Believe It: Sometimes It Pays Not to Buy Stuff On Sale

The other day a coworker of mine told me about the “great deal” he got at an electronics retailer. He decided to buy a $2400 plasma television that was $400 off the retail price. It was an impulsive buy, and one he said he couldn’t pass up.

“Good for you,” I told him. “You paid for that in cash, right?”

“Heck no! I put it on my credit card,” he replied.

“So your using my old trick of putting it on your dividend credit card and then paying the card off in full at the end of the month, in essence using the credit card company to give you an extra one or two percent off the price of the television. Even better!”

But I was wrong again. In fact, the guy sheepishly admitted that he was going to be making the minimum payments on his credit card. Oy.

I’ve already discussed how the sad consequences of taking on excessive debt today limits your ability to make decisions in the future. That is because when you take on new debt, you are spending tomorrow’s wages today. Ironically, by always buying on credit the latest and greatest cell phones, biggest houses, newest automobiles, and annual dream vacations we end up in a financial death spiral that prevents us from living the kind of life that we really want.

Competent household CEOs understand that keeping their monetary resources from being obligated to too many loans gives them the power to snap up bargains with cold hard cash when they become available. This is because buying items on credit clandestinely erodes your purchasing power, sometimes to shocking levels.

Let’s look at my coworker’s case as an example:

We’ll assume that he got his plasma television on sale for $2000, tax included. We’ll also assume that his credit card has annual interest rate of 18.9%. For simplicity, let’s further assume that he will make a minimum monthly payment of $50.

Assuming he faithfully makes the $50 minimum monthly payments on time, it will take him 5 years and 4 months before that plasma television is finally, mercifully, paid off. Does that sound like a smart move to you? Over five years to pay off a lousy plasma television?

This isn’t a brand new car we’re talking about here folks.

Even more importantly, my coworker actually ends up getting shafted on the price of the television.

“But, Len, the guy saved $400!”

True. He did save $400 off the retail price. Initially.

But one of the biggest problems with stretching out payments (for anything) over time is that little devil in the details called interest. Those of you that didn’t skip out on high school economics know that interest is, of course, the fee you pay someone for borrowing his or her money.

The total interest charges my coworker will pay if he only makes the minimum payments will amount to a staggering $1181.23. So in the end, that $2000 television will ultimately cost him $3181.23!

That’s right. Instead of saving $400 on his plasma television set, my coworker actually will end up paying $781.38 over the retail price.

This is a great example of why I hate paying interest to anybody.

But wait, it could be even worse.

I can only imagine that my coworker will be making the minimum payments because he is already financially pushed to the limit. For the record, our office isn’t handing out another raise until nine months from now. Assuming that is true, in the absence of an unlikely monetary windfall such as an inheritance or lottery win, he now has very little, if any, future discretionary spending options; until his next raise my coworker now has zero financial margin for error.

He has lost all financial maneuverability if his car breaks down, or if he wants to catch a special sporting event on a whim. And tapping the credit cards from here on out will only get him deeper into debt, if not into a state of default.

“Are you finished yet, Len?”

Almost.

Assuming my hunch about my coworker is true, his already precarious finances and credit rating are now subject to greater risk in the event of an unforeseen loss of future income due to layoff or injury.

Worst of all, he passed up a golden opportunity to pay down his existing debts. Obviously, that $50 per month he decided to commit to his credit card company could have been better used towards paying down his debt and earning his financial freedom. Financial freedom that, in the real world, would have assured his plasma television was really purchased for a sale price of $2000.

One can only hope that his television will still be operating in peak condition after he finishes making the last of his 64 monthly payments.

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