Everything is 100% Financed

Let me say it again, everything is 100% financed.  Another way of saying it, you have to finance everything that you buy.  I repeat this over and over and restate it to drive home a point, most of you do not understand this concept and it is killing your finances.

Why is it that everything is financed?  Simply put, you have two choices when you purchase something.  First, you could pay cash for it.  Second, you could finance it. 

But wait, you just differentiated a cash payment and financing, so how can you say everything is financed 100%?  When you pay cash for something, you are still financing it in a sense, and this is where most of you fail in your understanding. 

Paying cash for something is a form of financing.  Why?  Because every dollar you pay means you cannot earn money elsewhere.  If you decide to pay cash for a car, you are still financing it because you give up the opportunity to earn money elsewhere, which could prove more costly over time than actually financing the car with an auto loan.

Sure, buying something like a car, or even your home, with cash is nice because it means you are not obligated with a monthly payment.  But what is the impact of paying cash versus financing in the long run if you could have earned more money elsewhere, or simply had the cash on hand to seize an opportunity you wouldn’t have been able to since you paid cash?

Let’s say you bought a car for $20,000.  You decided to pay cash because you could.  Then came an opportunity to earn 10% on your money for the next five years.  You don’t have enough cash to act on the opportunity because you bought the car.  Guess what?  You essentially financed the car at 10%.

OK, what if you were able to secure a loan for the car at 5% for the full amount?  Same opportunity comes along, only now you can act on it.  You now made 5% on the money as opposed to 0%.

Let’s look at another viewpoint.  You finance the car still, placing the $20,000 instead in a safe investment vehicle, making 3%.  You are now losing about 2% a year.  Sucks, doesn’t it?  But now you have $20,000 in an emergency fund, which you didn’t before and guess what, you needed it.  Had you paid cash for the car, you would have had to run up credit cards at high interest rates, but since you got an auto loan, you have the cash on hand to work through the crisis, even paying your auto loan for months before depleting your funds.

Are you getting the picture?  There are certainly times when you should pay cash, just as there are times when you need to finance.  Carrying debt is not a problem, just don’t become a slave to it.  A healthy balance is needed in everyone’s financial plan.