Cash or Credit? It is one of the most fundamental questions, you are asked when making a purchase at a store. You could pay with cash or use your debit card; most businesses treat either as cash. Using your credit card may give you a cash rebate, frequent flier miles or points to be used for flights or merchandise. It is your choice or is it?
What is your choice?
Using your credit card for a ten dollar purchase is certainly a choice! Using your credit card for a major purchase such as furniture, major appliances or vacation is an important decision. When faced with a major purchase, what do you do? Do you examine the alternatives? Do you just write a check using your emergency or sinking fund? In other words do you just use the funds you put aside for those planned replacements that you know will be made over time? Sure you do! Too many people say charge it because they are unprepared and cannot pay for it in cash. Is that you?
Okay, you had to replace your washer and dryer! It was bad timing, it was during the holidays, you were expecting company, your children were returning from college, or you just spent all your Christmas money on presents. So you put it on your credit card and you will pay it off over the next couple of years. Your credit card charges 24% per year on the unpaid balance. You were lucky and bought the washer and dryer on sale. It still totaled $1,000! If you make minimum payments of $30 per month, you will pay this purchase off in roughly ten (10) years. You paid over $1,300 in interest for that washer and dryer!
Good or Bad choice?
Was this a good choice? You tell me! You will pay over $2,300 for two (2) major appliances. In the next ten (10) years, it is very likely that you will replace the washer and it won’t even be paid. Did you receive the kind of quality you would expect for such a expensive purchase? If you were not making payments, what could do with the money? If you add up all your payments, it is probably a pretty big number. If you invested that money, how much would you have? Many would respond that they had no choice!
I disagree! You maintain your car, because you need it. You eat because the alternative is obvious. You know you must replace equipment, furniture or clothes over time. You can get your finances in good shape so you are not paying the price of a Mercedes for a Volkswagen. Set up a sinking fund for these replacements so you have a real choice. If you don’t, you will pay more in interest which makes everything more expensive. Start a savings account for those unplanned and unexpected expenses that will always occur. Recently, I wrote an article called “5 Important Financial Skills” points out five healthy financial habits.
The next time you are asked cash or credit, what are you going to say? Remember to only put things on your credit card that you can pay off each month. Plan your major purchases, clothing or furniture purchases and save the money before you need it. Not having the money means you do not have a choice. Using credit also means that the payments are going for principle and interest that would be better spent elsewhere. A decision means you have a choice. Having savings for those extraordinary purchases gives you a choice. What are you going to do? Cash or Credit?
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