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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 Friday, 25th September 2009 (by J.D. Roth)
September 25th, 2009 at 5:14 am
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.
September 25th, 2009 at 5:16 am
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.
September 25th, 2009 at 5:19 am
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.
September 25th, 2009 at 5:39 am
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”.
September 25th, 2009 at 5:52 am
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.”
September 25th, 2009 at 5:54 am
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…
September 25th, 2009 at 5:56 am
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.
September 25th, 2009 at 5:58 am
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]
September 25th, 2009 at 6:11 am
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.
September 25th, 2009 at 6:13 am
I would say to get rid of the $18,000 debt first! That’s my two cents.
September 25th, 2009 at 6:16 am
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.
September 25th, 2009 at 6:18 am
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.
September 25th, 2009 at 6:23 am
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.)
September 25th, 2009 at 6:32 am
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.
September 25th, 2009 at 6:37 am
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.
September 25th, 2009 at 6:40 am
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.
September 25th, 2009 at 6:42 am
Seats, schmeats — Johnny Cash and Scotch is all you need for a party.
September 25th, 2009 at 6:45 am
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!
September 25th, 2009 at 6:54 am
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.
September 25th, 2009 at 6:56 am
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.
September 25th, 2009 at 6:58 am
@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.
September 25th, 2009 at 7:00 am
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
September 25th, 2009 at 7:02 am
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.
September 25th, 2009 at 7:12 am
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
September 25th, 2009 at 7:13 am
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?
September 25th, 2009 at 7:13 am
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.
September 25th, 2009 at 7:16 am
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.
September 25th, 2009 at 7:18 am
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.
September 25th, 2009 at 7:21 am
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.
September 25th, 2009 at 7:25 am
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.
September 25th, 2009 at 7:30 am
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!
September 25th, 2009 at 7:45 am
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.
September 25th, 2009 at 8:05 am
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!
September 25th, 2009 at 8:22 am
@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.
September 25th, 2009 at 8:36 am
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.
September 25th, 2009 at 8:38 am
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.
September 25th, 2009 at 8:39 am
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.
September 25th, 2009 at 8:40 am
Okay…..I give. What’s an OAIL detector?
September 25th, 2009 at 8:42 am
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!
September 25th, 2009 at 8:48 am
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.
September 25th, 2009 at 8:50 am
@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.
September 25th, 2009 at 8:59 am
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.
September 25th, 2009 at 9:02 am
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.
September 25th, 2009 at 9:23 am
@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.
September 25th, 2009 at 9:24 am
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?
September 25th, 2009 at 9:33 am
@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.
September 25th, 2009 at 9:43 am
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).
September 25th, 2009 at 9:43 am
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.
September 25th, 2009 at 9:56 am
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?
September 25th, 2009 at 9:58 am
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.
September 25th, 2009 at 9:59 am
Generally speaking, I believe it is NOT ok to finance fun. However there may be situations where it should be “considered”.
Our situation:
We got married in 2003 and instead of a one-week beach honeymoon, we planned on a 6-month RTW (around the world) trip. We saved up over the years leading up to our wedding. By 2004, we still have not saved enough. Finally, in the summer of 2005, we have saved enough for the travel expenses but not enough for the “emergency fund” when we got back. We knew it was a risk. Long story short, we took the plunge in 2005 and when when we got back, we started accummulating debt. The difference is, this was a calculated risk, we “planned” to be in debt. There might have been a few things we would have changed but all in all, it was TOTALLY worth it.
It may not be the right decision for everyone but here’s why we did it:
1. We were debt-free besides the mortgage. We rented the house while we were away.
2. We wanted to start a family soon and did not have much time since we were approaching our mid-30s
3. We are both professionals that would have decent job prospects when we got back.
4. We could (and have) stayed at my parents’ house when we got back since the house was being rented.
5. We wanted to travel while we were young, not when we are retired.
6. We decided that we would do whatever it takes to get back up on our feet when we got back which we did - including delivering pizzas and working retail to get some cash flow.
We lived through the consequences of this decision and it wasn’t all pretty. It took us a few months before finding decent jobs but found part-time jobs in no time. Partly because we ended up moving to a different state (intentionally). We are still at the tail end of paying off the debt. We do feel we have our finances under control and are living frugally. We are minimizing interest charges by utilizing intro APRs. The trip cost way more than we thought but again TO US, ABSOLUTELY worth it. It was an experience of a lifetime
Nowadays, we save up for anything fun we want to buy or even not so fun like home repairs etc. Occasionally, we implement a 75% (or so) policy wherein if we have 75% of the money and the time is right, we would go ahead and do it.
