Conventional thinking says that when we buy something, we either pay cash, or we finance the purchase by using credit, or a loan. We understand that there is a cost to financing; the interest we have to pay in order to use someone else's money. What we don't realize is that there is also a cost to paying cash.
When we use cash to make purchases, we save our money in an account until there is enough to make the purchase - a car for example. While we are saving, we are earning interest on our money and the wonder of compound interest is that we earn interest on interest which causes our savings to grow more quickly than if interest was earned only on the principal. However, once we withdraw our money from the bank to make a purchase, that money is no longer able to earn interest, forever! And the cycle repeats. We save and then spend, each time losing the compound interest that we could have earned. Rather than borrowing from the bank, when we use cash, we are effectively borrowing from ourselves.
Let's take a look at an example to see just how much cost is associated with one buying decision.
Let's say you want to buy a new TV and the one you want has a purchase price of $1000. Notice I didn't say "costs $1000". Assuming you have $1000 in a savings account that is earning 4%, what would the value of your account be in 30 years when you retire?
If we use a future value calculator we can see that if we had not spent our money on the TV but let it grow, it would have grown to $3243! That's compound interest in the amount of $2243. That is the amount of money we gave up, that we could have had, if we had not made that purchase. This is called Opportunity Cost, and that is the cost associated with paying cash.
So when we buy something, we either pay interest or give up interest. Either way we are financing.
That is why the truth about money is that we finance everything we buy. What if there was another way? What if there was a way to make purchases and not give up the interest you could have earned allowing your money to grow as if you had not spent the money. Interested? I can show you how.
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