Have our lives become one big repayment? Many years ago, I used to wonder how in the West they managed to do everything on repayment. You could buy clothes on a monthly repayment through store cards. You could buy household appliances on a whim and just make a monthly repayment. No need to pay the three hundred dollars. Just pay something like fifteen dollars a month for three years. I thought it was such a bargain! If a new phone came out, you could get it on a plan. And everybody did it! Years later, haven’t we started living like that here as well? New cars are being advertised not so much with the total price, but the monthly repayment on the car. Even when this is not done, we tend to evaluate it through the monthly repayment on a bank loan. The store cards are now here with us. I see the posters outside furniture shops. A fantastic sofa set and the price is twenty thousand shillings per month.
From the business’ perspective, it makes sense. When will people ever have saved a lump sum of Kshs 400, 000? More people will be enticed by the easy payment. Beyond the buying of things, we have also taken this monthly repayment life further. Don’t have money for school fees; let the Sacco loan make life easier by breaking it down into bits. Don’t want to show your friends that money has run out and you actually can’t afford to be at the bar; bring out the credit card. If it is declined, abuse the establishment and pretend that they have a problem with their connection. Buying new clothes and shoes; your friend owns the shop or has a connection at the shop and “malipo rahisi” can be organized. So we get the convenience. But with some things we also have to flip the coin and understand the potential inconvenience. What are the dangers of living life through the eyes of repayments? First we don’t really look at the price. (Click to Tweet)
If you are buying a car, the cost is not the amount needed to service the loan. The cost is the entire cost of the car. I’ve heard many people talk about this cost as Kshs 25,000 per month for example. No, that’s not right. The car costs you one million shillings. Make your decision based on that figure. You cannot necessarily afford something because you can afford the repayment. Let’s use the car as an example, but the principle applies for many things that you’re buying or paying for, through some of these monthly installments. The cost of that car is closer to one and half million shillings because of the interest. You have got to ask yourself if you are ready to pay that much for the car (which will be worth one third of that after the five years). You have also got to look at what you are foregoing to make that monthly repayment.
Many times, these decisions are made by looking at income as opposed to looking at your entire monthly budget. Many people have found themselves in situations where key essentials are now being compromised. This has led to people taking on more debt. You buy a car, you realise you now can’t afford to pay school fees, then you take a loan for school fees, then another for insurance etc. You are now entrapped by a series of monthly repayments that are leaving you with no room to breathe! You easily slip into living beyond your means. The starting point was that monthly repayment that looked so easy. You’ve got to do a realistic budget and ensure that you can actually afford the Kshs 25,000 without your life falling apart. In addition, at times we sacrifice money that was being invested or could have been invested. One way of knowing you can’t afford it is if after the five years you won’t even have true assets or investments that are greater than the money you spent on the car.
The monthly payment also stops us from saving for anything. More than, that even contemplating that those things can be saved for is non-existent. Since even a holiday can be financed, we procrastinate and delay saving. The wise thing to do is to actually use this monthly repayment ahead of time. For example instead of the loan for the holiday at the end of the year, how about saving that same exact amount of money per month from the beginning of the year? Go for holiday debt free. Don’t struggle paying for the holiday after the fact. That will also show you how much holiday you can actually afford. The monthly repayment can cheat you into going for holiday you really can’t afford. How about saving for the car we talked about for just one year with that same repayment? It would mean that you would only need to borrow a portion of it hence less costs, less interest. You save for three years and you can literally buy it in cash.
In most places, do you know what buying in cash gets you? Better prices. So instead of paying one million shillings you may end up paying Kshs 900, 000. You have a car that you know you’ll want to replace in two to three years. Save now. When the monthly repayment becomes a way of life, we also tend to make it our motive to earn more money. Many people want to earn another extra thirty thousand shilling simply because they have either over extended themselves and need to make their payments or that they want a gap to go get something else that will cost that amount of money on a monthly basis. That’s not a reason to be paid more. Your motive for more should be because of the value you provide and it should give you ability to grow actual wealth (Click to Tweet). So don’t live your financial life only through the eyes of monthly repayments. As much it may be convenient do not let it become dependence and control your life.
Want to continue the discussion on how you can buy that car without getting a loan? Check in at the Centonomy 101 Class. Registration is ongoing for the class starting on 7th June 2016. For more information, and to register: call 0700 036 433 or email email@example.com
Waceke Nduati-Omanga runs programs on Personal Finance Management and Entrepreneurship.