The Installment Thinking Trap | Example: Your Monthly Electricity Bill

The Installment Thinking Trap | Example: Your Monthly Electricity Bill

Beginning in the late 19th century consumerism was revolutionized by a simple yet powerful concept; the installment plan. Prior to that, for the most part, if you wanted to buy something you had to have the money to pay for it outright.

Fast forward a hundred years or so and you find a completely different consumer mindset. Now the question in people's minds is not so much "how much will this cost?" but "what's the monthly payment?"

The $300 per month Houston electricity bill doesn't sound as scary as the $3,600 per year electric bill. $150 a month for your iPhone? That's doable. But $1,800 a year? It hurts a little more to think about it that way.

Unfortunately, this mental trick we use not only causes us to overspend but it also reduces our motivation to take obvious steps to lower our expenses. After all, a monthly savings of $30 or $40 doesn't sound so impressive to us.

If a friend called you and offered you $400 cash to drive them to the airport you would probably be more than happy to grab your keys and jump in the car. Friendship aside, $400 cash for an hour or so of your time sounds pretty good.

Yet most people yawn if you tell them in 5 minutes on line they can switch their electricity provider and save $80 a month. That's $960 a year! And $960 the year after that! Human nature is a funny thing.

Here is a new mental trick to use. Don't ever look at an expense in terms of monthly payments again. To really put your expenses in a better perspective look at everything as an annual expense. Pretend you are being asked to pay for everything a year at a time.

Take the electricity bill example from above. If you are lucky enough to live in Texas you have the option of choosing the cheapest electricity company. Here are your options:

Continue with your current provider and pay $3,600 for electricity this year.

Switch to company B and pay $2,000 for electricity this year.

Switch to company C and pay $1,600 for electricity this year.

The answer is obvious and would make you $10,000 richer over the next decade. Planning to retire in 25 years or so? This one obvious decision would add over $48,000 to your bank account if you invest the savings at a modest 6%.

Apply this same thought process to all your expenses and you can revolutionize your own finances.

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