Why ‘Save to Spend’ Is Still The Best Strategy
In recent years, the easy access to credit severely reduced the amount of people across the nation that saved up their money to purchase the things that they desired. Instead of budgeting their money and putting a little of it away each paycheck to save up for the expensive items and vacations that they wanted, people began to place these massive purchases on their credit cards with the realization that they could pay off the balance of the credit card over time. In effect, the common trend was reversed with people buying first and paying later instead of saving first and buying later.
What Makes Debt A Bad Idea?
What many people forget to remember is that there was a reason that our parents and our grandparents tried to stay away from debt as much as possible. In most cases, debt is not a good thing and it can get you into a lot of trouble fairly quickly. As people get into debt, they find that their financial options are limited, they are less able to handle emergencies, and they can lose every thing that they have worked for in order for their debt to be paid off.
Let’s take a look at how debt works. When you are incurring debt, you are paying someone to lend you money for a short period of time and the person that is lending you the money gets all of their money back plus some of yours for having the money for you to borrow. When you are buying items on credit, you are paying more for the item than you would have if you had paid in cash and sometimes it can be significantly more depending on the interest rate on the credit card that you used to pay for the purchase. For example, if you purchased a table that costs $200 on a credit card that had a 15% interest rate and took six months to pay off the purchase, you could end up spending around $450 to buy the table – $250 more than you would have paid if you would have purchased the table with cash.
Why Is ‘Save To Spend’ A Good Idea?
When you use the save to spend method, you determine what item you would like to purchase and place a certain amount of money aside each month to be able to pay for the purchase in cash when the time comes. For example, a person who would like to go on a vacation that will cost $1,000 may decide to save $200 per month for 5 months in order to have the money that they need to take their vacation. This makes obtaining the money more manageable and ensures that you will not be working off the costs of the vacation for months to come.
Items purchased using the save to spend method cost less than purchasing items with a credit card and if the person is really savvy with their money, they will be more inclined to seek out deals on the things that they want in order to maximize what they are getting for their money. People seem to be more aware of money leaving their bank account than they are of charges racking up on their credit card and tend to be more cautious about the prices of items when they are paying for the purchases out of their pocket or out of their bank account. They will also avoid having interest charges placed on the cost of the items that they will have to pay off eventually which can greatly increase the cost of owning the items.
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Plus if you stick your cash in a savings account, you’ll earn at least a little interest on it instead of PAYing interest. Granted that would work better on a larger purchase (like a vehicle), but even a couple of dollars is better than nothing.
Your example for the cost of the table is wrong. 200 x .15 = 30. Interest is yearly. For the monthly calculation, look on your credit card statement.
I do agree that credit cards are bad. One of their sneakier tricks is the extremely fine print where your interest rate jumps up to some outrageously large number when you are late for ANY bill. My sister got screwed over by one of her cards. Then there’s the fees….