Most people think about money in terms of affording a monthly payment. However, asking, “Can I afford this monthly payment” is the wrong question, and it is the wrong way to think about money.

Actually, I think it is a bad habit, and people are created by their habits. Don’t believe me? People wiser than me think that habits are important, too. Here is an example from a quote I often use before most of my financial talks I give to my residents and student (that is often mistakenly attributed to Aristotle). It says this,

We are what we repeatedly do. Excellence, therefore, is not an act, but a habit. ~ Will Durant

Lawrence B. Keller

Of course, the point here is that it is no accident when people become excellent. It is built from habits hard-wired into their systematic decisions. Their excellent nature is built from the ground up by good habits that end up defining them.

One habit that I am in the business of breaking is people viewing money decisions in terms of whether they can afford something based solely on their monthly budget. Many people rationalize bad financial decisions by saying, “I can afford the monthly payment”. This post is here to debunk this false thinking.

Losing The Forest for the Trees

We can’t lose the forest for the trees when it comes to money. Any long time reader will know that I am a big proponent of taking a big picture view of personal finances. It must be the philosopher in me.

In fact, I encourage every single person to sit down (with their significant other, if they have one) and to go through the Three Kinder Questions to paint a very broad picture of what is important to them in life.

Otherwise, you are hoping that your life will magically (and coincidentally) end up being what you hoped for someday. Of course, this is a ridiculous thought. It is hard to get to where we are going, if we don’t know the final destination.

I’ve also told people that I don’t personally follow a line-by-line budget. Heresy, you say! Slow down. I still budget. Just not using a line-by-line or zero dollar budget.

We are believers in the backwards budget. Regular budgeting makes me want to beat my head against a wall. I think that – as long as you are on a journey to accomplish your big picture financial goals – you can spend your money however you please.

However, we must always keep our big picture goals in mind with any of our financial decision.

A Hypocritical Example

For example, one big picture financial goal we should all have is to become debt free. When keeping our “debt-free” mentality in mind, we realize that viewing our financial decisions in the monthly cash-flow model (i.e. the “I can afford the monthly payment” model) doesn’t fit this goal.  The idea of a monthly payment means you are in debt.  Getting to the goal of paying for items with cash better fits the big picture goal.

Financing a car is the classic example of this phenomenon.

Instead of looking at the overall price tag of the vehicle and how that will impact your financial future, most people simply look at the monthly payment, and say, “we can afford that!

This is an unhelpful perspective based on irrational decision making. Unfortunately, humans tend to be irrational decision makers. And, as intelligence increases, the more likely it becomes that people can reason their way to a very bad financial decision.

TPP Financed Two Cars

Warning! Many readers from WCI are new to this site. What you’ll find below is my typical transparent and honest picture of my family’s financial decisions. You may cast me off for what I am about to share, but remember my wife and I will be financially independent in our mid-40’s – because we kept the big picture focus on our finances despite what you are about to read. Oh, and we are human. We make mistakes just like everyone else on this broken road to financial independence!

My wife and I have three kids. Back when we got pregnant with our third kid, I was still in my dark-days of financial knowledge (i.e. I was financially illiterate). I knew next to nothing about money.

We had two cars – neither of which could fit three car seats. So, what did we do? We bought a (barely) used-certified mini-van (a.k.a. the swagger wagon) that cost $45,000. And by “bought,” I mean we financed the car.

Two years later, when I finished fellowship and couldn’t pay cash for a car, I used The 10% Rule to make what most people would call a really bad decision. I financed another car. It was one of the small lifestyle creeps that we allowed ourselves with the 10% of the increase in the post-tax pay that I experienced after finishing fellowship.

To be fair (because I always take heat for this decision) – I wanted a rear-wheel drive, four door, naturally-aspirated V-8 sedan with a manual transmission. Oh, and it needed to fit three car seats in the back (Daddy, go faster!). Guess how many cars fit that description in this country that doesn’t cost $100,000?

One. It is called a Chevy SS. And they stopped making it in 2017. Right when I finished fellowship. I wanted to wait to pay for this car in cash, but it was now or never. And, as a car guy, I can assure you that this car is a unicorn. There were only 1,400 cars like mine (with a manual transmission) sold in this country. Ever.

So, I financed my 415 horse-power “grocery-getter” for $45,000. And I haven’t regretted it for a second.

Now, I’ll be the first to admit that this was not a financially prudent decision. It is certainly not what the White Coat Investor recommends about car purchases. Note: I do not recommend that most people finance cars – it is a mathematically bad financial decision!

However, I am a car guy. I don’t travel that much. And I kept my big picture view of our finances when making this decision.

TPP – The Hypocrite?

Ironically, I don’t think buying my Chevy SS is hypocritical because my wife and I will still be financially independent in our mid 40’s. Remember, I am a believer in backwards budgeting. So, as long as we are accomplishing our financial goals (paying for kids’ college education, FI by mid 40s, paying off mortgage early, etc) – I don’t care how the rest of the money is spent.

I don’t like putting people in boxes, and I don’t want to be put in a box either. After all, philosophers don’t fit in boxes (they prefer to think outside of them).

This was the only time I could buy a specific car that most people don’t want to (shouldn’t?) buy used. Not the way that people drive these things. While it is a sleeper, the SS is a muscle car.