September 25th, 2009 at 10:04 am
I don’t think putting furnature into a room is a “fun” item, that’s a household item. You DID pay for that room, JD: You paid in uncomfortable feet, in lack of fun with your friends when you could have entertained, and so on. You paid, not with cash, but with other things in life which are more precious.
I am not saying that you should have put that on a CC, or that you SHOULD Have put furnature into that room, but it’s wrong to say that you were not paying in that time.
For things that are closer to needs, there are options in between: You can find 0% financing, and make sure to pay it off before time runs out; You can wait up to a set amount of time for a sale, &c.
Something like furnishing a room falls, for me, between a want & a need, and thus, needs tools that are also between them.
September 25th, 2009 at 10:06 am
I agree that is isn’t a good idea to finance toys or vacation. You will end up paying twice as much for that vacation that you went on two years ago, and instead of taking another nice vacation. If you can save for it, you deserve it.
September 25th, 2009 at 10:10 am
When retirement accounts are fully funded (that means not only employer sponsored plans but also the maximum for IRAs)
all insurance is up to date and sufficient (life insurance, casualty insurance, liability insurance, car insurance)
all home projects planned/anticipated for the next 10 years are accounted for
car replacement fund is on target…
Unless you are pretty much hitting all these targets at 100%, there’s no justification for financing (via debt) fun.
September 25th, 2009 at 10:14 am
Financing expensive “toys” or trips is asking for trouble. Saving $100 a month is not a lot. If these people slap a $6,000 holiday on their credit card and suddenly one of them loses their job, they’ve just gone from a relatively comfortable life to one where they have some bad consumer debt. Financing, even if they don’t run into any financial trouble, always costs more, anyway. And financing just plain sucks - you’re still paying for the item when it isn’t shiny and new anymore.
Maybe I’m no fun, but I think accelerating car payments and saving more money (some for fun stuff too) is the way to go…
September 25th, 2009 at 10:21 am
I can only comment on what I do — no financing for trips or toys. I generally don’t want toys, so that’s easy, but I do regret not having traveled very much (so far, that is). However, I don’t regret not having the debt.
I totally agree with the comment about working towards something rather than paying off something that’s already happened. I never thought of it that way before!
@ Kevin — I think you’re exaggerating just a little. Most people aren’t in the position of winding up severely disabled in the time it takes to save up a trip versus taking out the loan. If there’s a possibility of that happening, then how will said people be able to pay off the loan with the impending disability and the health care costs that go with it?
I often hear people say “I want to enjoy this while I’m young” — but I think this is just an excuse or a sign of people’s prejudices or fears about aging. Either way, I’m not sure basing a financial decision on emotions rather than numbers is a good strategy.
September 25th, 2009 at 10:24 am
Buying an item that depreciates with credit is basically a way to pay more for that item — bad idea.
Buying an item that appreciates with credit may make sense — depending on the cost of credit and the appreciation rate.
Buying “an experience” is subjective, but if it will provide lasting value (long-term happy memories), then it could easily be worthwhile.
September 25th, 2009 at 10:25 am
This article reminds me of one of my mother’s stories.
When my mother was little her family loved to go to the beach. However her parents were tight on money. One year her father had to tell her that they could not afford to go, it broke my mothers heart. Her father went to the bank and took out a small loan for $200 to pay for a three day vacation to the beach. They drove all night and camped out while they were there. To this day my mother remembers that trip fondly and the fact that her dad was willing to finance that vacation for the memories.
One of the secrets to living a fulfilling and debt free life is being able to recognize the emotional value of an event in someone’s life. Buying “toys” like 4 wheelers, expensive cars, and new furniture almost never provide enough emotional return to justify the cost of financing.
My suggestion is to never plan on financing anything. If you can’t afford it right now, then you cant buy it right now. You should consider financing something only if the item/vacation provokes very strong emotions in either you or someone that you love. The more people in your family that feel emotionally invested, the more you should consider financing. Learn to treat financing as if it is your last option, much like moving in with your parents after being out on your own after several years.
