At AskMetafilter last week, a user asked a question I’ve been thinking about a lot lately. Now that I have my finances firmly under control, now that I’m building wealth, is it ever okay to finance fun? Here’s the question (with minor edits for clarification):
When is it okay to finance Toys? We have a budget, all bills are paid, we are saving $100 every month, the only debt we have is our cars and house. No credit cards. Each month we have about $900 left over. Between the both of us, we have a wishlist including:
- a four-wheeler
- a vacation
- cosmetic home improvements
Facts and opinions welcome. Should we save ’til we can pay cash? Or is it okay to finance some or all of our wishlist?
I believe that in general, it’s not a good idea to finance Toys. I’m not saying that you shouldn’t buy Toys (as long as you have a balanced financial life), but that buying Toys on credit is almost always a poor financial decision.
The AskMetafilter user who posed this question still has $18,000 in car loans and is only saving $100 per month. I’d strongly advise against financing fun in a situation like this. But what about in my case? I’ve paid off my consumer debt. I have ample emergency savings. I’m maxing out my retirement plans. I’m financially secure. Should I buy Toys on credit?
To be honest, this option rarely tempts me anymore. You could probably persuade me taking out a no-interest loan is worthwhile if I have my money in a certificate of deposit earning 3%, but that’s about the only circumstance I can think of where it makes sense to finance Toys.
To me, this question implies a lack of patience. I’ve been there. I used to “need” shiny new Toys today. Over the past few years, I’ve developed discipline. Now I use purpose-driven saving to pursue my goals. I use multiple accounts at ING Direct to save for different Toys: new furniture (almost there!), my Mini Cooper, next year’s trip to France, etc. Yes, I want this stuff now, but I’ve learned to wait.
It would have been nice, for example, to buy new furniture in March when the work on our living room was finished. I could have put that expense on my credit card — or obtained store financing — and we could have used the room to entertain this summer. Instead it’s stood empty. In fact, I had a party last weekend for which it would be nice to have the extra seating. At one point, six of us were standing around the empty room, listening to Johnny Cash and sipping Scotch. It was fun — but it would have been more fun if we’d had someplace to sit!
By waiting, however, I’ve been able to save money to pay cash for the furniture and we’ve picked up a 25% off coupon and we timed our purchase to coincide with a huge sale (50% off on one item we want!). If I had made a premature purchase in March, I would have paid more for the furniture — and I would have had to pay interest on the amount I financed. Patience pays.
By saving, you create a delay. During this delay, you often decide that you don’t want the Toy you once thought you wanted. Or you discover another, better Toy. Or you find a better price. Patience is a virtue, especially with your pocketbook.
But maybe I’m missing something. Maybe there are time that it makes sense to finance fun. What do you think? Does it ever make sense to purchase Toys on credit? Would you borrow $5,000 to make a trip to Europe knowing that it would take you years to repay the loan? Would you buy a boat on credit? Is the answer different for somebody $18,000 in debt versus the millionaire down the street?
When is it okay to finance fun — and when should a person practice patience?
[AskMetafilter: After all bills are paid when is it ok to finance "toys"?]
This article is about Ask the Readers, Choices, Savings
I think it depends on the type of fun and the financial situation at the time. If it’s an object that is the type of fun, then it can probably wait, and you can probably get it cheaper in the long run by waiting (e.g., Nintendo just reduced the price of the Wii video game system). However, if the fun is an event (e.g., family reunion in the Bahamas) and is something that is unlikely to occur again (due to death or illness of a family member after the event), then it would make sense to finance it and have a cherished memory that no amount of money could ever replace.
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I would argue that it never is, with a caveat. There are times that something special comes along, like a once-in-a-lifetime trip with family/friends/special event, that someone is not able to pay out-of-pocket. Then, assuming there are no other debts, the cost isn’t too high, the interest won’t be exorbitant, etc, I suppose you could make a case for it. But beyond “once-in-a-lifetime” kind of stuff, no. Taking the time to save gives you more time to think about if you REALLY want it, to make choices between the various options, and in the tech world, to let the bugs get worked out and the biggest price hit taken by the early adopters.
