Monthly Payment thinking (know what you are spending)

When making purchases or saving money it is best to know the true cost or benefit.

When purchasing a car, for instance, the salesperson will often try to discuss the cost of the car in terms of monthly payment.  Such as, "if you add feature x your payment only goes up $10".  Make sure that you are considering the true cost over the length of the loan including interest.  For example if you were planning on paying for the car with a 60 month loan at 2% interest the total cost is about $630.

When purchasing a house, especially when building a new house, it is easy to fall into the same trap.  When something is spread out over 30 years, the monthly payment doesn't seem that large.  Check out the following example.

You are taking out a $150,000 30 year mortgage on a house at an interest rate of 4%.  You decide to add $6,300 to the loan so that you can make some upgrades to the house.  Over the course of the loan the $6,300 is going to cost you about $30 a month or about $10,800 in total over the 30 years.

So, if you decided that you could wait for the upgrades until you saved up enough money you would be paying $6,300 for them instead of $10,800.

If you decide that you can live without the upgrades and instead invest the $30 a month in an investment earning 6% a year you will have a little more than $30,000 dollars at the end of your 30 year mortgage.

So, when buying a large ticket item always be aware of the total price and don't just focus on the monthly payment.  Similarly, when investing, know that even small increases in your savings can provide you will a big payoff down the line.