|Shawn McAnnally is a man on a budget and founder of BudgetBrains.com, a site that helps regular people find simple solutions to life's complicated financial problems.
One of the biggest challenges people face in
their struggles to avoid debt are large purchases. The easy availability of
credit in virtually every retail store makes it hard to resist. You don't need
to save for the things you want, you can simply finance the purchase with a new
credit card or store account. While this is true, and it does allow for faster
gratification, it comes with a hefty hidden cost.
Nobody will lend you money for free. With the
exception of some 0% offers, all financing costs you more than it would if you
bought the item outright. This is the compensation that financiers require for
extending you the privilege to buy things before you can actually afford them.
Beyond this tangible cost is another type of expense that people typically don't
think about. It is one that applies even if the financing rate is 0%.
Financing reduces your economic mobility. In
simple terms, the more you owe, the higher your future monthly obligations are.
When you add a financed purchase, you are adding a bill. Every month, that new
bill reduces your free cash flow, or the amount of money you can control the use
of. In the short term, you have gained the most recent object of your desire. In
the long term, you have diminished your ability to make new purchases. At some
point, you will want to acquire something else. You may be able to afford it the
first few times, but eventually you will run out of purchasing power as the
rising tide of your debt drowns you in minimum payments and interest charges.
These bills will exist long after that purchase has lost its allure.
Everyone knows the feeling that a five year
financed car purchase brings. Sooner or later, there is another item that you
want, but you're stuck spending your money on something you financed months or
even years ago. You gave up the ability to choose the direction your money flows
today in exchange for something yesterday. Worse yet, if faced with an emergency
medical expense or sudden job loss, the amount of money that must be spent each
month is higher than it would be if you were just paying standard bills. This
can encourage further financing and can greatly worsen your overall economic
situation at a time when you can least afford it.
Getting Some Time to Think
It is easy to make the choice to finance, and all too difficult to think about
the long-term effects when you are in the midst of a purchasing frenzy. The
trick is to make these decisions outside the bubble of your desire and by doing
so, make them in a more rational way. To do that, you must train yourself to
view them as the long-term commitments that they are. You can do this by vowing
to avoid making large purchases without an evaluation period. When you decide
that you want something, give yourself a holding period during which you can let
the initial impulse fade. Spend some time considering the true cost of the
purchase and make a list of the benefits and drawbacks. Think of what else you
could use the money for.
Sometimes, after the initial buzz fades, you will
find that the purchase isnít worth it. Other times, you will still feel that
strong desire. The point of the evaluation period isnít to prevent you from all
large purchases, but to help you weed out the ones that will bring the least
amount of satisfaction. Itís about taking your emotions out of your spending
decisions so that your judgments will be sound. Thatís a key first step to
controlling your spending, but not the only one. Once youíve decided to make a
purchase, you owe it to yourself to make the purchase as affordable as you can.
Paying the Lowest Amount
Part of the evaluation detailed above involves considering the true cost
of the item. That includes the cost associated with financing. Financing a
purchase is expensive. Most people donít think twice about comparison shopping
for cars or even groceries. Those same people then put the purchase on a credit
card they wonít pay off when the statement arrives or sign a five-year loan
agreement with ďaffordableĒ payments. This drastically raises the cost of the
purchase and negates the benefits sought when wisely looking for the lowest
There is only one way to avoid the burden that
debt brings and that is to save for large purchases, paying for them with your
own money and not somebody else's. You can only truly alleviate the problems
associated with debt by not incurring debt in the first place. For many people
this seems like a fantastic proposition, but not one that is readily attainable.
The truth is that it is much easier to do than you would think. Don't give into
the myth that credit is the only way to buy expensive things. It isn't.
You simply have to plan ahead. Use your
evaluation period to outline a plan to pay for your purchase on your own,
without the pricey aid that credit card companies and banks will all too
willingly provide. Most large purchases are easy to foresee and almost anything
can easily be paid for with cash if you think about it beforehand.
There are two steps to this sort of planning and
both are simple. First, you need to identify the total cost. Next, break that
amount into smaller, more manageable pieces. To do this you need to set a goal
date, the time at which you want to have the money available to make the
purchase. You then divide the total cost by the paychecks you will receive
before the selected goal date. The result is the amount you need to save each
period. If this doesn't fit into your budget, you need to evaluate whether a
cheaper alternative would be more appropriate, whether you can lengthen the time
until the purchase, or whether changes in your budget will allow you to reach
The process is relatively short and easy. Fifteen
to twenty minutes now can provide you with the financial power to purchase the
things you want without sacrificing either your financial security or freedom.
Purchases made without these types of stressful baggage are always the best