After drawing up a budget for our full annual salary received as a lump sum on the first day of the year, let us consider a major insight provided.
Let us note that the expenses we have listed such as our mortgage, loan repayments and pension contributions all have an investment portion. What value are we managing to retain in our glass?
At the least we should try to make this assessment on an annual basis. Then, we will be in a position to evaluate what financial progress we are making over the years.
Then, let us consider the financial benefit of using cash rather than credit in making expenditures. It is possible to justify economically having a car loan or a mortgage. However, more often than not, it does not make good financial sense using credit to finance certain smaller purchases.
Most credit facilities incur high interest charges, higher than we can typically earn on any of our investments.
So, it is in our interest to save up toward a specific purchase or expenditure rather than rush into it by way of a credit facility. Less of our budgeted cash will be consumed in interest payments and so be available to help balance our budget.
On an annual basis, it would be useful to make an assessment of the amount of cash spent on meeting interest charges. For example, if we use your credit card to buy food and clothing, what is the interest charged, if any?
Alternatively, we may have been eager to acquire that new couch for the drawing room and bought it on hire purchase. Let us notice the interest charge; we do not take that charge for granted.
By avoiding interest charges, we allow more of our cash to really work for us rather than handing it to others for the service of financing our needs.
The trade-off is that we will have to delay our gratification, and we may not want to do that. The choice is ours. We may be willing to delay gratification on some things and not on others. We design our lives. Once we each have made our choice, don’t blame someone else for the consequences.
Avoiding or minimizing interest charges provides an opportunity to save and invest more. The effect on our financial health is spectacular in the long term. It is equivalent to taking a small amount of funds and investing it in high-interest earning investments.
In the long term, the small amount of funds will be exponentially greater than double the amount of funds invested at half the interest rate for the same period. Avoiding interest charges is a gold mine in terms of getting our financial act together.
The moral is that it is in our best financial interest to make mostly cash expenditures. If we do not have cash, let us wait until we have it, if we can.
So, saving interest on the money we spend will further reinforce the success of interest earned on the money we do save.
