Time Value of Money.
I remember the spring of 1980 and the excitement of taking delivery of my very first motorcycle. It was just after the death of my mother, and I had received more than enough in life insurance proceeds to cover the $3,000 cost for a 1979 Suzuki GS 1000 L.
Over the next two years, I traveled more than 12,000 miles before coming to the end of the road, “literally” of me and my Suzuki. I have some great memories of my very first motorcycle but they have come at a great cost. Let me explain. With the purchase 37 years ago of a $3,000 bike and a 6% assumed annual interest rate excluding income taxes, that experience has cost me more than $25,900 to date. And the cost just keeps increasing with time.
Here is another example of a simple decision to buy a truck. On February 14, 2004, I purchased a 2002 Ford Excursion Limited, 4X4, 7.3 liter diesel engine, leather interior, seven passenger, rear heat and air, with only 16,625 miles. It was like brand new. I financed $37,309.28 over 72 months at 5.49% annual percentage rate, and paid back $43,875.38. Today, the Ford Excursion has 119,000 miles, and I have vowed to never sell it. But if I had saved the $609.38 per month for 72 months and left the money to accrue at 5.49% annual percentage rate, today I would have had more than $77,000. But instead, I have a 15-year-old truck worth nothing close to $77,000.
Hopefully by now, you are beginning to see where I am going with this. There are always two sides of the story. After all, it’s the universal principle the law of polarity. Either you are paying interest (the borrower) or you are receiving interest (the lender). If your goal is to someday be in a position where your time is yours to do with as you please, you may want to spend some time moving to the lender side of the equation.
One of the most important decisions is the decision of being proactive when it comes to the subject of managing your finances.The sooner a person begins to make saving money a top priority, the sooner one will begin to see the benefits.
Developing the ability to control your spending is one of the benefits of managing your expenses along with your emotions. In addition to housing, healthcare and education, transportation expenses (along with the new car smell) prevent too many households of ever being able to experience a life without debt.
Let’s say that today you decide to start saving $500 per month and attain a 6% APR (interest) on the savings. Sixty months later, you will have saved $34,885. The next thing you know, you find yourself setting in a new car dealership and looking at a car that cost $34,885, including taxes, title, and doc fees. Which choice, listed below, would you likely choose?
- Write a check for the full amount, thus depleting your savings
- Sign a finance contract for $578.15 per month for 72 months
- Look at a less expensive automobile
- Get up and run out of the dealership as fast as you can
If your goal in life is to create a financially self-sustainable life without debt, then “D” would be the correct answer.
