Using financing wisely
No money down, 0% APR, no payments until next year. These are all phrases that we hear a whole lot these days. Consumer financing has become available almost anywhere for nearly anything. It used to be that you could get financing for your house and car, but now you can even get financing for a vacuum, couch or even clothes!
The need for immediate satisfaction is really the driver behind the availability in financing options. You see that flat screen TV advertised in the newspaper with the “No Money Down” and “No Payments for Two Years”. After that, it is only a hundred bucks a month for a couple of years. No problem, I can afford that! Well… can you? By financing your TV, you are overpaying by a huge margin because of the cost of interest. Once you have everything paid off, you ended up paying way more than the sticker price for something that has already lost a ton of value.
Just because you are making installments on something, doesn’t make it any less expensive. $900 seems like a lot of money, but $30/month for three years sounds like a lot less, even though it ends up being a lot more. Also, you might not have $900 just lying around to spend on a TV, but can easily commit to $30 a month for the next three years.
Financing something that you can’t afford and can easily live without may make sense in the short run, but it will really end up hurting you in the long run.
Financing an investment is called “leverage” and is usually considered a good thing. It helps you make more money. Financing a consumer good is called “consumer debt” and is usually considered a bad thing. It helps you spend more money.
Just make sure you really need something before you buy it. One trick I use is the 21 day rule. If you see something that you want, promise yourself that you won’t buy it for 21 days. If, at the end of those three weeks, you are still just as excited about it, go ahead and buy it. If you aren’t, it might mean that you were only caught up in the moment and you really don’t need that item.