Our society is so entrenched in the notion that we need credit cards to build credit that to suggest otherwise is likely to get you ridiculed.
It's amazing how powerful the marketing for credit cards has been.
It's amazing how quickly they have taken off since their inception.
I suppose it comes from the general lack of patience our society has today.
Everything has to be instant.
In the land of instant messages, cell phones, microwaved dinners, and the internet, it's no surprise that we have grown quite impatient with the notion of waiting for something.
We don't want to wait for something we want today--even if the waiting period would be a short, one-time deal.
If you managed to save what you'd typically have as a credit limit on a credit card, what you'd typically need for a down payment on a house, and what you'd typically need to buy a car, then you'd never have to pay another interest payment in your life.
Think about how much money you waste paying interest to someone else simply because you couldn't wait a few years to pay for it with cash.
Why do I say that it would only take just one time? Let me illustrate.
Let's say you need $20,000 for a down payment on a house, $10,000 for a typical credit limit on a credit card, and $20,000 to buy a brand new car.
The total savings you would need would be $50,000.
Now, let's say that the average college graduate makes about $30,000 per year fresh out of college.
After taxes (which, at that income level, you're likely to get back anyway), that would make your net income around $22,500--or $1875 per month.
I'm currently able to pay all my bills with about $1200 a month (that includes rent, car, insurance, etc.
) because I live in a low cost-of-living area.
Assuming someone could live like that (it's possible), that would leave an extra $675 per month--or $8100 per year.
It would take about six years to save $50,000 on that income.
Six years? Are you crazy? Look at it like this.
The typical college graduate is about 22 years old.
Six years of their lives would put them at 28 years old.
That's not very old, is it? And I'm being overly generous with those numbers.
The typical college graduate makes more than that and most of them don't even move out on their own for a couple years after they graduate anyway.
So it's far more likely that it would really only take three or four years to save $50,000.
What's the benefit of waiting a few years before buying those nicer, more expensive things? The benefit is that once you do it, you never have to sacrifice again.
Let's take buying the car as an example.
Assume you saved up $20,000 to buy a brand new car that you pay for with cash.
If you take a loan for that amount, you'd probably be paying for the car for six years at an interest rate of about 6%.
The payment at that interest rate over that time period would be $386.
65 per month.
$386.
65 paid every month for six years would come out to a total of $27,838.
You are paying $7,838 just to buy that car NOW instead of waiting to pay for it with cash.
What could you do with $7,838? I can hear the naysayers now.
"But what if you invested the $20,000 into mutual funds and got 11-12% interest over that time while only paying 6% interest on the car! Wouldn't you be making more money that way?" Couple of things to think about with that logic.
First of all, good luck getting that interest rate in this market.
But we'll neglect that for now because the market will eventually improve.
Second, something you don't think about is insurance costs.
In most states, you are required to carry full coverage auto insurance on a car for the entire term of the loan.
Do you really NEED full coverage insurance on the car for that long? Doubtful.
Especially if you have money in savings to cover damages that may occur after a few years have passed.
Owning your car outright will save you a bundle of money on car insurance if you know when to realistically drop full coverage to lesser coverage.
Let's ignore those savings and do a comparison.
In the first example we'll assume you take a loan and invest your $20,000 into a good growth stock mutual fund (a fund that gets around 12%) over the course of the loan (6 years).
At the end of 6 years that $20,000 would be worth $39,477.
Your net profit in this instance is $11,639 ($39,477 - $27,838).
For the second example, let's assume that you pay for the car upfront but you take what you would have paid for a payment and invested the payment every month for six years.
If you invested $386.
65 every month for six years, your total growth for that monthly payment would be $40,891(at 12% growth).
That's a net profit of $20,891.
By paying for the car up front and investing the payments every month, you made about $9000 more than if you invested the initial money and took a loan.
Isn't that a nice thought? That you can buy a car and actually MAKE money on that car instead of throwing thousands of dollars away in interest? Can you see how each time you go through that process that the money you make would actually grow every time you bought a car? Can you also see how it would only take ONE period of time in your life to get to the point where you can do this? Do you see what your impatience is costing you? My favorite quote by Dave Ramsey goes something like this: "If you live like no one else, then later you can live like no one else.