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I vote no for financing fun or toys, unless you can finance for 0% and you will have cash to pay off the fun/toy in short order. Even so, I think its best to save up for these kinds of purchases. And I especially vote no in this situation when theny have $18,000 in car loans and are only saving a small amount each month. I’d take that $900 and put it towards paying off the cars and increasing savings way before financing further fun purchases.
We put aside a set amount each month for travel/vacation, fun (yes we have an account at ING labeled fun) and house/furniture. Generally our travel fund has enough in it to cover plane tickets but not much else, so when we plan a trip we up our trip savings so that by the time the trip comes around we have enough to pay for it in full with cash (although we don’t use credit card for day to day purchases, we normally use our cards to book tickets, hotels, rental cars and then we pay the bill in full).
We’ve been in our home for five years and we still have pending furniture purchases (one of our goals this year is to save up enough to buy new living room furniture). We also have a somewhat empty room, and could totally use a new bed.
My concern with financing these purchases, especially during this economy, is what happens if you have a salary reduction (like I did – and everyone else in my company), a job loss or a true emergency.
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If the original poster has $900 left over, why are they only saving $100? Anyways, I think that financing toys like that is a mistake because it increases the ongoing costs of maintaining the household.
If you wait until you have saved it up, then if something goes wrong, you aren’t in a really bad place. One thing to do is make your emergency fund be 6 months (or 3 if you’re comfortable with that) + cost of next toy, and then buy the toy when you hit your target.
Honestly, if they have $900/month left over, how long would it take to save for a vacation? or the cosmetic home improvements? I have no idea what a 4 wheeler would be, so no comment there.
I agree with Lesley @2, if it is a once in a lifetime event, I might consider. E.g. if I hadn’t had the cash to make it to the celebration/gathering for my grandmother’s 90th bday, I would have borrowed for it, but I also would have done all I could to make the trip itself really cheap, and not gone to the museums, golfing, etc.
Perhaps this is really just another argument for an “opportunity fund”.
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I would say have to agree with sjw that with so much in free cash available, that the writer should be saving more than just $100 each month. Also, they don’t mention anything about retirement planning (unless that is included in the “all bills are paid part”). With that much left over, they could still fully fund an IRA of their choosing and still have half of the extra money left over.
Personally, I have no problem with financing anything as long as they are investing the money in a vehicle that earns more than the financing costs. As Sam had ssid, if they are taking advantage of a 0% interest offer such as what Best Buy offers regularly on “fun” stuff for the home, and the money is being put into a high-yielding account, then they are not losing anything. However, if they are putting the “fun” on a regular credit card and paying over time while paying any interest, I would say that is a poor choice.
I wrote the following on No Credit Needed the other day regarding staying out of debt, and believe it applies here as well (as sjw mentioned):
“I’d also suggest creating “event funds” as a way to plan for certain things such as a large purchase, holiday gifts, or vacation. What this accomplishes is simply a way to segregate funds that will go toward these specific events, and acts as a guide insofar as how much is available to spend for each purchase. It acts as kind of simplified budgeting tool so as not to take on debt and enabling people to pay off the each purchase completely.”
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Funny you should mention this now…I’ve been thinking lately about how frugality is sometimes just plain boring.
Sure it’s responsible and rewarding in its own right. But buying toys is fun. Shopping for stuff is fun. It feels awesome and it’s a blast.
Sometimes I’ll sneak in a fun purchase like a new computer or a new phone to satisfy that primal need to buy stuff. I’ll do my homework on it and all that good stuff, but you gotta let that animal out to play every so often to make sure it doesn’t get repressed and come out in a fit of rage or something.
Great, now I feel like going out and buying a bunch of books…which I find to be so much fun…
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I agree with Walter and Lesley – no financed Toys, and no financed Fun unless it is a once-in-a-lifetime event that cannot be done at a later time.
I also agree with swj that if you DO finance something fun, that you should make every effort to economize.
One thing that many students do that I am actually okay with is to take a cheap backpacking trip to Europe right after graduating, before they begin their life in the “real world”. I think this is a good experience, and one that is very hard to replicate or even find time for once they start working full-time. As long as they don’t significantly raise the amount of their overall loans, it shouldn’t impact their ability to pay it back, and it’s a memory they will cherish forever.
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I would say in general you shouldn’t finance “toys” but there are always exceptions.
[edit - I just read the comments and Walter beat me to this example!]
