Consumerism is inevitable and here to stay. We’ve all handed over hard earned money for something we needed, and we’ll continue to do so our entire lives. What you buy doesn’t really matter, but the way you choose to pay for your purchases can have a long-lasting impact on our financial well-being. This is especially the case when money is spent on Major Capital Purchases.
Major Capital Purchases are the high-ticket items we buy that cannot be completely covered with our monthly cash flow. These can include vacations, weddings, and cars. For many American families, a new set of tires or a roof repair can count as Major Capital Purchases. Basically, if you need to finance it, it’s a Major Capital Purchase.
Take a look at the following graph:
The zero line running through the middle of the graph is called the ‘zero line.’ This line represents the point when a person has nothing or owes nothing. If you owe more than you’ve earned and collected, you fall below the zero line.
The Debtor (Red Line)
A debtor hasn’t accumulated a savings or resources and is backed into borrowing money to stay afloat. The money they borrow is based on their future earnings, so they have to work endlessly to pay it off and get that borrowed sum down to zero.
The fear of many debtors is not having paid back what they owe before needing to borrow money again. Essentially, they work large portions of their lives to pay for what they’ve already spent—plus interest. These problems get worse if debt is owed to a creditor, because then the creditor seizes control of your resources.
The Saver (Blue Line)
Understanding the inherent wealth transfers in borrowing at interest, a saver will wait until they have accumulated enough money to pay for their purchase up front and in cash. But, even though they aren’t accumulating debt, they’re still consuming their savings and inching back towards the zero line.
The saver, in many ways, shares the debtor’s fear of unexpected and costly emergencies. If something were to arise, the saver may have to drain their savings to pay for it. A saver is constantly fluctuating between having large sums of money to having very little.
Additionally, savers will often keep their money in savings accounts which are subject to government taxes that increase as your savings grow. Then, when a purchase is made with those funds, you limit the ability of your savings to earn interest because you’ve dipped into your money.
People choose to pay cash for large purchases so that they don’t have to owe money to lender, which is not bad in and of itself, but that also means they don’t give their money the chance to earn interest.
Is it possible to keep money in the account to earn interest but still purchase the things you need? Let’s move onto the green line in the graph and we may just get our answer.
The Wealth Creator (Green Line)
The wealth creator is a bit of a saver and a bit of a debtor all at once. They save funds, but when they need to make a purchase, they use their savings as collateral to get a loan at a lower interest rate than they are earning on their savings. The benefits to this approach are plentiful.
First, this strategy keeps you from depleting your savings when you need to make a purchase. This allows your savings to continue to accumulate compound interest. Additionally, though the wealth creator has to pay interest on the loan, they can often negotiate rates in their favor. Then, once the loan is repaid, the amount of savings that can be collateralized increased proportionally until the loan terms are met.
Everyone wants to do what is best when it comes to their money and resources. We want to save and grow our wealth while simultaneously being able to afford the purchases we need to make. Understand, though, that once we wave goodbye to our dollars, that decision is permanent. That’s why it’s important that when we do spend, or have to spend, our money we spend it wisely.
Chris Jacob is a Registered Representative with Saxony Securities, Inc. Securities offered through Saxony Securities Inc. (SSI). Member FINRA, SIPC. Non-security products and services or tax services are not offered through SSI. Cadeau is not affiliated with SSI.