September 25th, 2009 at 10:35 am
Another financial blog that I follow stated some time back that the American dream is not to own a home but to have financial freedom - to be able to make choices without being tied by financial bonds of debt. That said, the biggest consideration for me with anything being financed is whether I want fo be chained to debt, regardless of what the purchase is for. When I owe nothing I am free to make choices that I cannot make if I am tied to a job through bills that I have to pay. As an example, a number of years back I lived in California. My family and my in-laws were mostly in Arizona and we wanted to be closer. We did not have any debt at the time and owed no one anything that had to be paid every month. That allowed us to quit the job and move. I was out of work for three months with no significant hit because I did not have to be concerned with bills that had to be paid every month I could choose how frugally to live until I found my next job. Had we had car payments or worse, toy/vacation payments where the fun is over but the payments continue, we would have forfeited our ability to choose whether to move or stay. Every time we put ourselves in debt, whether interest free or not, ties us to the lender and we are no longer free to choose the course that our lives will take.
So I would say, no. Wait and save and then buy. If the vacation of a lifetime comes, if you are following the “process” then you will have you nest egg and some savings going for those kinds of things, you will have some advance notice to focus more of your available funds toward the activity and can probably do it with no debt.
September 25th, 2009 at 10:52 am
Saving up for fun doesn’t mean you don’t have fun or have toys. We have an antique car, bikes, kayaks and we take wonderful vacations and stay at fancy hotels, etc.
Saving up for fun, in my mind, isn’t that different than having the fun and paying it off for the next 6 months (or longer) except paying it off can be more expensive (finance chages0 and you’ve got debt hanging over your head. But when you save up for the fun you pay for the fun (or toys) in cash you enjoy the fun, the vacation or toy and you don’t come home from vacation and have to pay off a credit card for the next 6 months.
I’ll tell you that saving up for a vacation is freeing, before we even leave the flight, rental car, and hotel are paid for and we go with enough cash (on our debit card, we don’t carry that much cash) to cover our daily budget and budget doesn’t mean we scrimp at all. Most of the time we budget $100-$200 a day for spending money and we live large, we eat out, we drink fine wine, we do some shopping, we pay entrance fees for museums, concerts, shows, etc. Let me tell you that it is awesome to enjoy our vacation to the fullest and come home with no bills to pay.
September 25th, 2009 at 11:11 am
I agree with #58 and others who said the same thing.
I generally do not finance material things but some experiences like family vacations spent together MIGHT be worth it, like my example above #51. The only thing is a lot of people have too high expectations. To me, a 3-day camping trip is more satisfying than a disney vacation for example. We need to define what is enough. In most cases, experiences have a lasting satisfaction than buying a TV for example.
September 25th, 2009 at 11:18 am
My DH & I did the opposite to J.D. - we financed an apartment full of furniture. Lots of reasons why (some of them not good reasons). Like, we were already late 30s/early 40s and neither of us had ever lived anywhere decent. Like, his parents were giving full-time care to his grandmother and once a year they came to stay with us for a break. Like, most of our friends were also apartment dwellers and we were the only ones with a place big enough to gather everyone together.
Yes, we overspent through financing, but we were able to assemble furnishings we truly love that we will keep for life - instead of paying cash at IKEA and replacing things every 5-10 years. And in the meantime our quality of life has been much higher because we’ve been in the position of providing that gathering place.
September 25th, 2009 at 11:20 am
chacha1, have you paid off the furniture? How long did it take?
September 25th, 2009 at 11:30 am
@chacha1
One of the reasons we haven’t purchased furniture before now is because we knew we wanted nice furniture for this particular room. It’s taken a few years, but we will soon have some fine-quality pieces to enjoy for the rest of our lives.
Also, I should note that I plan to post a guest article from Karawynn tomorrow that’s all about how to shop for quality furniture…
September 25th, 2009 at 11:42 am
J.D.,
This is a great topic and one I can never really seem to get a solid conclusive answer to. Obviously I think every situation is different and there no real right answer despite what the Dave Ramsey disciples say. I think it all comes down to self-discipline. If you commit to financing something, are you going to have the self-discipline to pay it down or let it snowball into other debts? I think it is also subjective from the standpoint of what the item in question actually is. I think a 4-wheeler and a once-in-a-lifetime vacation are two entirely different things. At 25, the only debt I have is the $6,000 remaining on my car loan which I have have paid ahead on and my mortgage on my home which I close on in three days. I purchased a very nice bedroom set at Nebraska Furniture Mart (Warren Buffett’s store) for my new home and my girlfriend are I are splitting the costs. I am very anti-credit card but we were able to get very high quality pieces of furniture for about 60% of the price along with no interest financing for 30 months. The minimum payments are only $32 but I have the self discipline to pay it off quickly, especially from my 20% year end bonus from my employer and my $8k tax credit coming at the beginning of next year. Was it an item that I could have probably lived without for a few months? Probably, but what is the harm in getting it now from a financial standpoint? I understand that a dollar spent today is a dollar you’re robbing from your future, but if I was going to buy it anyways when those two windfalls came, what is the harm in buying it now when I’m not paying interest? It comes down to self-discipline in my opinion.
