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Finding Financial Freedom


Finding Financial Freedom Through Small Decisions

Do you value freedom?

Debt decreases freedom.

Savings increases freedom.

This concept is relatively easy to understand. But it’s incredibly hard to put into practice. The world around us is constantly bombarding us with stuff to buy. Within 10 minutes of browsing our favorite social network, we’ve seen a bunch of ads specifically targeting us. The brands know who you are, what you like, and spend millions of dollars placing carefully designed ads on your timeline. They even track you from one platform to the next. You’ll see ads on Instagram and later on Facebook. They do whatever they can to get your business. And the reason they do it is that it works. This isn’t necessarily a bad thing, but it does play to our impulses.


Recently I was online shopping for some much needed new clothes. I loaded up a few items in my cart and began the checkout process. I love how easy it is to buy things online. Just a couple of clicks and you’re done. Two days later, the products arrive and you’re ready to go. It’s an amazing time saver and I find it much more enjoyable than driving to the mall or any other brick and mortar store. This time, however, I saw something that I hadn’t seen before: the clothing company offering to finance the purchase of my clothes over 18 months. The advertisement said that the loan was interest free for 12 months and then the rate jumped up to some much higher number in the last 6. They also bragged that getting approval for the loan took only minutes and that “most people are instantly approved.” My first thought was that it was completely insane to finance two dress shirts, a pair of pants, and some boots. The more I thought about this concept, the more it bothered me. Of course I wouldn’t finance clothes. That’s ridiculous. And my guess is that most of you wouldn’t either. Unless you have a serious addiction to buying stuff.

Debt, however, is a massive problem in our society. I don’t think we analyze debt in the appropriate manner. People take on debt for loads of different things: clothes (as I recently discovered), furniture, appliances, vacations, recreational vehicles, cars, school, healthcare, homes, and much much more. Some of these are actually understandable, paying for school and a home is often considered “good debt.” Taking out a loan for furniture, a four-wheeler, or even a car is often a very silly thing to do and has negative financial consequences. Let’s call those types of loans “bad debt.”

When we are faced with a situation in which we are considering taking out a loan to purchase an item we usually think about two things:

  1. How much do I want the item?

  2. Can I afford the payment?

I don’t think this is the right way to analyze the situation. Let’s take a look at a hypothetical situation.

This person, let’s call him Mark, has an income of $3,500 per month after taxes. This is his “take home pay.” I’ve created a list to show his budget.

Let’s assume that up to this point Mark had been an extremely diligent saver and had managed to save $20,000.00

Assuming that’s all he’s saved, Mark has a Net Worth of $20,000, that increases by $700 for each month that he stays on budget.

In this (extremely simplified) budget Mark has a surplus of $700 at the end of the month. That’s great! Now, let’s say that Mark decided that he needed a new car. Maybe his car even broke down and he really needs a new one.

Here’s how Mark is thinking about the situation:

  1. How much do I want the item? ✅

  2. Can I afford the payment?

He has a few different options. He can pull some cash from his savings account and pay for a car. You can get really good cars for about $5,000. Or he can finance a car. If Mark understood the concept that “saving increases freedom” he wouldn’t spend a ton on a car. He would value saving money over spending it. If he didn’t realize this, he would think that he can afford any car as long as the monthly payment wasn’t greater than the $700 that he has left at the end of the month.

Mark decides to go down to the local dealership and check out the new cars. He falls in love with one of them. He works with the salesman and ends up realizing that he can “afford” a $40,000.00 car because the monthly payment is ~$645.00. The salesman shows him ratings on the car, convinces him to purchase it, and now Mark is the proud owner of a brand new car. It fits into his budget, even accounting for gas and insurance.

  1. How much do I want the item? ✅

  2. Can I afford the payment? ✅

But what Mark doesn’t have anymore is freedom. Here’s why:

He’s financed a car over 6 years and will end up paying much more than the $40,000 sticker price. The new thing to do is finance a car over 6 years!

When he finally owns the car, it’s likely to be worth less than he paid for it. This is called depreciation.

His Net Worth would have changed by:

NW = 20,000 - (total cost of car + total depreciation)

NW = 20,000 - (46,382 + 27,528)  

Net Worth = -$53,910

Had Mark made a better financial decision, he would have settled on a much cheaper car, and decided to put some of his $700 to work.

Best case is that he pays cash for a car and invests the rest into an investment account. Assuming the investment account generated approximately 5% annualized returns, in 6 years,

His Net Worth would have changed by:

NW= 20,000 - (Cost of car + total Depreciation) + Investment account balance

NW = 20,000 - (5,000 + 3,441) + $59,992

Net Worth = $71,551

Let’s say he even financed a car that cost $15,000. Assuming his payment is $250 per month, he’s still have $450 left. Assuming Mark made the decision to invest that $450 into an investment account, and the investment account generated approximately 5% returns on an annual basis, he’d have $38,566 amount at the end of 6 years.

His Net Worth would have changed by:

NW = 20,000 - ($17,543 + $10,323) + $38,566

Net Worth = $30,700

(Note: the car is being excluded from the Net Worth calculation because they depreciate rapidly, and most people don’t liquidate their cars without replacing them)

The impact that financing a car has on finances is absolutely incredible. But what’s more incredible is the benefit that the compounding interest had on his net worth. Mark saw an increase of 300% in his net worth just by purchasing a cheap car and investing the rest. Obviously we know that markets don’t always go up by 5% per year. Sometimes the returns are lower than that, sometimes they are higher. The S&P 500 has averaged over 10% per year from 1926 through 2018. We have an enduring belief in the power of markets and we want to align our interests with those powers.

We shouldn’t think of “how much payment” we can afford, instead we should be thinking instead of the long term effects that our purchases can have on our freedom.

Debt decreases freedom.

Savings increases freedom.

We would love to help you start on your journey towards financial freedom. Click here to schedule a free 30-minute consultation with our Financial Planning Team.