Why ‘It’s Only $X per Month’ Is Disastrous Financial Thinking

Recently, my wife and I have been shopping around for a car to replace our 2004 vehicle, which has over 200,000 miles on it and a host of repair issues starting to pop up. At one point during this process, we found ourselves at a dealership and we overheard a financial representative talking to a customer while we were waiting.

Part of the representative’s pitch to this customer involved looking at different financing options (something I’m glad that we’re able to avoid, because we’re simply paying cash for the replacement). The finance person was clearly nudging the customer toward a long-term finance package and was pitching it hard because the package was “only $350 per month.”

Only $350 per month.

At a quick glance, particularly if you’ve never really thought too much about your finances, that might not seem too bad. The average American household brings in about $60,000 per year, which, after taxes, amounts to about $1,000 per week that’s brought home. That means that the $350 per month is actually less than 10% of that income. It doesn’t seem that big in comparison, right?


The idea of a relatively low monthly cost makes it easy to get yourself hooked up to expenses that you really can’t afford over the long run, not because of the individual cost, but because monthly expenses really start to pile up over time.

Let’s say that family signs up for that $350 a month bill for the next six years for that car.

They’ve likely also got a mortgage or rent. Let’s say that’s $1,500 a month.

They’ve probably got a monthly electric bill. Let’s park that in at $150 a month.

They’ve all got cell phones. Let’s park that at another $150 per month.

Maybe they have cable television. On average, that’s another $100 per month.

If they’re feeding their family of four even at the basic minimal USDA food costs, that’s another $500 or so a month.

So, before they even agree to take on this car, out of the $4,000 they’re bringing home, they’ve already locked into place at least $2,400 a month in required expenses that can’t really budge. That doesn’t include things like minor emergencies, insurance, gasoline for their car, car maintenance, home repairs, property taxes, clothing, extra little purchases, and so on, which is covered by the remaining $1,600 a month.

On top of this situation, they want to stack on another $350 per month. What will that change? Suddenly, things like minor emergencies, insurance, gasoline for their car, car maintenance, home repairs, property taxes, clothing, extra little purchases, and so on now have to come out of only $1,250 per month. They’ve lost about 25% of their monthly breathing room in their budget to afford this car.

What that means is that there are either going to have to be some real lifestyle changes or they’re going to start sinking into credit card debt.

This situation obviously makes it harder than ever before to save for things like retirement or for your children’s college education. You’ve just cut your budgetary breathing room by 25% – that doesn’t leave much room for that kind of future planning. For most American families, retirement savings just doesn’t happen in that situation, and it’s disastrous.

There’s another problem, too. They’re now signed up for a minimum of $2,750 a month in expenses. In order to keep the lights on, a roof over their head, food on the table, and to get back and forth to work, the family must be earning at least $40,000 per year, minimum.

What happens if there’s a job loss? It’s very likely that, in this family, a job loss means that things go into panic mode very quickly. This is a situation that’s likely in “paycheck to paycheck” mode – remember, 78% of Americans are in “paycheck to paycheck” mode.

So, not only would this family be thrown into chaos, the replacement job now has to be making more than it would before buying this expensive vehicle in order to make ends meet and not start losing things.

In short, that extra $350 a month is an extra shackle. It becomes even more risky than ever before to lose your job or to do anything that would risk your job, because you need it to keep things going. If you lost it, there are fewer jobs that could keep things going for you. Your boss probably knows this, too. You can’t really consider a career change because you need to have that money coming in, too.

All of this is stressful. You’re now making tougher and tougher financial decisions every day of the week. You have 25% less flexibility in your monthly budget. You have a little less freedom and a little more tension at work.

Here’s the truth: the pathway to financial success involves avoiding “$X per month” expenses. You want your monthly required expenses to be as low as humanly possible. That way, you have enough flexibility in your budget to easily pull yourself out of debt and to start saving for the future.

So, how do you do that?

You drive your car until it’s in need of a number of repairs, and then replace it with what you can afford. Do everything you can to get out of the cycle of making car payments, starting right now. It starts with the car you’re currently driving. Drive it until you’re no longer making payments, then keep driving it until it’s ready to fall apart. If you’re on a lease, get out of that lease when you can and move into a situation where you can own some sort of car without payments on it.

You live in a small place that you can easily afford. Don’t live in a giant apartment or a huge house. Most of that space is just used to store stuff that you’ll rarely use anyway. Live in a smaller space instead. That will come with a smaller mortgage or a smaller rent check, depending on the the financial path you’re on.

You extract yourself from as many subscription services and monthly bills as possible, or cut their costs as low as possible. Your cell phone is a monthly bill. How can you cut that monthly bill? Maybe you can go to a different data plan, or switch carriers. Your electric bill is a monthly bill. How can you eat up less energy consistently? Maybe you can switch to LED lights and leave your thermostat off. Your cable bill is a monthly bill. How can you cut it? You can try cutting the cord entirely and just watching over-the-air television or Netflix (which is another monthly bill, but a smaller one). How many other little monthly bills do you have that you really don’t need? Scour your credit card and bank statements to see what you’re missing.

You start using that money you’re saving to pay off debts, starting with your credit cards. Debts are monthly bills that you can make disappear with some consistent effort. Credit cards are the worst offenders, as they have a high interest rate, so credit cards are always a good place to start. Start with focusing on your highest interest credit card; make minimum payments on all of your debts, then make the biggest extra payment you can on your highest interest card. Once it’s paid off, move on to whatever becomes your highest interest debt. As each one is paid off, your monthly required expenses will go down.

You build an emergency fund. One of the easiest ways to fall right back into debt is to have an unexpected crisis. Your car doesn’t start. You need to fly home for a family emergency. Your furnace goes on the fritz. Your washing machine dies and leaks water all over the basement. Those are ordinary events, unexpected and financially painful but not out of the ordinary. Such events, however, can force you deeper into debt, undoing your progress. A better approach is to have a cash emergency fund – an amount of cash set aside in a savings account for just such purposes. The easiest way to do it is to talk to your bank and set up a small automatic weekly transfer from your checking to your savings. That way, the emergency fund will automatically build without any worry and you can tap it when you need it.

Once the worst of your debts are gone, you start saving for upcoming future expenses. You’re going to have to eventually replace your car, right? Start saving for it now so you don’t have to fall back into that “only $X per month” trap. Put aside a “car payment” into savings each month with the intent of using all of that savings to buy a car when it comes time.

Don’t let yourself fall into the “it’s only $X per month” trap. Try to keep that monthly amount you’re required to spend as low as possible, so that you have the flexibility you need to easily handle a job loss and to prepare for your future. It’s also far less stressful.

Good luck!

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