For some events – timing might be an issue. For example if a good friend/relative decides to get married in the Caribbean or somewhere exotic and you know there will be other friends going. That might be a case where I would consider financing since there will be no gratification in that case if I delayed.
The AskMeta person sounds interesting – he said he has $900/month left over but only saves $100? [sjw said the same thing]
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Hmm… maybe if it’s on sale where the difference between the sale and normal price is *more* than the interest you’d have to pay, and you don’t expect this to be the case again before you’d have saved up enough to pay cash? On the other hand, this /would/ tend to remove the very useful sticker-shock effect.
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I would say to get rid of the $18,000 debt first! That’s my two cents.
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I agree with the above posters, I don’t like to say that its never okay to finance something because there are always exceptions.
In your furniture example, I know its prudent to wait until every penny has been saved and you have a coupon/etc., but what if the sale had been back in March? Wouldn’t the interest on a short term LOC (in my case, I pay about 4.5% annually, or some tiny fraction per month) to pay for the furniture been worth it if you saved 25% of the price over buying it when you HAD saved enough? Or if yes, it was a milestone to have finished a room and new furniture in the room meant you could use the room rather than have it sit empty while having parties.
I don’t know, sometimes that seems like frugal to the side of cheap. Each situation /family is different, but I don’t know if saving $25 in interest is worth it (to me) to have no furniture in a newly finished room for an entire summer (my SO would be pissed if we had parties without furniture too).
100% agree with the above about 1 off situations where you have to finance to participate. I guess everyone just needs to make sure the situation warrants it (may be too easy to call everything a once in a lifetime opportunity, since that can technically always apply to everything) and that you can pay off the line of credit quickly.
Financing something at 19% interest on a credit card is NEVER a good idea, ever, IMHO unless that’s all you have access to. Get a line of credit from a bank or a low interest card if you must finance something.
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I’d say no, BUT other commenters did bring up a good point about a once-in-a-lifetime event. That might be a maybe, depending on the event, but all in all, I vote no…pay off your debt and save up for the fun stuff so you don’t have to pay for it over and over in interest.
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I agree with the others that cases of something that is very time-sensitive and deferring the purchase (mostly this would apply to trips) is not an option – you’re either in or out, may well indeed be worth financing. The trick is not to let it become a habit.
I also still have no regrets about financing a musical instrument purchase several years ago, and would suggest the same to others in a similar situation — if I hadn’t taken out a credit union loan to buy the instrument, I would have been renting an inferior instrument for the time period, and in the end the interest paid on the loan was comparable to what I would have paid to rent over the same time frame, but I got to play a nicer instrument in the meantime. I suppose another option would have been to quit lessons and save the money that would have gone to renting until I’d saved up enough to buy, but by then my skills would have gotten rusty. (I should note that I had been renting a crappy one for a year and knew this was a hobby I’d stick with for a while; I wouldn’t recommend financing equipment for a new hobby that one was trying out.)
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If you have to finance it, it’s an investment. And if this ‘investment’ only yields momentary emotional satisfaction, it shouldn’t be funded with debt. There are a lot of people who wind up in bankruptcy court because they financed their fun.
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Financing fun is offset with knowing that the debt collector could be calling anytime. Sort of takes the fun out of it, doesn’t it?
As for the “once in a lifetime” events, it’s pretty common to know a wedding or family reunion is happening six months to year in advance, for which you could save up something to defray the cost. Maybe you couldn’t get it all, but you could at least prioritize other spending to make sure you got most of it knocked out in advance.
Also, a lot of “once in a lifetime” stuff is really like “important” and “urgent” stuff at work, or “emergencies” that people have to pay for. Someone hitting 90 or celebrating a 50th anniversary — those are events that don’t come along so often. But Disney will still be there 10 years from now, Europe isn’t going anywhere, and the Carribean is going to still be around, too.
As for the original question, I say a strong NO. If they want to take a vacation, then save up for it. Maybe scale back the idea somehow to make it fit the budget. Home improvements can likely be broken down into smaller segments that can be paid for in cash. And a four-wheeler? If you want one so bad, there’s this wonderful site called “craigslist” where people who are going broke because they financed their toys and can’t make the bills are trying to sell them to make ends meet. Pick up one there — with CASH. I can only imagine that the depreciation on toys is horrible, especially in this economy, find a way to take advantage of that.
