Have you ever asked yourself why there always seems to be too much month left over at the end of the money? This article attempts to explain that monthly crisis by exploring how we have been lulled into thinking in terms of "monthly" instead of "total" cost.

Actually, the monthly phenomenon has more to do with compound interest. So the question really becomes, do you have compound interest working for you or against you?

"Easy Monthly Payment" Scam

Have you ever noticed that car dealers always ask something like, "how much did you plan to spend per month"? That is not meant to be a friendly introduction, though that is how it comes across. Rather, by design it is a sales technique because the car does not cost $20,000. It only costs $385. That's it. No strings attached. Just $385... for the next 60 months.

I was a retail manager for many years. The greatest pitch offered was a standard refrain, "anything in the store is yours today for just $39.00." We did not say, "per month". We did not say "forever". We simply said an amount.

When you see a written or video ad, which price is plastered in huge, bold print. Is it the total price or the monthly amount? Obviously, it is the monthly especially if the retailer or dealer does his own financing. Selling money is a very lucrative business. (See Credit Cards Dirty Lil Secrets.)

The merchant lists the total price only because the law says it has to be there. But it is usually off lurking in some small corner nearly invisible. And mention of the monthly payment stays away from such naughty words as "price", "cost", or anything else that smacks of anything other than "easy payments".

It is all based upon the same monthly scam that you can still afford it even if you don't have all the money. Ask yourself if that really makes sense. Is it truly based upon sound judgment or is it based upon instant gratification? Then why do we do it?

We do it because we have been brain washed to think not in terms of total cost but "easy monthly payments". The thought process goes something like this: "Well, let's see. This bill will be paid next month. That frees up $22.50. And that pay raise is another $15. And if I can just squeeze another $7.50, I can buy it... I'll do it!"

I know,I've done it and so have you. This is how we think because this is how we have been trained to think and the retailer and creditor knows it. We put ourselves into their clutches, because that is what we have been taught to do by the system.

Affect of Compound Interest

When asked what was the most powerful thing he had ever witnessed, Albert Einstein's absolute genius responded simply, "compound interest." Here are two scenarios that illustrate the hallmark of his comment.

A $2000 sofa financed at 19.8% interest with minimum monthly payments will take 31 years and 2 months to pay off and you will pay more than $10,000. The interest alone robs you of $8,202 that you sweat for decades to earn. In fact, you will have to earn about $12,000 gross to net $8202 for the interest just so you can have your $2000 sofa. What could possibly be worth paying 5 times its value?

But it gets worse. If you were to put that same $8202 of monthly payments into a 10% mutual fund over the same 31 years, it would yield $45,540 in personal wealth.

Similarly, let's say you regularly buy a new car and pay $300 per month. If you do that for just 1/2 of your working life or twenty years, you will be giving up money that if invested at 10%, would build to $227,810.65. That amount would generate $1,936.39 per month for the rest of your life.

This is the power of compound interest. You can either have it working for you or against you. It's your choice.

Is It Necessary?

Is it necessary? I don't know. How's your financial future looking? Do you really appreciate paying 5-6 times the value of something? Is it really worth juggling the monthly payments, month after month, year after year? If it is, fine. Keep on keeping on.

But if you are tired of the scam, if you are tired of having your future wealth stolen from you, if you are tired of sweating your life away just to fatten the bottom line profit of the finance company, then repeat to yourself, "if I can't afford to pay for it in cash, I can't afford it." We need to memorize it, stamp it on our forehead, and ingrain it into our every fiber. Beat the monthly payment scam by getting out of debt and paying cash.

How Much is "A Ton Of Interest"?

Everyone knows that when you have a mortgage, you will pay a ton of interest. So exactly how much is "a ton of interest". If we stretch out our mortgage to its contracted length, we will have paid about 3 times the value of the mortgage in interest.

For example, to purchase a modest $100,000 home we will have to earn enough to cover taxes. So we will need about $400,000 gross to have $300,000 net, to pay $200,000 in bottom line profit (interest), so that we can live in our modest $100,000 home. What's wrong with this picture.

That means we have to work like a slave for decades, just to fatten someone else's pockets. Meanwhile our wealth will be siphoned away-- money that we could be investing to develop additional wealth for our family.

Admittedly, a mortgage is the only way that most of us can buy a home. But we certainly do not have to drag it out any longer than necessary. In fact, in other articles you can learn how to pay off your mortgage in the shortest possible time. (See Debt Destroyed By Magic Bullet.) But for now, let's just recognize the cost involved if you don't pay it off in advance.

A 30 year mortgage for a $175,000 home at 8% has a monthly payment of $1500. With 25 years to go, the monthly interest on this loan is about $1390. That means your "friendly" financial institution just charged you $1390 for the use of their $110 that month... and its legal.

If you think I'm kidding, look at your payment or ask the bank how much is going to interest and how much to principle; or check out the following examples.

30 year 08% mortgage after 15 years, the monthly interest is 77%
25 year 07% mortgage after 05 years, the monthly interest is 91%
20 year 10% mortgage after 10 years, the monthly interest is 73%
30 year 09% mortgage after 20 years, the monthly interest is 63%

If you have not already concluded that a mortgage is a bad thing, look up the term "mortgage" in the dictionary. It is a derivative of two Latin words, mortuus meaning "Death" and gage meaning "Grip". It is a "Death Grip".

Clearly I am not saying do not buy a house. What I am saying is get that mortgage paid off! Even if you just add a little extra against the principle each month, the results can be staggering.

Readers will probably be interested to know Mike, the author of this article, also offers a free debt elimination mini-course via e-mail. You can enroll at Debt Free In 7.5 Years.

Author's Bio: 

Mike has been an Internet Guide/Writer in the field of Credit/Debt Management for over 10 years. His site was awarded Best Of Net by Forbes Publication from 2000 to 2005 with site visitation doubling to over 500,000 average views per month in the last year.

He has also offered debt elimination seminars to businesses and community colleges for the last 9 years, and has written for several publications, and has been interviewed on the radio a number of times.