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Thinking in terms of monthly payment can cost you big

As part of the credit generation, many of us are living on the edge with our finances. We've been conditioned to think of major purchases in terms of monthly payments, to borrow money instead of saving up for the big-ticket items in advance.

The lifetime cost of this habit can be huge.

Consider a $30,000 car purchase: If you financed it for $410.06 a month at 4-per-cent interest over seven years, your total cost to buy the car would be just a tick under $35,000 after factoring in the interest. If you saved up for it instead, earning a bit of interest as you did so, then the out-of-pocket cost would be closer to $29,000. That's a $6,000 difference.

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Let's say you took the $410.06 monthly payment for financing the car and instead put that into a high-interest savings account. With an interest rate of just 1.5 per cent, it would take 5 years and 10 months to accumulate $30,000.

If you really do think in terms of monthly payments, then by financing, you're committed to that payment for seven years, whereas it would take less than six years to save up in advance. If you just look at the total out-of-pocket cost for the car, it's $34,445.04 to finance (84 months x $410.06) and $28,704.20 to save up in advance (70 months x $410.06).

Of course, in the real world, it's not quite that simple. Anyone looking at the above figures would clearly see the benefit of being a saver instead of a borrower. For those who are already spending every cent that's coming in the door (and sometimes more), how do you make that switch from financer to saver? How do you delay purchasing a car for five years when you need one today?

Planning, discipline and delayed gratification.

Like getting more physically fit, saving requires hard work. If it was easy, everyone would have a six pack and everyone would have more income than expenses. No one is going to flip the switch for you. You have to want it.

And while there may be some people who really need a new car today, there are more people who can delay the purchase for a few years. You could get a less expensive car for now and put away the monthly difference until you could pay for the car you want in cash. There's no law that says your next car always has to be nicer than your last one.

We don't need to limit the conversation to cars. We could be talking about a new stereo, a vacation or any other big-ticket item. Anything you are financing is fair game.

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The best way to start is to start small. Take baby steps and open up a high-interest savings account with a $50 pre-authorized contribution on the days you get paid. After a few months, if you don't feel a pinch, increase your savings amount.

The recipes for physical fitness and financial success are both basic but hard to stick to: No pain, no gain.

Preet Banerjee is a senior vice-president with Pro-Financial Asset Management. His website is

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About the Author
Personal Finance columnist

Preet Banerjee is a consultant to the financial services industry. You can follow him on twitter at  @PreetBanerjee. You can find his conflict of interest disclosure on his website. More

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