Me, personally, I’d be dropping those car loans like a bad habit. Debt really is slavery. We own our cars and are working on killing off the student loans, then we’ll have the mortgage left. Fewer obligations means more freedom in life.
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I think you can finance when the numbers work in your favor. IF someone like K-mart offers free layaway and you are buying toys for Christmas why not use the plan? I know its technically not financing, but you have to make regular payments – its sort of like the 0% financing.
My mother wrecked her car in 1999 and needed a new one – quickly. They had the money to buy a new one. But there was a 0% financing deal for 36 months and Dad ran the numbers and really couldn’t find a reason not to buy the new car with the free financing. The used cards weren’t that much cheaper and he was still able to work a good price for the new one (Mom wrecked the day after Christmas and it was a very opportune time of year to bargain for a car). So instead of them draining their account of $20k, they put $5k down and made payments for 3 years.
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Seats, schmeats — Johnny Cash and Scotch is all you need for a party.
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I’d suggest selling the cars in order to pay cash for cheaper cars as they are wasting money by having $18,000 in car loans financed when they could drive for free. Then, they’d be completely out of debt, besides their home mortgage.
Taking that extra estimated $1800 a month (2 car payments + $100 savings + extra $900) they could easily 1) allot some $ for long-term savings, 2) allot some money for future cars to be paid for in cash, and 3) allot the rest for their toys. I believe they’d have it all much faster than their current approach–AND w/o financing !
There may be one in a life time times when financing COULD be acceptable, but this is NOT one of those times!
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The only time I would be okay with financing toys or fun is if it’s a situation where fun is actually mandatory and can’t be put off: Someone is very sick or dying, or the family is in some other kind of crisis where being able to get away on a vacation, go out for a nice dinner, or get some enjoyment is almost a need, and much more important than carrying some extra debt.
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You have to do what’s best for you and financing probably is not the best option. I give you credit, I usually just set out one saving fund for a specific item, whether TV, laptop, trip and focus on that.
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@Kristin: How can you possibly give that kind of advice? Do you know the circumstances surrounding the car loans such as interest rate, number of months or even the number of cars that the loans cover? Perhaps this person just got the loans at 0% interest for 60 months, which comes out to only $300 per. If it is a 72 month period, that payment drops to $250 per month, and in both scenarios nullifies your “estimated” calculations (which by the way I can’t figure the reasoning behind if you wouldn’t mind explaining where you get the additional $1000 per month).
Giving specific advice should not be attempted without having all of the relevant information, which in this case, we have next to none. It is not only irresponsible, but foolish at the same time.
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I have to add: never say never. It’s not a great idea to finance a toy or fun, and I agree that if you wait to pay for the trip or toy in cash, you may decide you don’t want it any way. This is ideal.
However, depravity isn’t good either. If you really, really want to take a trip to Europe, for instance, and you’ve saved some money towards that trip, but need to finance the rest. Well, then I think that maybe, if all your other debt is paid off, it’s okay.
Basically, it’s best to wait and pay for things in cash and be patient. However, it’s not completely sinful to finance portions of items if all your other debt is paid in full. I think I just repeated myself.
-Little House
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Hubby and I have several “toys” we’d like to get. But then we woke up and realized that:
1.) The time we can use the “toys” such as a boat,camper or convertible is limited to only a few months out of the year. And we find that in those months that we COULD use the toys, we tend to be busy every weekend with family, and enjoying the weather.
2.) The maintenance cost is high
So what have we decided to do?
We decided to put away money every month ($100/month) to do our “fun things.” For instance, the perfect weekend we want to go out and speed through the countryside in a convertible, we will rent one for the day or the weekend!
We also have decided to rent a boat on those beautiful days that we want to go boating. We can get a speed-boat for the day at a local Lake for $150. A Pontoon boat for $75.
You can even rent a pop-up camper from someone if you wanted to go camping!
So…instead of paying out the wazoo, just rent (or borrow) them as you have time to use them. No, we cant say they are ours, but we can do the things we enjoy, and for alot less than if we were to own them.
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I look at it in terms of whether there is any “investment” aspect to the fun spending.
