When I went shopping for my first car, I was looking for a reasonably priced vehicle I could pay for on a student budget. The salesman was looking for something else: the biggest commission possible.
As he pushed me towards cars that cost more than I wanted to spend, he kept saying, "The monthly payment would be just $20 more or $50 more or $100 more." Only $20 or $50 or $100? That doesn't seem like that much, right?
And that is exactly why sales professionals take this tactic. From cell phone plans to mattresses to automobiles, almost everything is framed in terms of "low monthly payments." But if you fall into this trap and start to look only at the "cheap" monthly payments, you will likely overspend. Monthly payments add up, taking away from other goals and making you cash-strapped.
The good news: You can outsmart all those salespeople and marketing execs who want to kill your budget. Follow these simple-but-crucial tips to avoid the monthly payment trap and shop smarter.
Sellers trick you into focusing on monthly payments instead of overall cost
You've been there before. A focus on monthly payments is common in transactions big and small:
• When credit card bills come, the bills specify the minimum you have to pay over the course of the month.
• Services provided on a contract — cell phones, cable TV and gym memberships — are often advertised in terms of monthly payments.
• When you buy a house, the bank will lend to you based on how much you can afford to pay for your monthly housing payment, including mortgage, taxes and insurance.
• Consumers are given the option to pay in low monthly installments for many products, including mattresses and home appliances.
• Most financing offers, like for auto loans, are stated in terms of monthly costs.
It's especially common for monthly payments to be the key focus when you're using credit to make a purchase: We've all seen the furniture and appliance ads promising stuff like "three years, no interest," so you buy couches, beds and fridges that you can't afford to pay for right away.
In fact, one of the first questions you're often asked by a salesperson is: What is the biggest monthly payment you can afford? That's a trap. "With that number in hand, they'll calculate the most you can possibly spend and still hit that monthly payment by dragging out the loan for as long as possible," explains Interest.com.
This might mean a car salesman pushing you into a 60- or 72-month loan so you buy a more expensive car, a realtor showing you houses that are affordable with a 30-year mortgage but not a 15-year mortgage (which might be better for you) or a furniture store salesmen suggesting you finance your purchases over three years instead of paying them off in one.
Your best ammo? Ask: "What's the total cost going to be?"
Monthly payments obscure total costs
Make the salesperson "show you the money." That might mean pulling out your smartphone calculator. "Ignoring ... total cost can set you back thousands in the long run," Investopedia explains.
Spending $99 a month on cable TV might seem reasonable, for example, but when you consider that that's actually $1,188 a year and $5,940 over five years — assuming no price increases — you can see that adds up to big money.
Wasting money every month is bad enough when you do it with cash. It's worse if you're using credit cards. The tendency of creditors to offer low minimum balances on credit cards "encourages you to buy things you don't really want or need because you can put off the sting of paying for them until months or years later," writes Investopedia.
This comes at a huge cost: "If you carry an average daily balance of $3,000 in credit card debt, your minimum payment will be around $60 a month (assuming a 2% minimum payment requirement)... If the credit card charges a 15% APR, interest could cost you between $400 and $450 per year," writes Wisebread.
Paying only the minimum until the card is paid off would leave you paying off your $3,000 balance for 16 years! In the end, you'd have paid $3,641 in interest — aka money you could have just kept — and spent a total of $6,641 dollars.
Here's how to change how you shop
Watch out for sales professionals who tend to push you to buy expensive items when you consider only monthly costs.
For example, if you planned to spend $20,000 on a car but you tell the salesperson you can afford $450 a month, the salesmen might show you $25,000 cars that you could afford the payments on with a 60- or 72-month loan, as Interest.com explains. The last thing you need is lifestyle creep.
Remember: Whenever an advertisement offers you a "low monthly payment," multiply that amount by 12 to see how much you're spending over the whole year. If you want to go a step further, and consider opportunity cost, use this calculator to determine how much the cash you're spending on your cell phone or gym membership would be worth if you invested it instead.
If you're going to finance something, always calculate what the total cost will be, including interest. Sometimes your loan paperwork will show you the total. You can also use this calculator from Bankrate to find out how much you'll end up paying in total once interest is factored in.
Finally, if you're shopping for anything —from furniture to cars to houses — decide the total price you want to spend first. Only then should you focus on monthly payments — and determine the shortest financing period that will result in payments you can afford. This calculator can help.
Once you have your maximum budget in mind, don't exceed it — even if you could simply stretch out your loan term or pay "just" $10 more a month.
Sign up for The Payoff — your weekly crash course on how to live your best financial life. Additionally, for all your burning money questions, check out Mic’s credit, savings, career, investing and health care hubs for more information — that pays off.