You can castigate me for this, but it was a very intentional decision AFTER looking at the big financial picture. I don’t feel hypocritical about this in the least despite being a physician finance blogger. And we won’t be financing anything else from here on out. Ever.

Snowy Weather Hypocrite

Here is when the hypocritical-bad-decision-making part comes in…We live in North Carolina, and it reliably snows 2-4 times per year. Neither of our two cars drive in snow. Yet, I still have to make it to work when it snows, because people need surgery whether it is sunny outside out or a complete black out. Emergencies happen.

I’ve walked four miles in 8 inches of snow because of our car situation. I’ve also had to ask for a ride on multiple snowy occasions over the last two years.

Because of this, my wife and I started losing the forest for the trees. We began to reason our way to our own bad decision by saying, “Well, we could trade in the Swagger Wagon and get a four wheel drive SUV with captains seats that the three kids could still fit in. We can afford the monthly payment

Yes, we could afford it based on our monthly income. But it would sabotage some of our progress towards our goals, which we have previously decided are good goals – like being debt free outside the mortgage in the next twelve months.

Immediately, it became so easy to slip out of what has become a good habit: spending intentionally. We could very easily reason our way to a very bad financial decision.

The individual trees (cars in this instance) started to look so attractive!

A Better Way

Given that human nature has a tendency towards irrational decision making, financial success is usually best accomplished by playing good financial offense and good defense.

The “offense” involves making good money and then saving money automatically so that you will reach your goals without ever seeing the money hit your bank account. Your savings rate will be determined by that big picture we keep talking about (how old do you want to be when you hit financial independence?).

The defense is really the important part, though. We have to protect ourselves from that ability to stop focusing on the big picture. This is one reason to have a solid financial plan! I recommend using the Fire Your Financial Advisor course (here is my review of it) to get started.

We do this by making intentional financial decisions and by working out frugal muscles out. The more often we exercise our frugality on a consistent basis, the easier it becomes to avoid spending money we shouldn’t.

This habit can be built through small acts like bringing your lunch instead of buying it. Or it can be accomplished through big tasks like limiting how much house you purchase by not even looking at houses out of your price range.

Either way, the big picture of our personal finances must be kept in view, and we must avoid thinking about money in terms of monthly budget items that we can afford.

Take Home

It is easy to find ourselves buying things we don’t need because we can. This is why zero-percent financing works. It is the reason that we buy cars we cannot afford. It is also the reason that many high-income earners remain poor, and fail to build wealth. We buy things based on our current monthly income without thinking about how that will impact our future goals.

Thinking backwards is the solution to this problem. Plan your life out first, then set yourself on a path to get to those goals. When things pop-up, remind yourself of why you are doing what you are doing.

Oh, and if you haven’t read the personal finance book for doctors with a 5-star review, click here to check it out on Amazon.

How do you view your finances? Do you view things as a monthly budget item to be afforded? Or do you think about the downstream impact of these monthly financial decisions?

TPP

7 thoughts on “Can I Afford the Monthly Payments? Losing The Forest for the Trees”

  1. Interesting perspective TPP. We took out cars loans out on two BMWs In the last year of residency. The Mrs. had a good 6 figure salary. We loved the drive and the luxurious feel of the cars. What we did not realize was how expensive the maintenance was. If we drove in any sketchy areas, we were concerned about scratches and dents. Finally, as the cars aged…the costs really sky-rocketed!

    When we sold the cars, they were worth less than a similar non-luxury car in the same condition with similar mileage. We now own 2 cars with cash that are non-luxury.

    While I am no fan of car loans/financing, it is hard for me to castigate anyone if they will clearly and reasonably hit their goals.

  2. My former boss bought three of those brand new at the same time. Has them in storage I think. However, I would challenge the idea that used muscle cars are necessarily abused or suspect. I’ve had two highly used high hp to weight sports cars recently and they were bargains. $7,000 used instead of $47,000 new? I’ll take some risk for that even if $47,000 is fairly small change in my world. But I get it, there are things I have given up on buying used for the reasons you stated, particularly off road vehicle and boats. I don’t like being stranded miles from civilization and where we ride and fish there sometimes are no other people around and no cell service.

    • I think the point is to make intentional decisions. It sounds like we are of the same accord.

      Completely understand why you’d take a risk on the $7,000 muscle car! Definitely couldn’t find this car for $7,000. It was only made from 2014-2017. It’s a unicorn, I tell ya 😉

  3. I don’t like adding recurring expenses, so I try not to think of things in terms of monthly payments. It’s whether I can afford the item outright. I don’t know how well that will translate to a new car when the time comes. I’m saving a bit each month and praying the current car (a Honda) lasts as long as people say it will so that I might have the full amount saved by the time I need to buy. But worst case scenario I’ll finance what I don’t have and just make big payments until the loan is paid off.

    I’m glad you got the car you truly wanted. And it seems to have worked out okay in the end, so that’s all that really matters.

  4. Sadly, I have to say goodbye to my 2008 Honda Accord soon and will have to buy a “new to me” car.

    I am not looking forward to it. Unlike you I am decidedly not a car guy (I get it though, I do love my computers) but I do want a hybrid that gets excellent gas mileage and has less than 80k or so miles. I am looking at maybe a Prius. But they are more expensive then I was hoping to spend.

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