Going on a vacation is obviously done for fun. But I think it is important for one’s marriage and family life to go on vacations. So I am reluctant to cut out vacations entirely even when trying to reduce spending (although I certainly might cut back to a three-day vacation rather than a seven-day one).
Some fun expenses run the risk of using up time. For example, if I had a big-screen television, that would tempt me to watch more videos. I subtract points in cases like this because it doesn’t make sense to spend money on something that is going to use up more time when I already complain that I don’t have enough of the stuff.
Rob
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I love your Blog and the posts. From what I can tell you are about 15 years behind me and every time you put out an idea I go…check did that, check did that too. It sort of validates all the hard work I did and struggling I did to save money. I went to night school and graduated with straight A’s in 1994 and promised myself a new sports car. Well I did not get it until August 2008 and it was used (But perfect) All the other stuff had to come first. 401K, ROTH, Savings, 15-year mortgage but then you are about to turn 51 and say….If not now when? I got a screaming yellow 2006 Mustang convertible and I have had it a little over a year now. I love it!! It makes me happy. So yes you have to do all the hard things and they are important but you have to reward yourself too or what is the point?
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I personally don’t ever feel comfortable financing toys. Heck, I don’t feel comfy financing much of anything except a house. We’re trying to save up to pay cash for our next car, even.
We do buy fun stuff, but we always save up for it. If we can’t save for it, we don’t buy it.
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As a reformed sinner, financing “fun” is one of the worst traps to let yourself get into, because it’s far too easy to keep convincing yourself that events or objects are “once in a lifetime” opportunities. “This will be the ONLY time I can do this/see this/experience this!” or “This is the ONLY time I’ll ever have the chance to buy X, Y or Z!”
Since I’ve gotten control of my finances, I’ve learned a valuable lesson. The process of saving money up actually gives me time to research the product or service, so I end up knowing exactly what I want to buy and what the best prices are for it. For example, I saved up my change for 6 months to let myself buy a digital camera. I was able to look up all sorts of reviews, track sales, and try different models out. When it came time to purchase, I had confidence that the price was the lowest for that model in the marketplace. As a matter of fact, I did not see a lower price for the camera I chose for many months, and then only after there was a newer model available.
In the example of a family reunion being held somewhere special, there’s generally at least 6 months of group planning involved to pull off a large scale event like that, which is plenty of time to either adjust budgets, make sacrifices, or find additional sources of income. If your family is expecting you to travel to some expensive, exotic location with less notice than that, then perhaps there are some bigger communication issues that need addressing. Likewise, if you want to get involved with collecting anything, learning to spend responsibly is crucial, as there will always be something else that you want or “need” to add to your collection.
About the only sudden situation where I would give some leeway in regards to using credit or financing is in the case of travel because of a sudden major illness or death, but I think that really shouldn’t be classified as “fun”. To me, that’s more like having your car break down–it’s an unexpected expense, but more along the lines of a true “emergency” rather than something frivolous.
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I really don’t think someone in $18000 debt who’s only saving $100 (!!!) a month with $900 left over should be financing anything fun. But that’s just me.
I put all large purchases (holidays etc) on my credit card but I always pay them off before the due date, though I might not necessarily have the cash the day I make the purchase.
I agree that there may be some “experiential” things that are once in a lifetime but it would really depend on what the interest was and how long it would take me to pay off. But really, that is what an emergency fund (or savings) are for.
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It’s really interesting reading the comments on this post. It seems to me that a lot of the opinions are strongly coloured by a youthful “invincibility complex” that leads the writer to believe that an experience 5 years from now will be just as enjoyable and worthwhile as an experience now. I’m also noticing a subtext of patience as a virtue, that seems to suggest that suffering for the sake of suffering is a worthwhile pursuit.
I’d like to take a different tack. First of all, in the interest of clarity, I think it’s clear that the poser of the question should definitely NOT be financing any “fun” in the near future. Their financial lives are obviously pretty chaotic and disorganized. However, I believe there are definitely cases where it’s perfectly acceptable to finance “fun.”
As a few other writers have noted, if health is an issue, then by all means, take the experience while you can get it. Paying an extra 6% for a vacation is better than paying cash for it if it means the difference between enjoying it to the fullest, or being pushed around Aruba in a wheelchair.
