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Budgeting Cash Flow and Monthly Payments

Budgeting Cash Flow and Monthly Payments post image cash on hand

Are you tempted when you see the new car ads with such low monthly payments? How do you personally decide if something is affordable? What role does your monthly cash flow play with your budget?

I want to share how looking total purchase price vs monthly payments can dramatically improve your finances. When I changed my mindset, it became easier to watch my spending.

Total Purchase Price – An Eye Opener

Besides looking at the payments, you might want to look at the total purchase price. The first time I did this was with my credit cards. I read in a personal finance book that you end up paying a lot more due to interest if you only make the minimum payments.

The same thing with my car loans. The interest rates were horrendous and paying them on schedule meant I was paying way too much for my car.

I bought a car for about $10,000 at an interest rate of 13.75%. My car payments were around $230/month. With all the finance charges and fees, if I stuck to the car payment schedule, I would pay a total of $15,962. Fortunately we paid our car loan faster than planned and saved a bit of money in the process.

Now let me show you another an example, this time with a much bigger purchase. Most of us can’t buy a house outright, so a low interest mortgage can make sense for some of us.

Here are the numbers for a house:

  • Mortgage: $200,000
  • Interest Rate: 5%
  • Length: 30 years fixed

If you paid on time, at the end of 30 years you will have paid $386,517.71. That’s almost twice the purchase price for interest!

While there’s nothing wrong with getting a mortgage and paying it on schedule, how many times have you thought about the total cost of your house? It’s an eye opener and you may think twice about rushing into becoming a home owner.

Using a Cash Based Budget

Mastering your cash flow can help you see how important budgeting is for you.  Here are some of my favorite free options for tracking and managing your budget.

  • Mint: As you see with our monthly net worth reviews, I use this often to keep track of my spending habits.
  • Quicken: The most popular money management software has a lot of capabilities with budgets, investing, real estate, and more. Examine the features of the different editions before you buy to make sure you grab the best fit for you. Here is a review for Quicken 2011.
  • Pocket Smith: This is a really useful budgeting calendar and forecasting web tool.
  • BudgetPulse: A strength of BudgetPulse is the visualization of expenses and income.
  • Google Docs: There are several free templates you can use to get your budget up and running.

Take some time and try them out. Choose what works best for you and your finances.

Can Monthly Payments Make Sense?

Looking at the other side of the coin, even if you can afford to pay upfront for a good or service, it may make financial sense to go with payments.

Can there be times when taking monthly payments can be advantageous? For example, what if you were offered a 0% interest rate for 3 years on a new vehicle? Would you pay for it completely still or would you deposit your money into an account that can earn you some interest?

Thoughts on Buying What You Can Afford

Taking a look at how budgets and cash flow are related can help you figure the best plan to build your net worth. Do you tend to buy things outright or do you use installments? Have you considered how much interest you’re paying for your stuff?

Photo Credit: stopnlook

by Elle Martinez

Elle Martinez helps families at Couple Money achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth. Learn how to live on one income and have fun with the second..

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  • http://www.cheaptravelinsurance-hq.com Matthew Rogers

    Depending on how busy the year is I try and review all of the interest rates on my loans/lines of credit every six months or so. Even if most people can’t afford to pay down an expensive car loan early it may still be possible to get a line of credit and transfer the balance to that. I have some good friends who did this and instantly cut the interest rate that they paid on the car from approximately 12% down to 5%, thus saving alot of money.

  • http://knsfinancial.com Khaleef @ KNS Financial

    To me, credit and installment plans have helped to ruin our personal finances. People only focus on the monthly payment when deciding to make a purchase. Many will pay any price as long as they can get a manageable payment!

  • Elle

    Thanks Matthew and Khaleef! Looking at just monthly payments is short sighted in many cases. I think if people examine total purchase price they would modify their spending habits.

  • http://www.creditcardscanada.ca/blog/ Drew @ Credit Cards Canada

    That example of the car costing 50% more is a perfect illustration. Credit is useful for two reasons:

    1. You need something now and don’t have enough money (typically useful for really big-money purchases like real estate, vehicles and vacations

    2. You don’t want to carry around that much cash in your pocket for security reasons.

    Either way, pay down as much as possible as quickly as possible…unless you really want to pay a higher price.

  • http://www.andrewjacobsonfinancial.com Andrew Jacobson

    With the exception of my house, I always try to buy outright (and hopefully my next house I can buy outright!). Your post is a great reminder of why we need to always shop based on total purchase price. We all need to be aware of what interest we are paying. And since compound interest is the most powerful force in the universe (according to Einstein), I always try to earn it rather than pay it!

  • http://www.howisavemoney.net Lulu

    When I bought my last car I told the dealer I was interested in the total cost of the car not the monthly payments. He was stunned and remained quiet for a few moments before telling me that no one had ever told him that before.

    He was trying to sell me a more expensive brand new car with lower monthly payments, instead of the second hand car that cost less in total, but had slightly higher monthly payments.

    I told him I did not care what the monthly payments were because I could find a way to make that..but I did care what the total cost of the car was!!!!!

    • Michael

      I did the same thing! Just negotiated price of a car for my mother. I asked to negotiate the price of the car instead of all the other things like payments, trade-in, financing, down payment. Very smart move!