Not So Easy Monthly Payments

It’s been said the only reason most American families don’t own an elephant is that they’ve never been offered an elephant for a dollar down and easy monthly payments. You probably don’t own an elephant (who has a yard that big?) but chances are you’ve made a buying decision based on “easy monthly payments”

We hear the familiar phrases everyday, Six months same as cash. Interest free for 90 days. Easy terms. Low monthly payments. No money down. Low APR. 2.9% introductory rate. Bad credit? No problem. Whether shouted by a pitchman for a local car dealership or printed words in a glossy four-color magazine ad, these phrases all encourage us to follow the “Buy now, pay later” philosophy of spending. You’ve got to hand it to advertisers. They understand human nature, especially our desire for instant gratification. Given a choice between months of disciplined saving and no money down deferred payments, we’d buy our new home entertainment system today. (When the bill arrives three months later, we can read it in glorious surround sound.)

Before you sign up for “easy monthly payments” ask yourself these questions:

Do I need it? Or do I want it? Needs vs. Wants? We know. It’s a touchy question. When first introduced to the American public, television was a luxury item. Today some would argue that their 200 channel digital cable is a necessity. If we are to make wise decisions on how we spend our money, we need to evaluate the difference between our needs and our wants. The goal of advertisers (and we can’t fault them…they’re just doing their job!) is to convince us that we “need” what they are selling. As we listen to their pitch, we need to remember that money spent on one item is unavailable to be directed elsewhere. Money spent on a stereo is no longer available to be invested in a mutual fund.

Discerning the difference between our needs and our wants helps us prioritize our spending and avoid debt.

Can I accomplish my desired goal without spending the money?

Hundreds of thousands of people bought ¼ inch drill bits last year. Not a single one of them wanted a ¼ inch drill bit. What they wanted was a ¼ hole.

If your need to drill ¼ inch holes is limited to twice a year, is it worth spending money on a power tool and accessories? A neighbor or a friend may have exactly what you need. You’ll have an opportunity to save them money when you return a similar favor.

Is this a sound decision? Or am I presuming on the future? A danger of deferred monthly payments is that we are committing ourselves to future debt obligations without knowing what our financial status will be at that time. By deferring payments we are presuming upon the future; assuming (or hoping) that our income will increase or at least remain the same. The obvious problem with deferring payments is that when the deferral period is over the monthly payments are there even if our income isn’t. Even the easiest “easy monthly payment” is difficult to make if our income doesn’t keep pace.

Should the opportunity arise for us to buy an elephant (or anything else) with a dollar down and easy monthly payments, what should we do?

First, commit to waiting at least one month without buying the item. More often than not, after 30 days you’ll discover that item you couldn’t live without was a “want” and not a “need”. In short, by waiting 30 days you will avoid making impulse purchases. Second, if at the end of 30 days you still have an interest in making the purchase, determine your wisest course of action. By disciplining yourself to save for the item and pay for it in full, you create an additional window of time in which to evaluate your decision. If, as you are systematically saving money, you find another way to drill a ¼ inch hole and don’t need to buy the drill, you have available dollars to direct elsewhere.

You can avoid debt and spend wisely by: Discerning your wants from your needs, looking for a way to accomplish your goal without spending money and systematically saving to avoid impulse purchases.

Elephants and “easy monthly payments”. Don’t let either one of them sit on you

Cash or Credit

There it is, gleaming in the window. The $500 mountain bike you’ve been wanting for months. Do you pay with cash? Or use your credit card? Pay cash and the bike is paid for. Pay with credit and your $500 bike will cost you more that $500.

Studies show that simply using a credit card causes you to spend 30% more than you would by paying cash. One reason is psychological.

When you swipe that plastic card to make a purchase, you don’t feel like you’re spending real money. The reality of the cost (and the interest charges) is deferred for a month. And when the bill arrives, you know they only require $20 minimum payment on your $500 purchase. It seems so manageable. And your credit card company hopes you think that way for 20 years.

Paying with cash is distinctly different. The act of physically placing ten $50 bills into the salesperson’s hand is more difficult because you see with your own eyes that you’re handing over real money. You spend less money when pay with cash because you think more carefully about your buying decisions. Not to mention the hundreds of dollars you save on interest charges. Whatever “pain” you experience by paying cash is worth the gain. You’re another step closer to living Debt Free.