Furthermore, “financing” something just means you’re paying more for it than you have to. However, if that difference lets you enjoy it sooner, then the real question is, “how much would you pay to have that item/experience now, rather than later?” In JD’s example, he seems to suggest that since he ended up paying less for his furniture, then it was the right call, even though several of his guests had no place to sit down. The real question, however, is “would it have been worth $300 (or whatever the financing charges would’ve worked out to) in order to be able to offer his guests a place to sit?”
Now, if the answer to THAT question is “no,” then he still made the right call. However, phrasing it in the proper context like that serves to highlight the real, underlying value judgement being made, rather than simply adhering to some blanket “never finance anything” dogma.
Financing something really just means you’re willing to pay more to have it now. That’s it. If you have the rest of your financial house in order (debt-free except for the house, 3-6 month emergency fund, setting aside 15% for retirement), and financing the item/experience won’t negatively impact any of those other guidelines (except the debt one, obviously), then I say “go for it.” Life is short, and you only get one kick at this can. What good is it to save up and pay cash for your grad trip if you’re 2 years too late? What good is it to finally buy that grand piano with cash if arthritis has already set in?
You only live once, and you will NOT be as healthy and mobile as you are now. It’s a downhill road, so if you’re in a stable financial situation, consider what you’re really trading here. A few extra dollars for an experience NOW that might not even be an option later.
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I’d say never finance fun. Except for those Once-In-A-Lifetime events, for which you should have a plan for paying it off before you charge it, the payments will go on long after the joy has passed. Even some OIAL events should be turned down if you really can’t afford it (entire family extravagant vacations, for example, as opposed to Grandma’s 90th birthday).
When I was a teenager my Dad mentioned in passing that it was a bad idea to ever make payments over time for anything that doesn’t appreciate. The simple sense this made to me has strongly affected my attitudes toward credit, to the point of no car loans and no unpaid credit card balances. Memories of Grandma might appreciate, but a four-wheeler or vacation? Probably not.
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Let’s say your budget is $500/month for fun. You buy one exciting thing every three months worth $1500. With these assumptions, consider two cases.
1) you wait to buy the first item until the 4th month. You are not getting the exciting thing in the first quarter. You pay for everything in cash, and you store it in an online saving account at 3% where your average balance is $750.
2) you buy the item in month one, and finance the charge. You can pay it off in three months. I’m ignoring the month before your bill comes, because really, that only matters for the first exciting item. Your credit is good, so you pay %6 interest on the charge, which is an average balance of $750.
You can already see where this is going. In each scenario, you get one exciting thing each month. In the second one, you are losing 9% annually on a $750 amount. You will be paying for that forever unless you break the cycle. You didn’t pay 6% to get your toy early, you paid 9% on $750 for the rest of your life for one extra toy! That’s over $1000.0 for ten years of this cycle.
Do _not_ finance a toy, or anything else if you can avoid it. The one careful exception is a home, but there are so many factors that you have to consider that even that may be a very bad decision.
There is a clear breaking point at $0. If you are above that line, you will start moving up. If you are below that line, you will start moving down. The farther from the line, the faster you move. Get out of debt, and Do It Now!
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I’m not really sure the right answer is the same for everybody. Personally I couldn’t bring myself to use credit to purchase toys. The thought never even crossed my mind until last year when I saw an acquaintance do it on a particularly grand scale:
A couple I knew in grad school finished their degrees, and instead of immediately starting work (they both had jobs lined up) took 6 months to literally travel around the world before starting working. They felt strongly enough that they wouldn’t have the freedom to just take off for half a year once they entered the working world and chose to use credit to finance their trip. They had an absolutely once-in-a-lifetime experience and, from what I’ve heard, have zero regrets.
They went into debt for something that was deeply, truly, important to them. I can’t find fault with them for it – what they did took a level of courage and commitment to their values that not everyone has.
I guess in rambling on I’ve found my answer to the question – it can be ok to use credit for a “toy” if the toy is really something that is in alignment with your core values. Of course if one of your core values is financial security, then maybe it will never be comfortable for you to buy toys on credit.
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I am totally drinking the Dave Ramsey kool-aid right now and no way should they be financing anything that’s not life and death, let alone “toys”. Why are they saving money every month? That $100 plus their $900 “extra” s/b going to pay off their debts now! Better yet — yesterday!
