Are you considering a big purchase, such as a new TV or appliance? Perhaps you just made one.
How do you know if you can actually afford something?
At Home Life Hero, we recommend you budget for items before you buy them, which ideally means you are paying with cash for your purchase.
In general, pay with cash, right?
Not everyone is ready or able to use cash for big purchases, so they use credit cards. I used to live on my credit cards, and would make new purchases as soon as I paid them down. I felt I was building credit and filling up an apartment with things I needed: furniture, appliances, electronics, clothes and more.
Most people realize that maxing out your credit is a bad idea – I was paying big bucks in interest all the time to make my everyday purchases. Had I slowed down and planned ahead, I could have cleared off my credit cards and paid with cash. But that’s not how things work when credit is easy and you don’t know any better, which was the situation many young people find themselves in. So, I did what most people do when they need to buy a washing machine and dryer set:
I used no interest financing for a year
Yes, I admit it. It is far from the dumbest thing I’ve done with money over the years.
That’s not dumb, Andrew – it’s smart to use other people’s money at zero interest.
I can hear you loud and clear, everyone I have ever made that comment to. Just last week I was discussing this with a co-worker who said the same thing to me. People who use credit cards, and especially zero percent interest deals, do not like it when I call that behavior dumb. Even though I am referring to myself, I am by definition referring to them as well if they are doing the same thing.
You may be, right now, in the middle of a zero interest repayment plan on a purchase. Please believe that I am not saying you are dumb. It is so attractive to use someone else’s money for “free”. It also gives us a chance to “stick it to the man” by outsmarting their stupid system, and that our money works for us while we pay off the purchase.
I felt so smart when I paid off that washer and dryer on time. It was a $900 purchase, and by the time I paid it off I avoided paying over $300 in accrued interest. I won that battle, but I was still losing the war of purchasing habits, because I believed purchasing on credit and making payments was the right move. Beating the $300 interest penalty only reinforced this behavior.
Other people pay that penalty. Lots of them. An article on creditcards.com estimates that 25% of the people who use such deals suffer the interest wrath, while 75% successfully pay off the purchase without getting hit by charges. Keep in mind that figure comes from a website that exists, in part, to direct you to credit card and loan offers. They have an interest in keeping the scare-factor low.
On the other hand, I heard Dave Ramsey on the radio today quote an 88% figure, meaning that 88% of people who use these deals get burned and have to pay the high interest for the whole purchase. I couldn’t find the data to back that up, and Dave’s business, if you didn’t know, is consulting people out of debt, not into it. Maybe the figure is somewhere between 25-88%. It doesn’t matter. Many people start those interest free purchases with good intent and get burned by paying 29% interest instead.
Shouldn’t you just pay with cash?
Yes, you should just pay with cash. Make a plan for your big purchases, save some money each month, and be patient. Paying with cash ensures that you won’t get bit with high interest charges. Period.
But paying with cash doesn’t always mean you can afford something, I think. Have you ever made a purchase that you regretted? Most of the time, people have buyer’s remorse after making a large purchase. Even if it was something they really wanted or needed, and even if they’ve saved for it. There can still be a feeling of loss or disappointment.
That is the feeling that comes from choosing a direction, any direction, in life. When evaluated up front, these are called opportunity costs.
Let’s say you have a thousand dollars that you’ve been saving for four different purchases. The items you want all cost exactly a thousand dollars. You can only choose one. Even though you will pay in cash, you lose out on the opportunity to have those other items instead. Mentally, you can fall into the trap of wishing you had made another decision, by a 3:1 ratio.
You have to be mentally strong to do anything in life, including make purchases.
When you spend money in a big chunk, you feel that trade-off, or opportunity cost, whether you realize it or not. Decision require energy. Making big purchase decisions drain you mentally, even if you think you are buying something “fun”.
Paying with credit makes it worse because you not only have to live with purchase choice you made, and therefore the ones you didn’t make, but also this bill. This freaking bill that shows up every month, threatening more interest charges and late payment fees.
Cash helps reduce the impact of buyer’s remorse, both because you had to plan upfront and there’s no bill coming each month to remind you of the decision. But it doesn’t solve it.
A recent example of buyer’s remorse, even with cash
I had been saving for a new television all last year. My “blow money” category is a really small percentage of my overall budget. I’m working on paying down debt and have another baby on the way, so my ability to save for things that aren’t in the need category is pretty small. Still, there’s a small amount of cash that is mine, and I’m allowed to spend it guilt free on whatever I want.
