Few of us can claim to not be guilty of at least a purchase or two where we said to ourselves "Only X per month? That's not bad at all!" Using the monthly payment to assess affordability, however, is a financial trap.
Photo by ell brown.
With the variety of ways people can acquire credit and spend money these days it's unsurprising that financial mistakes and misfortunes abound. Over at US News & World Report, they've put together a list of seven common financial mistakes. Among the mistakes they highlight is seeing the monthly bill as an indicator that something is in your budget.
Equating monthly payments with affordability: Far too many of us decide whether we can afford something based on whether we can manage the monthly payment. This is particularly true for homes, cars, and furniture. But just because we can handle a payment does not mean we can truly afford something. Monthly payments also ignore the true cost of ownership. A car, for example, costs a lot more than the monthly payment when you consider insurance, gas, repairs and maintenance. Instead of focusing on the monthly payment, separate needs from wants and evaluate how you might better use the money. If you still have consumer debt, for example, consider paying the debt off before buying something that will commit you to future monthly payments for potentially years to come.
Shifting your perspective away from "Do I have an extra $200 a month to spend on this thing?" to "Is spending $200 a month plus all the additional expenses on this thing the best use of my money?" will help you channel your money towards more productive uses. Check out the full list of money mistakes at the link below or share your best advice on easily corrected financial choices in the comments below.