Not too long ago a twentysomething friend of mine was telling me all about the brand new big-screen television he bought. According to him, it was a great deal.
“How much was it?” I asked.
“I paid $2000 after I got the guy to knock $400 off the price tag. I couldn’t pass it up!”
“Awesome! You paid cash, right?”
“No way!” he said. “I put it on my credit card.”
“I hear ya. I put everything on my card too, just to take advantage of the cash rewards — but then I pay it off in full at the end of the month.”
“Oh, no,” he said. “I can’t afford to do that!”
“Then maybe you didn’t get quite the deal you think you did.”
That’s when he looked at me kind of cross-eyed. “What do you mean, Len?”
I’ll tell you what I mean: Nobody in their right mind should ever go into debt to buy a big-screen television. After all, taking on excessive debt limits our future financial options because we end up spending tomorrow’s wages today.
Besides, people who buy things on credit rarely get the bargains they think they’re scooping up.
Take my young friend, for example. True, he saved $400 at the checkout stand; but those savings will end up being only fleeting. Here’s why: Most people who use their credit cards irresponsibly aren’t concerned about making interest payments — so they’re more likely to make minimum payments that ultimately increase their final purchase costs.
For example, I can’t say with any certainty what my friend is going to do, but if he only makes a minimum monthly payment of $50 at 18% interest, by the time he pays off his credit card — 5 years and 2 months from now — his “$2000” big screen television will end up costing him $3077.
Does that sound smart to you? It shouldn’t take five years to pay off a lousy big screen television. I mean, this isn’t a brand new car, folks.
Ironically, people who continually use their credit cards to finance their lifestyle with the latest cell phones, newest autos, no-holds-barred vacations, and other impulsive big-ticket purchases, usually end up in a financial death spiral that prevents them from living the kind of life they really want.
They also forfeit a golden opportunity to pay down their existing debt and attain financial freedom. Financial freedom that, in the real world, gives savvy household CEOs the power to snap up those too-good-to-be-true bargains with cold hard cash when they become available.
Here’s hoping that my friend’s big-screen TV will still be working when he makes the last of those 62 monthly payments — especially considering how much he’s paying for it.
Photo Credit: See Modern Britain
Yikes, this post brought me back to my youth when I made purchases based on whether I could afford the monthly payment. What a misguided approach to personal finance that was!!!
I’m glad to say that after getting myself into a financial mess using that method, I did figure it out and now live a debt-free, mortgage-free life. It was all due to listening to wiser people, making little behavior changes over time and creating a plan for my financial future.
If I can change, anyone can! I love your voice of wisdom, Len…
Awww, thank you, Ree. And I’m glad you got yourself out of that mess too!
This is a great example of why basic financial education should be a part of curriculum, as well as taught by parents at home. Of course, if the blind are leading the blind, this TV purchase is the kind of thing that happens. That’s why there are bloggers like us who get it and can help get people to think about things a little bit, and do the math.
I also hope your friends TV is still working after he makes his final payment… What a slap in the face it will be if he’s still making a monthly payment on something he can no longer use!
Five years … I suspect it’s gonna be close, Mrs. S.
Let’s talk modern America here. Our government sets the example. They borrow money to bailout large companies like GM, which by the way we tax payers lost 10 billion on. They create money to put into the big banks so they will loan more and not really have to bear the loss of a default. We are a consumer society, money or no money. You live the nice life racking up debt on your credit cards. When you max out you claim bankruptcy and pay pennies on the dollar. Then you start the process again. I know this works, because when I worked in car sales my manger told me just because the have a bankruptcy doesn’t mean we can’t get them onto a new car. There are some really creative financing out there to get just about anyone a loan.
Even if you lose it all just jump on Obamacare, food stamps, and unemployment. It may not be the high life but it won’t cost you much. And what little it cost you can put on your credit card, right!
I remember a friend of mine saying he just save $200 on a Kayak because it was on sale. My brother said no you didn’t you just spent $1800. But Len I agree, just because it’s on sale doesn’t mean it’s a bargain.
It’s all true, Drew. It’s all true.