Plan For It!

One of the most frustrating things for me to watch is people making poor financial choices. Purchasing a brand new leather couch on store credit, because with 0% interest for 36 months, it’s the same as cash! Financing a luxurious Bahamas cruise on your credit card, because hey, I can pay it off right? Purchasing a brand new car, with a loan, when your current car is driveable for another 5 years and is paid off. The list goes on… It is frustrating for me because I can see the consequences these little choices have on the bigger picture of their overall financial situation.

In our lives, we are constantly being asked to make choices. On a daily basis, we make close to 35,000 conscious decisions. Right or left? Hot or iced? Credit or debit? Regular or decaf? Medium or large? Chicken or fish? The list goes on. Some of these decisions are small, like cream in your coffee or butter on your toast. Others are much larger, like the choice to start a family or to purchase a home. But every choice you make has a consequence associated with it, good or bad.

The same goes for your financial decisions. Let’s look at the choice to purchase furniture I mentioned earlier. Let’s say this new couch costs $1500. Do you need the couch right away? You may think, “yes, my couch is hideous! There is a hole in it.” I’d encourage you to check out this post on wants vs. needs before continuing. Chances are no, you don’t need it right away. But hey, the store offers $0 down, 0% interest for 12 months, why not? Same as cash, right? Now you have a $150 payment every month for a couch that you don’t really need. It looks great, and you’ve got plenty of seating now – perfect for entertaining.

Let’s look at long-term effects of that choice.

You now have a $1500 loan on your credit. You also have a vehicle loan, currently sitting at $18,000. Don’t forget the student loans at $40,000 and the credit card debt you’ve racked up, $8000. That’s a total of $67,500 in debt on your credit bureau. You were struggling to make your payments before purchasing the couch, now you really can’t. And because it is a loan, and an additional payment every month, you start to default. Before you know it, your little $1500, $0 down, 0% loan turns into $2200 sent to collections, ruining your credit because you defaulted on payments. For a couch. A non-essential household item, providing you with entertainment, not survival.

What if you had made a different choice with that couch? Instead of buying it on the spot, on credit, you shop around a little bit. Check multiple stores, websites, and read reviews. You decide you want the couch, but because it is a WANT, you save for it. You already have an emergency fund in place, in case your car breaks down or a tire goes flat, and now you have $270 extra in your budget, so you save for it. Put that $270 away in a savings account, or withdraw it and put it under your mattress. Whatever works for you. (Sidenote: if you store cash at home to save, please get a safe. Don’t just set it somewhere and assume it will be fine. Accidents happen.) In 6 months, you will have $1620 saved up for that new couch. Walk into the store, with cash, and you’ll be able to negotiate your price. You won’t be relying on their credit to make the purchase. Cash is king, and you will be able to get a better deal than if you had bought the couch on credit. Plus, you OWN the couch 6 months earlier than you would have if you had used credit.

Can you see the difference having a plan and saving for things can have on your finances? If you can learn to delay gratification until you can truly afford something, you will continue to make decisions that will only benefit your financial situation down the road. Always choose cash over credit.