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Budgeting Essentials Blog

Helping you master the practical essentials of Budgeting, Cash Flow, Accounting and Debt Relief.
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Put more money in your pocket - by not paying interest

One cost savings area that small businesses miss is borrowing money and paying interest on their equipment purchases.  While it may seem convenient to borrow the money, there is a cost you have to consider.  This is where you can put more money into your pocket.   Learn more in this week’s blog.

“Conventional” wisdom teaches business owners that paying interest is a “normal” business expense that you should expect to pay.  But, is interest really an expense that you must have in your business?  How are you supposed to pay for your large purchases?

When you examine the process that leads to paying interest, it typically goes like this. You need to make a big ticket purchase for something you need for your business, such as a piece of equipment. You don’t have sufficient cash flow to pay for it outright, so you borrow the money.  Then you are obligated to make payments on the loan for the term that you agreed to.  If you miss a payment, the lender has the right to come and take your equipment away.  Ot they can take you to court. 

Hopefully you negotiated a good deal, because when you add in the finance charge (interest) you could be adding up to 73% or more to the total price of the purchase1 over the life of the loan.  Some vendors even present you with the payment amount instead of the purchase price.  This scenario applies to a lower monthly payment over a longer period of time, which means more money for the lender in interest paid.  If you don’t know to ask about the terms or are in a bind to get that loan, you could accept that payment without thinking about what it really means to you.  By the time you are finished paying for the first piece of equipment, you have almost paid for another one.  And the first one that is probably nearing its replacement time.  In terms of dollars and cents, you get taken to the cleaners.

This is a mistake that both consumers and business owners are making with their purchases.  Many people are never taught about this.  Often if they find out about it, they are already deeply in debt and don’t know how to change their situation.  The banks, vendors and credit card companies are making money this way, so they are not going to say anything.

So what can you do so you don’t have to pay interest?  The key here is preparation.  Instead of making the payments to the bank or the credit card company, start making the payment to yourself.  You can estimate how long your equipment is going to last.  You also have a pretty good idea what the replacement item is going to cost.  Armed with that information, you have what you need to calculate how much you have to put away every month.  Now, when it is time to make your purchase, you'll have the money put away to complete the deal. 

If you need $6,000 in 60 months, you put away $100 every month.  Put it in a separate account and designate it for that purpose.  You are going to have to be diligent about this.  If you use this money for anything other than replacing your equipment, you won’t have the funds available when it comes time to purchase your new equipment.  You can use this same procedure when you need to purchase anything new.  Put the money away before you make the purchase. 

A great time to review these funds is when you are preparing your annual budget.  Priorities can change, as well as technologies and prices.  Make sure you have enough to meet your needs when they come up.  These procedures save you from having to pay interest, so you can put more money in your pocket.  At the same time, you will have the funds available to make your capital purchases when you need them!

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God Bless your week!

 

1 On a $5000 loan at 24% for 60 months, the total payments equal $8,630.38 (172.6% of the loan amount).  This is the equivalent of putting the purchase on a high interest credit card and making sure you pay it off in 60 months.

 

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© 2019 Dan Heiland 2019 Kat Heil, LLC

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How do I keep myself encouraged?
Don’t condemn yourself for borrowing.

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