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@Kevin — You seem to be playing both sides, and I don’t think it works that way. If you got to the place where you have an emergency fund, no debt but the house and are putting aside 15% for retirement, doesn’t that say that you likely have developed financial discipline that would prevent you from charging a vacation or rushing out and buying a grand piano? In our budget, we have line items specifically to pay for vacations and other long-term things (in particular, my wife’s grad school). If someone who was financially disciplined really wanted a grand piano, I’d expect they might establish a “grand piano fund” and add to it monthly, and they likely would have a decent idea of what they wanted to pay for it. If an opportunity opened up, they might pay for it, but I just can’t put together the vision of someone with financial discipline running out and buying a grand piano on impulse.
I guess, though, that the original question that sparked it might be an example. My own experience in the last few months has firmly established in my mind the validity of the debt-free lifestyle. My wife got laid off from her job, but because we had paid off both cars and have been able to work the budget to live off of one income, this is a blessing rather than a panic situation. She can be home with the kids and work on starting her own business and has the time to do it. The layoff was a minor speedbump or a blessing, depending on how you look at it — and severance pay and unemployment is gravy on top we are stocking away. Had we financed toys and vacations, this would not be the case and she would likely be feverishly looking for a job to pay the debt down. No amount of Stuff or vacation can provide that kind of peace of mind.
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Nancy has a great point. One can rationalize almost any purchase if we try hard enough. It’s a slippery slope. Financing “fun”? With $18,000 in debt? The truth is that the poster isn’t going to have any fun on vacation or on that four-wheeler (which by the way will lead to increased insurance and medical bills on top of the purchase price) if they know in the back of their mind that they’re going to have to pay it off eventually, with interest.
Fun is way funner when it’s paid in cash.
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There’s a 3rd option, which I prefer:
* Save until you can buy it with cash, but don’t buy with cash.
* Put that cash in a sub-account in ING Direct some other account that you won’t touch.
* If you can get 0% financing, finance it.
* Make those payments from your account that’s set aside.
This way you’re earning interest on your money instead of paying interest or just not gaining anything.
Of course you should only do this if you can get 0% financing, else you’re throwing away money.
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A once in a lifetime opportunity comes only once. The second time you have a once-in-a-lifetime trip (or whatever) you need to finance, realize your OAIL detector is broken, skip it and start saving for the third.
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Okay…..I give. What’s an OAIL detector?
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The consensus seems to be ‘it depends’
Speaking to the specific example, they are saving $100 and have $900 left over each month? Questions that come my mind are, do they have an emergency fund of 6 months, are they maxing out their retirement accounts, how are their college savings looking? Not until they have their financial foundation in place and are doing all they can for their future, would I say splurge money on toys. If you can at least put down 20% cash on the item, have 2-3x the cash flow of the payment(w/ low apr) and have your financial foundation established, then would I say shop smartly!
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J.D., I think you have it nailed when you say it’s about developing patience. There’s often more than the financial aspect involved in financial planning, and one of the biggest issues (IMO) is developing character traits. Saving for something wars against the instant gratification mindset that’s so prevalent in society. Even if you get a screaming deal (arbitrage between no interest financing and enough cash in a money market account to pay it off), it’s sometimes better to wait. Just my two cents.
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@FinanceAnswers: You hit on my points exactly. We do not have all of the information regarding this specific situation, so to offer pointed advice would be pointless. And I would have to agree with you that if they are in an optimal financial state, then who is anyone to tell them how to live their lives and spend the money that they work hard for.
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I used to think financing a toy was perfectly fine-I’ve financed a number of them over the years. Now I don’t because it’s just not fun anymore. I’ve realized that things don’t usually provide me with long term happiness.
I wouldn’t borrow $5k to go to Europe. My family went on a week-long driving trip this past summer and had the best week we’ve ever had together. We saved up for it and paid our credit card bill in full when it arrived. Without the savings account I’m not sure I would have had as much fun on this trip. I would’ve been thinking about the costs of hotels and meals racking up on our credit card.
Everyone has their own definition of fun, and for me the most fun is not having that monthly bill show up for a toy or experience from the past. I’m not a millionaire down the street-yet, and I don’t play one on TV. I’ve just found what works for me and debt doesn’t.