" Think about it.
It's amazing how powerful the marketing for credit cards has been.
It's amazing how quickly they have taken off since their inception.
I suppose it comes from the general lack of patience our society has today.
Everything has to be instant.
In the land of instant messages, cell phones, microwaved dinners, and the internet, it's no surprise that we have grown quite impatient with the notion of waiting for something.
We don't want to wait for something we want today--even if the waiting period would be a short, one-time deal.
If you managed to save what you'd typically have as a credit limit on a credit card, what you'd typically need for a down payment on a house, and what you'd typically need to buy a car, then you'd never have to pay another interest payment in your life.
Think about how much money you waste paying interest to someone else simply because you couldn't wait a few years to pay for it with cash.
Why do I say that it would only take just one time? Let me illustrate.
Let's say you need $20,000 for a down payment on a house, $10,000 for a typical credit limit on a credit card, and $20,000 to buy a brand new car.
The total savings you would need would be $50,000.
Now, let's say that the average college graduate makes about $30,000 per year fresh out of college.
After taxes (which, at that income level, you're likely to get back anyway), that would make your net income around $22,500--or $1875 per month.
I'm currently able to pay all my bills with about $1200 a month (that includes rent, car, insurance, etc.
) because I live in a low cost-of-living area.
Assuming someone could live like that (it's possible), that would leave an extra $675 per month--or $8100 per year.
It would take about six years to save $50,000 on that income.
Six years? Are you crazy? Look at it like this.
The typical college graduate is about 22 years old.
Six years of their lives would put them at 28 years old.
That's not very old, is it? And I'm being overly generous with those numbers.
The typical college graduate makes more than that and most of them don't even move out on their own for a couple years after they graduate anyway.
So it's far more likely that it would really only take three or four years to save $50,000.
What's the benefit of waiting a few years before buying those nicer, more expensive things? The benefit is that once you do it, you never have to sacrifice again.
Let's take buying the car as an example.
Assume you saved up $20,000 to buy a brand new car that you pay for with cash.
If you take a loan for that amount, you'd probably be paying for the car for six years at an interest rate of about 6%.
The payment at that interest rate over that time period would be $386.
65 per month.
$386.
65 paid every month for six years would come out to a total of $27,838.
You are paying $7,838 just to buy that car NOW instead of waiting to pay for it with cash.
What could you do with $7,838? I can hear the naysayers now.
"But what if you invested the $20,000 into mutual funds and got 11-12% interest over that time while only paying 6% interest on the car! Wouldn't you be making more money that way?" Couple of things to think about with that logic.
First of all, good luck getting that interest rate in this market.
But we'll neglect that for now because the market will eventually improve.
Second, something you don't think about is insurance costs.
In most states, you are required to carry full coverage auto insurance on a car for the entire term of the loan.
Do you really NEED full coverage insurance on the car for that long? Doubtful.
Especially if you have money in savings to cover damages that may occur after a few years have passed.
Owning your car outright will save you a bundle of money on car insurance if you know when to realistically drop full coverage to lesser coverage.
Let's ignore those savings and do a comparison.
In the first example we'll assume you take a loan and invest your $20,000 into a good growth stock mutual fund (a fund that gets around 12%) over the course of the loan (6 years).
At the end of 6 years that $20,000 would be worth $39,477.
Your net profit in this instance is $11,639 ($39,477 - $27,838).
For the second example, let's assume that you pay for the car upfront but you take what you would have paid for a payment and invested the payment every month for six years.
If you invested $386.
65 every month for six years, your total growth for that monthly payment would be $40,891(at 12% growth).
That's a net profit of $20,891.
By paying for the car up front and investing the payments every month, you made about $9000 more than if you invested the initial money and took a loan.
Isn't that a nice thought? That you can buy a car and actually MAKE money on that car instead of throwing thousands of dollars away in interest? Can you see how each time you go through that process that the money you make would actually grow every time you bought a car? Can you also see how it would only take ONE period of time in your life to get to the point where you can do this? Do you see what your impatience is costing you? My favorite quote by Dave Ramsey goes something like this: "If you live like no one else, then later you can live like no one else.
" Think about it.