Between saving monthly, winning a weight-loss contest, and receiving some birthday and Christmas cash, I finally had enough. The TV that fit my specifications went on sale after Christmas , and I plunked down the cash on the counter, proud to be making a purchase I had planned all year.
After setting it up at the house, I was very happy. The TV was beautiful, and exactly what I wanted. It wasn’t the most expensive TV I’ve ever purchased (under $600), but it hit all the marks.
And yet, I felt disappointed the next day. The next morning, I received an email from a company I like. A small product I really wanted was on sale for 12 dollars. I had $10.63 left in my “blow money” budget.
I was cash-strapped with no margin
My household wasn’t about to go under. My lights were on, food was on the table, and all the bills were paid. But I felt cash-strapped. I couldn’t even make a $12 purchase without breaking my budget, or holding a budget committee meeting with my wife to talk about adding a buck-fifty to my fun money.
Pro-tip: do not hold a budget committee meeting with your wife over a buck-fifty.
By spending nearly every dime I had, even though it was only in this one category, I had completely eliminated my ability to act spontaneously. I couldn’t do what I wanted, because I had already used up all my margin.
I would say, looking back, that I could not afford the TV. I didn’t know it at the time I made the purchase. I needed more margin.
I read an article years ago in Men’s Health magazine which claimed that you can only afford something if you could buy three of them. I don’t know if that is a perfect solution, but it is a statement about keeping some margin in your life. Have some padding in case something else comes up.
Here’s one more way to look at the topic
Years ago, I bought a fancy pair of sunglasses for $250; I felt like I deserved them. We were making more money than we ever had at the time, and I felt like I could easily afford something nice. The truth is that I didn’t really understand my whole financial picture, but that’s a post for another day. I bought my Maui Jim sunglasses, with cash, guilt-free. Or so I thought.
The truth is that I worried about them. I was careful to make sure I always put them back in their hard-backed case. I would only clean them with a special cloth. I was concerned they would fall off my head and get damaged. One day, they did. During a particularly blustery day on a beach in North Carolina they glasses flew right off my head and got a fairly deep scratch on one of the lenses. It was right in the middle, right where I would have to look over it every time my eyes scanned the road while driving.
I was so upset. My fancy pair of Maui Jims were damaged, and annoyingly so. But I couldn’t just throw them out, they were too expensive. I learned to live with the scratch. I kept those sunglasses for almost three years, until they finally started to fall apart from other impacts and normal wear and tear that sunglasses will receive. At some point, they would separate at the nose connection, literally coming apart lens from lens, and I would carefully snap them back into place to wear them.
I felt like I had to make sure I got my value out of them. Over the three years I owned those sunglasses, I got far more serious about my money and budget. I knew I needed to get the most wear from them before I could justify replacing them.
Out with the old, in with the cheapo sunglasses
Earlier this year, I spent 20 dollars on the replacement pair. They are polarized, but aren’t nearly as fancy. If I’m honest, I do not think I look as good in them. They aren’t as flexible, or as light weight, as the Maui Jims.
But I promise you, if they get scratched or damaged, or if my toddler stomps on them during playtime, I’ll just whip out another $20 bill and replace them. Guilt-free. Buyer’s remorse-free. I have the margin to buy another pair and still live my life.
I can afford them.
If you made it this far, let’s sum up what it means to afford something. You can share your version of what it means in the comments.
I can afford something if I have budgeted for it, can pay cash for it, and still have enough margin in my life and budget to buy it again.
I still utilize 0 percent from time to time, but more on interest arbitrage on something I was going to buy in cash anyway. For me the decider is largely if I feel I need it now and I still feel the same way three months from now. Then I go buy it because I clearly do value it. In the interim I consider things like the value of it to me, the price of alternatives, and if I can afford he opportunity cost. Honestly in the last five or so years I’ve rarely found a single thi I’ve truly wanted I couldn’t afford. Instead I’ve found many things I didn’t really value when I got down to it, I could get a just as good alternative for less, or ultimately that value wasn’t worth the cost of other things I had to forgo in order to buy.
I think you have a really good point about finding the real value in a purchase. When I say no, or wait a while to decide on a purchase, I’m out of the heat of the moment of the purchase. Most times I find I will make a better decision at that point.
The issue with credit purchasing, for me at least, was the continuous cycle. If I had the credit available at zero percent, I was more focused on the good deal I was getting, less on the real need or value of the product.
You would think experienced shoppers would be able to break that cycle, but as a former salesperson I can tell you that is not the case! People of all ages and income can end up buying things they want but don’t need when zero interest is involved.
It’s no necessarily bad to buy on zero interest, of course. If a purchase is a small enough percentage of your net worth then it really doesn’t matter how you buy it.