In this blog, we're going to be talking about the paradigm of you finance everything that you purchase. When I was a kid, my dad would always tell me, "Caleb, there's no such thing as a free lunch." And what he was really trying to tell me is whenever someone gives you something for free, there's usually a catch. Be really aware of that and don't get bought into a quick hype. I'm really grateful for that. It's funny how concepts compound because this concept of you finance everything you purchase is essentially saying there's a catch to any decision you make.
You might have grown up in a house where you were taught that paying interest or getting a loan for liability was bad. You might have been taught that paying cash is king. Or you may have read things by Robert Kiyosaki or watched videos by financial gurus that said, get as much debt as you possibly can. What I find is a lot of people are either in one camp, and it's hard for us to start thinking logically. It's hard for us to critically think and say, is it possible that there's a principle that's deeper than just paying cash for everything or financing everything? It really comes down to you finance everything that you purchase. I'm going to do my very best to try to break this down as simply as possible.
Let's suppose that I want to purchase a car and let's suppose that the car is $20,000. Let's also suppose that I have $20,000 in my control. (This is fake money for all you guys just wondering.) So let's say I have $20,000 and it's in my control and I can pay cash for the car. Now, if I pay $20,000 for that car, I have the car, but what do I not have? I don't have my money. So you could say that while I don't pay any interest to buy that car, my $20,000 is never able to earn for me ever again. And there's a cost that every day that goes by, the opportunity cost of what I could do with that money.
Now, you might be thinking, well, the majority of people wouldn't be doing anything with their money. They would be spending it. If that's you, if you're someone that is not thinking about investing or if you hold onto money and you get a loan and you're going to spend the difference, you're probably better off paying cash for that car because it's like that forced savings tool. And that's just the reality. When a lot of financial gurus say, "Don't be in debt," they know that people that get into debt are usually buying things they shouldn't buy and are spending the difference. So this opportunity cost might make sense on paper, but when you factor in human behavior, you're just better off paying cash.
My pushback to that is, if you're not disciplined, if you don't have the mindset of investing and being disciplined with your time and money, it's just going to be a very hard road. When we look at all the financial headwinds that are hitting us, it's going to hit you the hardest because of the lack of wealth, margin, and resources that we have. But that's just the honest truth: the majority of Americans are in that boat.
Going back to my example, you finance everything you purchase. We would agree that if I paid $20,000 for that car, I'm giving up control of that $20,000 and I'm losing what I could have earned, but I'm not paying any interest. So a lot of people would say, "Well, you don't have an interest payment, congratulations, you're not financing," but you are financing because you're losing what you could have earned on that money.
We're going to take a look at a calculator in a second and I'll give you a good concept and show you how to run your own future value calculation so that you can do this opportunity cost, you finance everything that you purchase, equation in your own personal life.
On the flip side, if I get a bank loan, I'm paying interest, and depending on the interest rate and the terms, it may be good, it might not be good. But I'm paying interest and it's allowing me to have money. If I spend the money on things that are not getting me a good result, maybe the bank loan is the worst thing that ever happened to me. But what it could also allow me to do is invest in myself, invest in businesses, or invest in other investments that give me a way greater rate of return than what I'm paying the bank.
I want to pull up a future value calculator. This is something very simple to do. With $20,000, let's suppose for the next five years I can earn 5% on my money. We're making this assumption, and we're saying we have $20,000, and I'm putting it into a place I can earn 5%, and now I'm earning an additional $5,526. Could we agree that if I paid cash for this car, I am financing because over the next five years what I could have earned in this scenario was an additional $5,526? There is a true cost, I call it the ignorance cost because it's not being paid; it's evaporated out of thin air. Earning 5% over five years, this is what I could have earned.
Let's say the credit union or the bank would give me a loan at 3%. In a way, I would be paying, and this is assuming simple interest, $3,185 for the ability to earn $5,526. This is just a quick example: you can see where, if you could earn 5% and be disciplined with that and pay a bank or something else $3,000 or less, depending on how the loan terms are figured out, there are efficiencies in this concept of you finance everything that you purchase.
Let's suppose you have a 15% interest rate because you don't have good credit. You might find that there's no way you could earn an additional $20,000 or double your money over the next five years, so you'd be much better off paying cash. The principle here is there's no one-size-fits-all. You really have to ask yourself over these next period of time if you can get a better result with your time and money. What opportunities would that open up to justify the cost, or the cost of control, or the interest rate that I'm going to be charged?
The simplest way to do it is if you're being charged 4%, can you generate with your money a greater rate of return than that 4%? If the answer is you don't know or it's no, or if you think you're going to spend money, pay cash and know you are financing that decision, but you're making the most efficient decision. If you're someone like me, a real estate investor, entrepreneur, or someone who likes the idea of controlling capital and is a good steward of your money and loves investments, you might even make 10, 15, 20, 30% on your money. Using loans will cost you a little bit but will create so much opportunity and potential open doors.
Note: This is not investment advice. I'm not telling you to take out a loan and invest. What I'm trying to describe is that every decision we make has a consequence, and we have to take a step back and understand the principle behind it so we can make the best decision for ourselves and what we're hoping to accomplish with our dreams and our life.
Let me know what you think by reaching out on Instagram. Let me know if I missed anything and also let me know if you're the type of person that likes to pay cash for things or if you're the type of person that likes to leverage debt and invest the difference. Again, it doesn't make it a right or wrong answer. I would just love to hear from you. I'd also love to hear about any subjects that I should be making blog posts like this on and trying to create principles out of concepts that people are having. Appreciate you and hope you live a continually intentional life.