September 25th, 2009 at 11:44 am
Save for it, it is so much sweeter when you can pay cash for it and the desire to have it grows stronger as you get closer to the goal. Additionally, if you lose your job or something happens that impacts you ability to pay off the debt, you won’t have to worry about it.
September 25th, 2009 at 11:53 am
I do not finance fun anymore, or at least I thought so until recently.
I’m paying down substantial debt and doing well on our plan. However, my mother has always wanted to go to Europe and she is turning 72 in February. She’s starting to slow down a lot this year and there’s no way she is going to afford it on her SS.
So… it comes down to what I want my money to do for me. Yes, I’d love to hit our March target for being debt-free. But if I put off Europe for another year and she isn’t able to enjoy the trip anymore, I have the proverbial bank full of money and heart full of regret.
I put half of the expense down in cash, then expect to finance the second half using a line of credit from the bank. Throw in a 10-year anniversary vacation with my wife (which I’ve promised for five years) and we’re now looking at being debt free by October 2010 instead of March 2010.
Worth it? Absolutely. Would I do it for a four-wheeler, boat, new fishing rod, weekend jaunt for no reason? No way.
If nothing else comes from our climb out of debt in the last two years, the fact that I see paying off debt in October as “delayed gratification” is a huge change in my way of thinking. I don’t think of the other everyday sacrifices as a big deal anymore and I get real satisfaction out of knowing I’ve paid down debt each month.
September 25th, 2009 at 12:02 pm
I’ve mentioned before on this site that I financed a nice BMW when I was 25, and was technically way more than I could afford. But it was at 1.9% financing and I freaking love my car. It makes me happy every time I get into it or see it. I’m a firm believer that for the most part material things don’t bring you happiness, and I look to my family and friends for most of my happiness, however I can’t deny that having (and buying) that car makes me smile. That was 5 years ago. No regrets.
September 25th, 2009 at 12:11 pm
Yeah this poster shouldn’t be financing thier toys right now. They could easily save up if they put thier extra 900 a month to it. But here’s an interesting thought for ya.
So my husband just started his 1st year of med school. I’m in finishing dental school soon. We are both financing with student loans. Like a lot of school loans, even though we eat super cheap, bring our lunch to school, have one car that was a wedding present, I wear the same clothes every week- hey scrubs are great!
We just dropped about 2 grand for a really nice digital piano. Feels like a real piano, stienway grand was the subject for recording. My husband has been playing since he was 7 and for the last 2 years we have been married he hasn’t had access to a piano. It’s something he has wanted for a long time.
Well he got 2000 in scholarship money that was a check cut out to him. Should we have used that to pay down our mountians of grad school loans? Dave Ramsey would tell me yes.
But, if we waited until all our school loans were paid off we’d be looking at lik 7-8 years to get him a piano. I’d much rather spend the money now so I can enjoy hearing him play piano in his 20s. I also don’t mind that he is in a generally better mood when he learns a new Debussy piece. Personal finance is personal. Pick the things that are really important to you and focus on them.
September 25th, 2009 at 12:18 pm
Jeez, some of you must just be a ball of fun to have around…
My husband and I are still working our way out of car and house debt, but we went ahead and financed a $20,000 RV that we plan to use quite a bit, even more when we have children. I see my parents with their RV now - but they are getting older and don’t get nearly as much use out of it as they would like due to age and health concerns.
The decision for us was partly based on the great opprtunity, as our RV is valued at over $26K and we are happy with our deal. If we hadn’t received such a spectacular deal on exactly what we were looking for, we simply would have kept saving and waited.
Over the past year, with many family illnesses and deaths, I’ve found that I’m okay with a little more debt so that life doesn’t pass me by and I end up regretting all the things I wanted to do. Granted, you have to have some balance in life between money and fun, but if you have a stable job and easily can afford payments but not the whole price tag, it still might be worth it to you to finance and pay it off early. I know it is for us!
September 25th, 2009 at 12:23 pm
It is ALWAYS appropriate to finance fun, so long as you have the cash in the bank to pay off your financing! I’d rather have more fun any day, than more money!
September 25th, 2009 at 2:26 pm
In my opinion the only things you should ever borrow for are education, a home, and investments. My definition of “afford” is if I have money in the bank to pay for it. If I don’t, I can’t afford it. This includes cars, vacations, and most definitely consumer spending.
