t excuse it, either).
Want a new couch? Six months same as cash. New car? You can get an 8 year loan now. House? Obviously that’s mortgaged. Even on something as cheap as a $20 pair of shorts, Kohl’s will offer you a credit card to put it on.
Why is this? It’s simple. It’s more profitable for those companies if you buy with debt. Car dealerships make more money financing you a car than they do selling you a car.
The thing is, when you buy something with debt, you’re essentially promising your income from tomorrow for a purchase from today.
Think about it like this. Pretend you earn $100 every month. You want a couch but it costs $200. Rather than wait however many months it takes to save up for the couch, you buy it today on an 8 month payment plan. What you’ve just done is promise that for the next 8 months, you only earn $75, not $100. You’ve promised someone else $25 of your future income.
But Chris, you might say, how is that different than setting money aside each month and saving for the couch? I’ll tell you how. Risk.
Life happens. If you’ve been alive, you’ve experienced some sort of financial set back. Just this past week I had water flowing through the ceiling in my basement. It turns out my tub drain had a leak. It was a small fix, but I’m still out several hundred dollars to the plumber, and now I have a nice hole in my ceiling I need to fix. If I was buried in debt, this small fix might break me.
When you promise your future income to someone else, you are living life with more risk. If something happens and you need that money, you don’t have it. Or you fall behind on your debt and pay ridiculous fees.
I don’t know about you, but I can’t use a financed couch to pay for a plumber. But cash will work.