Paycheck Chronicles

Paying Before You Buy

Every one of us is bombarded, every day, by offers to buy stuff.  Sometimes the advertisements include the offer of credit to make your purchase possible.  You've seen them:  "We finance, E-1 and up!"  "Only $49 per month."  "$199 per month for a three year lease."  It is so tempting, especially when buying cars, and it is often easy to get a loan for much more than you should reasonably be spending.

In a perfect world, we would all save up for our purchases.  However, sometimes that just isn't going to happen.  The lure of the new car or the big screen TV is just too much.  I'm not going to try to tell you that you should never buy on credit.  However, think about doing one small thing that can make a world of difference.

Before you buy something on credit, wait several months.  Preferrably at least six months, a year would be even better.  In that time, figure out how much said item is going to cost you each month and put it into a special savings account.  This accomplishes two important things:  it establishes that you can actually afford the loan you want to get, and it gives you a sizeable downpayment, which will make your overall borrowing costs less.

For example, let's say you want to buy a new Ford F-150 and it is going to cost approximately $25,000.  You've got some money saved up for a down payment, maybe $3,000, so you are planning to finance $22,000.  You don't want your payments to be too high, but you also don't want to have the loan for too long.  You figure that the right balance between the two is to finance the $22,000 for 48 months.  With an interest rate of 2.5% (currently available at USAA for well-qualified buyers), your monthly payment would be $482.  In addition, your car insurance is going to go up about $20 per month because your new F-150 is more expensive to insure than your old Fiesta.  All told, your new monthly expenses will be around $500 per month.

Six months, three options for savings

So, if you are using my plan, you might hold off on your purchase for six months, putting $500 per month into a savings account.  At the end of six months, you've saved an additional $3,000 towards your purchase, giving you a total of $6,000 for a down payment.  You then need to finance only $19,000, and you're sure you can make a $480 payment.  You've got a couple of choice for how you can work your savings:  a lower payment, a shorter term, or a slightly higher payment with a much shorter term.

Option one:  a lower payment:  19,000 loan for 48 months at 2.5% interest will result in a monthly loan payment of $416 per month.  That's $64 per month less than the exact same purchase made six months ago.  You'll pay $985 in total interest, which will save you about $156 in interest over the life of the loan.

Option two:   At the same 2.5% interest rate, and a $480 monthly payment, you could pay the car off in just 42 months.  That would save you six months of payments and a total of $278 in interest.  Not too shabby.

Option three:  Even better, if you could manage an extra $60 per month, you could shorten your term to 36 months and qualify for a lower 1.45% interest rate.  (Again, at USAA.)  With your six month delay, and an extra $60 per month, you could save 12 months of payments and $713 in interest.  Now we're talking!

Serious Savings

Lets go even more extreme and imagine that you could delay your desires for an entire year.  You'd save $6,000, plus the $3,000 you already had, making for a $9,000 deposit.  That means a $16,000 loan.  Financed at 1.45% for 36 months, your new payment would be $454 per month.  That's $80 a month less than the six month savings, 36 month payment plan, so you're saving $80 a month for waiting six more months.  That's an impressive return.  In addition, your total intrest paid falls to $781.

As you can see, you can continue to play the numbers forever, imagining if you could delay your purchase 18 months, or two years, and suddenly you're saved the entire $25,000, $500 at a time.  FYI - it takes 50 months, just over four years.  However, even a small delay in purchasing can have a great impact on your overall financial situation.  Either by shortening the term and the total interest paid, or by lowering your payment, delaying purchases can have a positive impact on your bottom line.

Let's not forget the power of establishing that you can, in fact, afford that $480 payment.  That is a lot of money.  If you can not go six months or a year, making that self-payment every month, you need to seriously consider that perhaps you can not afford that purchase at this time.  Better to find that out now rather than six months into a four year car loan.

Here's to delaying gratification just a bit, and saving a bundle while doing it!


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