I see a lot of justification and rationalization in this thread, but aside from the hypothetical “once in a lifetime opportunity” I haven’t seen any logical argument for financing consumer spending.
Everybody wants things they can’t afford, whether it’s a more expensive car, an RV or ATV, a DSLR camera or a trip to Hawaii. The difference between financial security and living paycheck to paycheck is whether you give in and buy the things you want but can’t afford.
September 25th, 2009 at 2:42 pm
No.
I do love your line about one side of the house not being furnished being a reminder that you bought too big a house. Amen. We have one of those, too.
September 25th, 2009 at 2:54 pm
I think a few others have said this, but my feeling is, It Depends… You don’t ever want to finance things you can’t afford, but this holds true for lots of things — cars, for example. If you have the money, there are plenty of reasons to finance… Deferred payments (if the interest rate on the loan is 3%, and you’re getting 8% on your investments), special promotions (use our financing, we’ll throw in a freebie (gotta figure out if the freebie is worth what you’re paying for the financing))… That doesn’t count the use of credit cards simply for earning points, miles, rebates, etc, that you pay off when the bill comes. My point is, rejecting all financing of toys, trips, etc out of hand is pretty extreem.
September 25th, 2009 at 3:16 pm
They didn’t state their ages, but since they didn’t mention kids, I’ll assume they are DINKs. I’m wondering if they are making plans for the near term future….whether or not they want to buy a home, or if they do have children in the future. When we were DINKS, we lived off my husband’s salary, and banked mine. We have been able to make some very difficult decisions fairly easily, because we always had money in the bank, like putting 25% down on a relatively small house, and that made our mortgage payments very (laughably) small. Likewise, after baby #1 came along, while I did go back to work for a few months, I was able to quit because of the small mortgage payment that was easily managed by my husband’s salary. My husband was also able to go to graduate school after a few years, which required a move, and we were able to use house money as part of his tuition…we could sell the inexpensive house easily.
I’m really happy that we didn’t get sucked into the theory that you have to buy every shiny toy that comes along. If I were them, I’d see able banking at least half of that $900. They may not even know what they want to do in the future, but, money in the bank trumps any toy they can find, and makes big decisions easier to comtemplate.
September 25th, 2009 at 5:06 pm
We need to have toys, that’s for sure, but we shouldn’t toy with our financial futures
September 25th, 2009 at 5:19 pm
It all depends on your situation. There is nothing wrong with financing fun, especially if it is a significant purchase…. Fun for some people isn’t a new nintendo, or computer.. it’s a plane or a boat or a sports car, or ??? If you have enough free cash to afford the payments, upkeep and keep your life style then why not?
You can work your whole life just to end up dead… oh but your heirs will thank you, when they buy the boat, plane, or ???. If you can keep your long term debt below 40% of your pay, put 20% towards savings/retirement, 5-10% for monthly bills, ?? for taxes (be smart buy tax reducing properties, land or a business) and the rest is for you to play with. The best scenario is to pay off your cars, CC, and student loans before you purchase something big. The above is correct, patients are a virtue when you want something big… you must prepare yourself years out!
September 25th, 2009 at 5:24 pm
@Suzanne, it’s going to be paid off in <6 months. Should have been long since, but we have been grasshoppers and also spent on vacations and etc etc (slow starters, slow learners). Also there was a layoff in there, which didn’t help.
We chose to go the finance route (leveraging our lifestyle) so that we could HAVE something that qualified as a lifestyle, versus saving for years and living like starving students and then finding ourselves utterly out of touch with friends and family because we never spent time together.
I’d note however that we didn’t spend money on “toys” like gaming consoles, ATVs, boats, whatever. Most of our money has gone on experiences and high cost of living (srsly).
@JonAtHome, we also view paying off debt as delayed gratification - obviously. We make progress every day and don’t kick ourselves over the late start we got. What’s past has passed!
September 25th, 2009 at 7:08 pm
In my estimation, the only time it is OK to finance fun is if the financing is free. Either that, or, if you can guess-timate the amount of interest you will pay (meaning, what you’ll pay for the “fun” altogether) and it still seems worth it, then go for it.
The vacation is a good example. If you know it will cost $5K, and you think it will cost about an extra thousand to pay that off, and $6K for this vacation is worth it to you, then go ahead and do it.
To me, the only time I would consider doing such a thing would be for some sort of overseas vaction. Anything else, I’ll wait and save.
