The First “Most Expensive Money You Can Borrow” Formula

Here’s something you may not know: The most expensive money that you can borrow is from suppliers who offer cash or early payment discounts that you don’t take. For example, perhaps your friendly office supply store offers a 2 percent discount if you pay cash at the time of purchase instead of paying within the usual 30 days. You don’t pay cash, so you pay the full amount (which is 2 percent more than the cash amount) 30 days later. In effect, you pay a 2 percent monthly interest charge. A 2 percent monthly interest charge works out to a 24 percent annual interest charge – and that’s a great deal of money.

Here’s another example that’s only slightly more complicated. Many, many suppliers offer a 2 percent discount if you pay within the first 10 days that an invoice is due rather than 30 days later. (These payment terms are often described and printed at the bottom of the invoice as 2% 10, Net 30.)