Scriptures: Phil 4:11-13; 1 Tim 6:6-11; Prov 3:5-6
Have you ever felt that you will never reach your financial goals? Maybe you have become impatient and opted to abandon your financial principles to get what you want now. In either case, be assured there is still hope of accomplishing your financial goals.
Patience (or should I say the lack thereof) is what fails us when we are striving for our goals. We never seem to achieve what we are working towards as quickly as we would like. We simply don’t like the definition of patience as long suffering. And yet this is exactly what we are called to do in so many circumstances.
Our children in the back seat of a long car ride often remind us of being impatient. They exclaim with annoying frequency; are we there yet? I have spoken to so many adults who feel the same way when they look at their financial position. They exclaim; when are we ever going to achieve our financial goals? It’s the same kind of impatience felt by the young ones sitting in the back seat of the car.
When you are feeling this kind of impatience it is usually because we are not content with our circumstances. And it is usually your wants driving you more than your needs. It is your wants that make you impatient with your situation and it is your wants that make you discontented.
Thus my first point, which I have made in previous posts, is that we must learn to be content. Yet, I don’t want to dwell on this point now because you are saying to yourself that you are content but isn’t there value in buying something on sale now, even though you don’t have all of the money on-hand to make the purchase?
And so the question is: Is it ever prudent to use credit payments to purchase an item you are saving for now when that item goes on sale at a time when you can’t pay cash (one of your core financial principles)?
And my answer is maybe, but first let me be clear: I am a very strong proponent of paying cash for all of my purchases, even if they are big dollar purchases. Yet there are times when it may be prudent to make a purchase by borrowing money to close the deal.
But let me detour my discussion to play out the kids in the back seat analogy a bit more. When you start hearing those voices in the back seat exclaiming are we there yet, your thoughts typically turn to the options you have. Is there a short cut I can take to get where I am going faster? You may be stuck in traffic and you start pondering alternate routes. You look for an out.
But deviating from your current course comes with risks. There may have been lots of other folks who had the same idea as you and now there is a traffic jam on that route too. In fact, it may even take longer because it was an alternative route and now you are becoming more aggravated because of your poor choice.
If you can relate to this analogy, then let me say, there are always alternatives in how you pay for an item and all of them come with varying levels of risk and conditions. Paying all cash is the least risky and paying all credit is the most risky. But is there a point along this spectrum that would suggest an acceptable set of risks and conditions that is financially prudent?
So here’s an example to help you understand some of these conditions.
You have a great budget in place and have been saving $50/month for a sofa that you expect will cost $3000. Given your budget and savings plan, you will have saved $3000 in 60 months or 5 years – okay, now you know why you need patience. And as of this month you have saved $1400.
It’s Sunday afternoon and you are reading the sales in the paper and see the sofa of your dreams. It was originally $3000 but now is only $2400, a 20% sales discount! Wow! You are so excited but your excitement is quickly tempered by the fact you are still $1000 short of this price.
What to do? Well, you start looking for those shortcuts, those alternative routes that will get you to your destination faster. Your wants start making you impatient and so you consider that easy out, the credit card. After all, you don’t carry a balance anymore and your credit line would allow you to make the purchase. And you have demonstrated that you can save the $50/month and so you can just pay the credit card the money and have the sofa now. Isn’t this a win-win for everyone?
Now you have heard me say this more than once now and I will say it again – do the math.
I have done this analysis using a spreadsheet and its financial functions. And here is what I have learned when I have played with the numbers.
Here are some additional assumptions: 18% interest rate on my credit card and no way can I pay more than $50/month as a minimum payment.
So right off the bat you can see that it will take you four months longer to pay off the balance on the credit card as compared to saving the money and paying full price. This may be okay but I will use this as part of several criteria for making this decision later on.
Next you will see that a 20% sales discount will save you $600 off the price of the sofa and at 18% interest rate on the credit card and 24 months to pay off the balance, you would pay $198 in interest, making the total sofa costs $2598, which is the same as a 13% sales discount.
Bottom line: You would still save money on the purchase of this sofa even though it took you four more months to pay it all off.
But this is indeed a slippery slope in that you allowed yourself to become a slave to the lender. You gave up any option you had to cover any unexpected options by using that $50 to cover that emergency expense. Yes, this would have delayed your overall savings plan and thus putting off satisfying your desire for a new sofa. And isn’t this a lesson to learn how to be content with what you have today?
Okay, but you are still learning and you really what that new couch. Are there any guidelines one can use in making this decision?
Here are some I came up while observing several scenarios in the spreadsheet I built for this example.
· Twenty percent (20%) seems to be the minimum sales discount I would consider before using a credit card. Note: This could be a smaller sales discount if using consumer credit offered by the retailer because it is usually much less than the 18% interest rate charged by credit card companies. But be sure you know the interest rate before signing on the dotted-line. Also watch out for interest-free rates for 12 months because if you don’t pay off the principal in that period of time, all of the interest fees are charged at that 13th pay period and therefore no longer interest-free.
· If you need more than four additional months to pay off the loan (credit card or consumer loan) than it would if you saved the cash, then keep on saving. In my example above it would take 24 months to pay off the credit card balance and only 20 months to save the money for a full price purchase. My logic here is that items such as furniture go on sale at least quarterly – every three months. If I have $3000 in the bank, it would be worth my while to wait at least three months to wait for a sale. In this I would not only pay less for the sofa but also have $600 extra for some of those accessories that would look so nice with that new sofa.
· Never pay more in total cost for an item as compared to paying cash. No matter what kind of financing you are using, you should never pay more than the price of the non-sale item. You will always have to pay interest on any money you borrow and so if the sale price plus interest is more than the non-sale price then don’t buy the item. Why should you pay more for something if you don’t have to? This is particularly true for depreciating assets, such as furniture.
· Lastly, look into the minimum payment rules for your credit card. You should never charge so much that the minimum payment would exceed what you are saving today. This should be obvious, but if your minimum payment on a $1000 credit card balance is $65 and all you have been saving is $50/month, then don’t charge the sofa because you will have to find $15/month in your budget to cover the difference.
Indulging our desires can and does cost us money. We should grow more tolerant of the “are we there yet” cries from our wants. We should all learn to become more content in our daily lives.
Yet, if we are having a weak moment, then at least apply these financial guidelines when making your decision to buy now instead of later. It should never cost you more money in the long run to satisfy your inner self.
