Cash Or Credit? Know When To Pay In Full (And When To Finance)

We all want things that seem to be a bit out of our means from time to time. And there are all kinds of deals out there to make us think that financing those momentary whims are a good idea. From new bedroom sets to new cars, seemingly sweet financing deals are EVERYWHERE. That’s when the cash or credit question comes into play.

This is especially true when it comes to big purchases. Is it wiser to take that financing deal with the crazy-low APR, or pay it all in full? Should you go for cash or credit, and is there one right answer for every situation?

Sometimes those “buy now, pay later” deals sound very appealing, especially on the big-ticket items that you want right NOW.

BUT, they don’t always tell you what those deals will translate into over the long haul.

A while ago, my brother had his heart set on a new couch. He asked me if it would be wiser to pay in full or to take a financing deal. The interest rate was 0% APR for 12 months, which sounded pretty exciting to him at the time. 

Knowing his situation as I did, I already knew the answer. However, I decided to walk him through the decision process as I would a client. I felt like this would teach him a lot more than a straight-up YES or NO from a big sister, so we sat down and looked at his options. 

In his case, the options were 1) pay $2000 upfront and the couch was his free and clear, or 2) break it down into payments of $167/month.

The second option sounded VERY appealing at first. However, before my brother said YES to the whole deal, I wanted to be sure he knew what that YES would really mean.

That meant asking the 7 questions that I ask clients (and that I ask myself) when an extravagant purchase is getting too tempting. And I’m going to share these 7 questions right here that you can ash yourself when the cash or credit question comes up!

Ask yourself these seven questions next time you’re contemplating a cash or credit question, and let them save you time, hassle, and money in the long run. 

1. How’s your cash flow? Do you currently make more money than you’re spending each month? It’s essential to know how much ‘wiggle room’ you have in your monthly budget, and if adding another monthly payment will be too much of a stretch. 
2. Do you have any outstanding debt already? If you owe on any other debt, especially any that is accruing interest, take that into account before you add more. While 0% APR is tempting, those 12 months will run out before you know it. You might end up adding even more a higher monthly payment (and more to your overall debt) in the long run.
3. If you live in a two-person household, could you live off of one income? If one of the income-earners in a two-person family lost their job, could you live off of one income? And if you could pull it off, for how long? In my brother’s case, he works in the restaurant industry, as does his live-in girlfriend. Having worked in the restaurant business myself, I know how unpredictable your income can be. So if you’re in a similar situation,  it’s best to base your projected income on a single earner. This way you cover any worst-case scenarios.
4. Do you have an emergency fund? It’s wise to have at LEAST 1K in the bank that is reserved for emergencies. If you’re not there yet, don’t plan on financing anything that you can’t pay for outright. Put that cash into an emergency account and build up your savings first. 
5. Do you have enough insurance coverage? Remember that practical matters come first. If you don’t have insurance (car, medical, home, and the like), take care of this before putting yourself on the hook for anything new. If something happens, you don’t want a ton of bills piling up on top of the thing you’re already financing.
6. Will you owe taxes at the end of the year? Sure, it would be nice to have a brand new couch. But are you sure that you want a letter from the IRS saying that you owe money on it? Here’s why I bring up taxes in particular. You want to be prepared not only for your current budget but also for any surprise expenses. A bigger tax bill than you bargained for is one of the more common surprises! So have an idea of your tax situation, and plan for it before bringing in any new recurring expenses. 
7. Are you contributing to your retirement? Before you jump all in with something new right now, be sure that you’re setting aside a little something for the future FIRST. Don’t skimp on retirement contributions in favor of immediate gratification. 

So what did my brother and I come up with after these seven questions? 

He assured me that he has plenty of money in his budget, contributed to his 401K through work, and had a significant savings. He also said that he could live off of one income for a while if need be. In his view, the monthly payments of $167 a month were something he said he could easily afford. 

Still, my advice to him was this: do NOT finance. 

Even with all of his reassurance that he’d be OK, I told him that financing a couch for a year would be a bad idea. Here’s why:

• Couches are not investments. You don’t get any return on the money you put in, so all you’ll ever get it what you have right now. For that matter, they’re not a necessity but a luxury. 
• If something happens before you pay it off, you won’t OWN it. If you can’t make the payments at any time, you have no recourse. It’s not yours yet, and you might lose it.  You may as well have been renting it. (Maybe in a pinch you could sell it. But you likely wouldn’t recoup your investment. Even at that, you still might not be able to make the payments.)
• He did not have medical insurance. Pre-empting emergencies comes first. Always. 
• This purchase was more about instant gratification than investing. I recognized this because I face similar temptations with purchases, as we all do! 

Here was what I suggested he do if he really wanted the couch:

Start setting aside money each month into a separate savings account. Once he saved up the $2000, he could buy and own it free and clear. Not only that, but he’d also have an emergency fund built up to cover any other unexpected expenses if he decided NOT to buy the couch. 

Now, there’s no way of knowing if what happened next was a coincidence or not. But one week later, he ran into an issue that forced him to take time off of work. That meant lost hours, lost income, and potential expenses up into the thousands. 

We’re talking about an emergency that came close to costing as much as, say, that brand new couch. In this case the couch would’ve been too much extra financial stress, and either paying in cash or letting it go was the right answer.

That’s one side of the “cash or credit” debate. Now, let’s look at the other side.

Suppose that you have the cash available to make a major purchase. Is there any occasion in which it would benefit you to finance it instead of paying for it right away?

Using credit and credit cards actually can benefit you if you use them properly.

First, you can improve your credit score by making consistent payments and retiring that debt ASAP. And with credit cards in particular, paying your monthly balance every months can get you some pretty awesome rewards. (For example, I love my Amazon card and my Airline miles)!

Here’s the most essential part of all, no matter whether you choose cash or credit. Have a plan.

Be sure that you can give positive answers to all the above seven questions BEFORE you decide to finance something. And always ave a clear plan to pay it off if you do take the financing route.

So there you have it! I hope this has helped you solve some of your “cash or credit” dilemmas and lead you to the right choice for your situation.

Have any further questions on whether to pay in full or go the credit route? Leave me a comment, and I’ll do my best to point you in the right direction!

Until next time,

Love, light, and MONEY, Honey…

Kaylee