The consumer instalment trap, and one rule that keeps you out of it
A woman earning 10,000 a month liked a handbag priced at 15,000. She couldn't afford it, so she took it on instalments. A year later the payments were done and the bag sold second-hand for 7,000. She paid for a whole year for something that lost half its value before she'd finished paying. Every consumer instalment takes this shape, and this lesson is about seeing it before you sign.
What you'll have at the end
A list of what's reasonable to pay in instalments and what isn't, one rule to apply to any coming purchase, and a question to ask yourself before signing.
Step one: understand what's being sold to you
What instalment companies and their apps sell is instant gratification: have the thing today and postpone the pain. And the pain is postponed cleverly: "no deposit", "first payment in three months", "pay later". At the moment of purchase nothing is deducted in front of you, so your brain works as if the thing were free. A card hides the sting of paying; instalments hide it, delay it and multiply it.
Step two: separate what lasts from what melts
Not every instalment is a mistake. The dividing rule: does what you're buying hold its value or earn you something, or does it melt?
Melts: a phone (half its value in a year), clothes and bags, restaurants, holidays and trips, luxury furniture. A new car loses about 20 percent in its first year and 40 to 50 percent after three, while its instalments carry on unchanged.
Lasts or earns: a flat you live in instead of renting, a tool you earn with, training that raises your pay, a fridge to replace the one that died.
Ads inviting you to "pay for your summer holiday in instalments" or "split the cost of your dinner" are asking you to pay for a year for a week that's already over. The trip melts on its own day.
Step three: apply the cash rule
If you can't pay for it in cash, it's outside what you can currently afford. That is the rule, in full. You buy what you want, after you've saved the price. A phone at 4,000 AED, save 700 a month for six months, then buy it and walk out of the shop with no instalment chasing you. The difference between you and the person who split it is that you'll own it, and they'll still be paying.
Step four: ask the question before you sign
Before any instalment contract, one question: how will I feel about this payment in six months, when the thing is ordinary and the payment is still coming out? People who answer honestly rarely sign. And a second question if you sign anyway: what share of my salary do all my monthly instalments come to after this one? Above 30 percent is danger, above 50 is not being able to cover food and rent, and lesson 3.1 showed where that ends up.
Step five: shut the door on the offers
Delete the instalment apps from your phone. Unsubscribe from offer messages. Don't keep your card details saved in any store. Willpower is a limited resource, and an offer that never reaches you needs none.
Where most people trip
On the thing you "genuinely need". The washing machine dies, the phone breaks. This is where the emergency fund from lesson 3.1 works, and the next module finishes building it: you buy from it in cash and refill it. If it doesn't hold enough, the cheaper stopgap, second-hand or smaller, beats two years of instalments on the newest model.
Tonight's exercise
Write down the last three things you bought on instalments. Next to each: what it's worth today if you sold it, and how much is still owed. The difference is the price of instant gratification, and seeing it once is enough.
Questions I get asked
My husband wants a new car on instalments and we're in emergency mode.
A three-year-old used car has lost half its value and not half its life, and can be bought in cash with what would have gone on the new one's deposit. Show him the number, not the opinion.
Small instalments through apps, 200 or 300 a time, are they a problem?
They're the most dangerous kind because they don't look like one. Five small ones are 1,500 a month you can't remember the reason for.
I bought something on instalments and regret it, should I sell?
If what's still owed is more than it's worth, sell it and close the balance from the surplus. Losing once is cheaper than paying for a year on something you don't want.
Log what you're saving for the phone or the washing machine as a dated goal in Fawatery, and watch the amount complete month by month instead of becoming an instalment
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Based on: "Do debts destroy you or make you a millionaire?" and "The traditional road to wealth, wealth books summary".
That's the end of the debt module. You know what you owe, in what order to clear it, and how not to come back. Module four builds the thing that makes instalments unnecessary in the first place: the emergency fund.