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I agree in that financing implies a lack of patience. Waiting and paying cash provides more benefits in that you may decide you don’t want the item or a cheaper price. Financing also is a gamble in that you’ll have the money in the future to make the payment. We all know we can’t predict the future and if we’ll be employed tomorrow. Even at 0% interest, the payment or multiple payments will be burdesome without the income to make payments.
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@Suzanne = OIAL – Once In A Lifetime. The “detector” bit would be broken if you encountered two once in a lifetime events
It’s kind of in the same vein as people who are financially “surprised” by Christmas gifts.
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One of the real problems with financing a toy, is that most people have an endless list of wants. We say we don’t. We tell ourselves “if only I had x or y, life would be awesome”. But even many of the minimalists I know are planning a trip as soon as they get back from one. Complete contentment is rare.
I’d rather be saving for a future purchase than tied to my last one. Except in rare circumstances, I wouldn’t want to see a chunk of my pay going to a vacation that already happened.
If I were to finance a boat (not that I want a boat, but yarn stores don’t have financing departments) no matter how much I enjoyed it, I would have a hard time remembering that I don’t really own it. If I don’t have something, I can focus and save for it.
Does that make any sense?
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@Gee, couldn’t agree more.
@Jason, thanks. That was bugging me!
It seems to me that everyone’s comments at the core of this are fairly universal: don’t finance unless you can pay for it now and are out of debt. Sure, there are many ways to pay (0% financing and keeping the money in a CD) that can work, but that’s assuming the money backing the trip is there in some account.
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It totally depends on what it is. If it’s just a night out to a dinner and a movie, you should be able to do this at least once a month in my opinion. If it is a bigger trip, you can take cheaper ones much more often. You should save for most if not all of a bigger trip (to Europe or to a resort somewhere).
I like your idea of keeping a wishlist tho and updating it as you go. Delaying the purchase is a great idea as well since you will probably change your mind (I know this has happened to me many times).
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I financed a bunch of art (5 figures) when I bought it for a few reasons:
1) 0% financing for a year
2) The art had no tax since I was buying it on a cruise (and I would have to take another cruise to get the tax break!)
3) They had a selection of works by an artist whose art I had promised myself I would buy once I sold my business, and I had just sold my business
4) Art is much cheaper when purchased at an auction (I already knew the gallery prices would be far more expensive, plus I would have to pay tax…in other words, I did my research)
I easily qualified for the loan, paid nothing for a year, kept the money in a savings account, and paid it off in full just before the 0% expired.
Interestingly enough, they were offering 10% off if paid in full, so I would have saved a bit more by paying in cash…BUT that would have basically killed my emergency fund, and I thought the small amount was worth it to have my money in cash. (By the time the end of the 12 months rolled around, I had plenty more cash in my savings account.)
So, I’d say yes to financing, as long as:
1) You are getting an amazing deal that would be difficult to get otherwise
2) You are getting an interest rate within a percent or two of your savings account interest rate (i.e. savings account 1.5%; interest rate 2.9% for a year)
AND
3) You have the financial discipline to actually save all of that money by the time the intro rate expires.
Most people will not meet all of these qualifications.
-Erica
P.S. I buy nearly all of my furniture used.
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I have an itty bitty car loan, that started off as a total of $2,500 to purchase my third, project car. Basically, this is a toy that I financed, for a couple of reasons:
1. I needed to build credit
2. The car was cheaper (and has been more useful) than the bike I was thinking of getting to build my credit
3. I didn’t want to drain my cash savings to pay for it
4. If something desperate happened, I do have enough cash to pay it off and not have to worry about it
Of course, I have no other debt but deferred student loans while I’m in school. No credit card balances, no other car debt. In this case, I’d argue that they already ARE paying for financed toys — the cars they already have. If it’s not important to you, why have $18k worth of loans for it??
And there’s no WAY I’d finance a $5k vacation that would take YEARS to pay off. Only if I could do it in a year or less, but if you can pay off that much debt in a year or less, why take it on in the first place unnecessarily?
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Personally, when faced with the option of financing something, I calculate total interest charges and add that to the cost of what I’m buying. If that total cost is worth it, then I go for it.
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