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Why I Spend More Than I Earn But it Doesn’t Lower My Net Worth

by Eric on January 5, 2009

According to Mint, my favorite budgeting software, I spend more than I earn. I was worried about this for a little while, until I realized something about Mint’s spending tracking.

I put about $300 per month into loans. My minimum loan payment on my car is $220 and my student loan minimum payment is about $30 (interest only). I pay $300 per month into each.

Minimum loan payments are designed to make the bank the most money possible for the life of the loan. I pay more to lower my payments. While it tightens up my cash flow, I think it is worth it because it saves me money.

Making early loan payments is one of the only ways you can spend more money to save money in the long run.

This is one of the only times you will hear me say that spending more is better. If you pay off your loans early, you will save money in the long run and have more cash to spend (or save) later in life.

UPDATE: After the first comment on this post I realised that I might be sending the wrong message here. I do not condone spending more than you earn. I do not consider loan payments “spending”, though I use those payments in that context here. I can only sustain this aggressive loan payment plan because I built up big savings working before I started school. DO NOT SPEND MONEY YOU DO NOT HAVE! If I had to put anything on credit that I could not pay off, I would cut back on my loan payments to the minimum or cut my overall spending.

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  • Eric

    So where does the extra cash come from?

  • Eric

    I have a substantial savings for school that I am slowly digging in to. I am paying for about half of tuition out of pocket and the rest in loans. I am paying those loans very aggressively, as the post explains. I would rather have less savings and less in loans than sit on a bunch of cash and pay interest to some bank.

  • dale

    I think it’s just a semantics thing, but debt repayment is the same as new spending. You “spent” the money when you purchased the car. You just spent someone else’s money and now you’re paying it back. The same with the school loans.

    In your situation’ “I have a substantial savings for school that I am slowly digging in to”, it makes sense to prepay your auto loan. For others who do not have “substantial savings”, it may be more conservative to bank the overpayment in a savings account and build an emergency fund. Once you pay the lender you can’t get the money back. True, you’ve reduced your debt and saved some interest expense, but if you need cash you’re better off having liquid savings as opposed to a prepaid loan.

  • Eric

    Dale, I look at it more like accrual accounting.

    I already made the purchase and it has already made the impact to my net worth. As I pay it off, my net worth stays the same. Only the interest in new spending, and I pay aggressively and twice per month to minimize interest over the life of the loan. I have already saved over $600 from early payments in the last year and a half on my car loan.

    I agree that people without savings should make minimum payments on a fair term loan to keep emergency liquidity in case something comes up.

    Thanks for the comments. You are welcome to comment any time.

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