Last two weeks I decided to move to another apartment and thus I walk and walk onto the outskirts of our central business district until I found one not so far from work. But if previously I used to just walk to and from work, now I am very much obliged to have a ride. Thus I decided to get a motorcycle to be used for as sundo, pang-araw-araw.
I told this stuff to my colleagues and I told them what model I wanted to buy. The bike is pretty much inexpensive but a bit higher than my 15th day cut off so I was left with these choices, do I pay the bike on spot cash or do I pay it by installments? It is pretty a neat question but somehow hard to decide because there are things I was considering when I sought to compute each payment mode. I also tried to rationalized both options and told it to my colleague.
- Installment – I get to pay only the down payment and its monthly amortization amounting to 4,000 and 2,000 respectively. Advantage: This is light to the pocket as I don’t have to shell out 40,000 on the spot and the rest of my extra money saved for that month can be used for investing like Forex and paying other bills specially my credit card! Disadvantage: Computing 2,000 monthly amortization by 36 months would equal to 72,000, this almost doubles the original price of the motorcycle unit in three years span, plus the value of the unit continues to depreciate as time passes by as the unit goes through wear.
- Spot Cash – I’ll pay 40,000 on the spot and no monthly fees to be extracted every month. Advantage: I can save more than 32,000 in a span of three years. Disadvantage: I’ll lost a big portion of money that could be invested on something else like Forex and it will compromise my capacity to pay for my credit card for that month, etc.
What is leveraging:
use borrowed capital for (an investment), expecting the profits made to be greater than the interest payable.
Applying leveraging here, we can see that if I choose to pay on spot cash then I lose all the capability to use the supposed-remaining funds to be invested upon for profit in which, could let me earn higher traversing the loaned amount or the monthly amortization. Income source that produce fruits over time could be employment, investing, and any other extra income such condo sale commission (amen!). Whereas if I get the monthly installment, I could prioritize other major bills like credit card, living expenses, or put it in investments that could grow at par or over the monthly amortization value and even exceed the potential overall lump sum of the unit purchased. I couldn’t also ignore the fact that may be perhaps if I will be appraised at work, my salary increase could cover for that 2,000 monthly bill for me 😀
Therefore I choose to think rich.. Leverage.