Ramit Sethi is one of the few financial gurus who is okay with people spending their money on discretionary items. Some of these purchases may seem like a waste of money, and while he’s okay with it, there are some caveats.
Sethi is only okay with people making those types of purchases if they can afford it, and there’s one common mistake people make that convinces them that it’s okay to bite more than they can chew. He’s talking about people who take out long-term loans with monthly payments, and he’s specifically pointing the finger at people who buy trucks.
“This is not a financial strategy. This is a trap,” Sethi explains.
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Sethi went on to share that he’s talked with many people who are struggling with their finances but somehow have a truck with a loan. There’s a lot of pride involved in that truck, and monthly loan payments make it seem more affordable. Sethi breaks down why this type of thinking is flawed.
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Do You Really Need The Truck?
Sethi angled some of the discussion specifically to people who buy trucks. He mentioned someone who earns $65,000 per year and bought a $90,000 truck with a loan. Sethi said that the person can’t afford the truck even though the monthly loan payments fit in the budget.
The issue with using monthly loan payments in this way is that it takes up space in your monthly budget for multiple years. That’s several years of not being able to invest that money or use it to cover expenses. Sethi explained that he’s had many conversations with people who are in financial trouble because of their trucks and SUVs, but he then pondered if those individuals really need those vehicles.
It’s possible to rent the vehicles instead or downgrade to a used model. He also finds it ironic that some of the same people who criticize women who buy expensive handbags proceed to buy trucks that they cannot afford.
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Interest Will Accumulate In Long-Term Loans
Most people need loans to buy homes and cars, but considering how interest accumulates in lengthy loans can make you think twice before buying something that you can’t afford. All loans are amortized so that the bulk of your initial payments go toward interest.
Sethi explains that you can end up paying thousands of additional dollars by taking out a lengthy auto loan. While 30-year mortgages are the norm for homes, most people shouldn’t be taking out seven-year auto loans.
You can find more affordable cars in the used car market and end up with a loan that has fewer years on it. Car dealers want you to think about covering something within your monthly budget because they can then have you commit to a long-term loan that has lower monthly payments. This may sound good at the moment, but interest payments will make the vehicle far more expensive.
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Pay Off Debt Quickly
A mortgage here and an auto loan there can quickly add up as you make your regular purchases each month. The gravity of debt can feel unsettling for people who are financially struggling, and that’s why it is important to pay it off as quickly as possible.
If you make an additional payment toward your auto loan or mortgage each month, you get to directly reduce the principal instead of only making the amortized monthly payment. After paying off your auto loan, you can use that momentum to pay off your mortgage sooner.
It’s incredibly freeing once you pay off your debt, but you shouldn’t rush to put yourself in debt. Long-term loans restrict your ability to buy other products and services, and you should walk into any big purchase knowing how much you can afford. If you end up with a loan, it’s a good idea to pay it off before it matures.
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