September 25th, 2009 at 7:26 pm
I wouldn’t finance “luxuries” unless it was 0% interest, and I had the money in the bank to pay it off when it was due. I’m very happy that we had enough cash to fly four kids home when a death occurred in our family. If we hadn’t had that money in the bank, however, I would have financed that particular expense.
September 25th, 2009 at 7:38 pm
One way to negotiate a car dealer down is to finance the car since the dealer gets a kick back from the financing company or makes money on the spread. Almost always they make more money in financing a car then actually selling it.
Last time I bought a car I told the dealer I had the money to pay cash for the car I wanted, but said I was willing to finance if they were willing to deal. They knocked off two grand and I did 100 percent financing. After 90 days I just payed the car off with the cash I had saved anyways. The dealer made money, I got a good deal, and the financing company got all of their money plus 3 months of interest and a 150 dollar early payment fee. We all walked away better off then we started.
Now one caveat is that you need to read the fine print of your loan documents to make sure you can pay off the loan early. If not you may be hit with some nasty early penalties.
September 25th, 2009 at 8:06 pm
For me a lot of the fun of buying an item is saving up for it. The anticipation, saving the money, then taking all the time to pick out just the right one. It seems like the more work I go through for something, the more I either don’t need it, or the more I actually end up enjoying it.
September 25th, 2009 at 8:25 pm
Yes, this sounds like an excellent character building opportunity for the poster on Metafilter. What a great opportunity to act like a grown up and tell yourself, “No” until you can save up and pay for it.
Now don’t get me wrong, you should have some fun, even when getting out of debt. Financing it is a sure-fire way to make sure it gets you.
September 25th, 2009 at 8:50 pm
Like most of the readers here, there’s no way I’d consider financing a “fun” purchase while I’m still trying to get out of debt.
I’m not very interested in toys, but I do like to travel. About six months ago I started a ‘travel’ account in ING. I recently had to buy a batch of tickets and discovered to my delight that the account (which I’d cleverly forgotten about) had more than enough money to cover my tickets. Wow does paying cash feel great!
September 25th, 2009 at 9:59 pm
J.D, I sympathize with your not having money to furnish the house after purchasing it - we were in the same boat. What we wound up doing was to buy a few card table/4 chair sets, before we threw “empty house parties.” People knew that there wouldn’t be furniture, but we did have places to sit. And many years later the card tables and chairs are still coming in handy.
As far as your original question, I’m also of the mind to not finance fun, unless there are extremely unusual circumstances. As many people have said, there are just so many more options available if one is not tied to payments. We’re fortunate in that we’ve been extremely lucky, but one part of luck seems to be putting one’s self in a position to be able to recognize and take advantage of unusual opportunities. The more payments one is tied to, the harder it is to have the available resources to take advantage of unique or short-term opportunities.
Thanks for your writing - I really enjoy it!
September 25th, 2009 at 10:41 pm
That is great Sierra I think that was great that you were able to pay for your tickets with cash. I have been reading Jessica V. Psalidas’ latest book titled, “Financial Purity” and am learning some great money saving tips. I hope to be able to get to a point where I will be able to pay for most things with cash, including travel. Good for you. You are an inspiration for all.
September 26th, 2009 at 1:33 am
I think it’s OK to finance fun when there is a time constraint, and you NEED that new toy NOW, in order to enhance other fun you’ve already saved for…
One example… 2 years ago my wife and I went on an African Safari. We saved a long time for this, but before we left we realized that we did not have a good enough camera. So, we financed the purchase of $1000 in camera equipment (and borrowed a $1000 lens) in order to make sure we had the right tools to get the most out of the trip.
It was worth it… we paid off the $1000 fairly quickly, and it did enhance our trip a great deal.
September 26th, 2009 at 6:50 am
It’s funny, but this topic has come up recently in our house. We had saved for a year to take our kids to another country so we could pay in cash…but then we got a tax bill from the IRS for several thousand dollars (from 2006). So, we didn’t go on some smaller family trips with my husband’s family just in case. Our out of coutry trip was later in summer so we could hold off on that decision. We didn’t think we owed the money but the IRS said it would take 6 weeks to resolve. Ended up, we were right. We did not owe the money and we went on our trip as planned, but it did cause some hard feelings with the in-laws.
Truthfully, I think we were right not to go. We see them frequently enough, but we had to make up for it with other visits and occassions. I just know under those circumstances, I’d have been sitting in the restaurant or what have you with extended family all around me, watching every drink my kids ordered. It wouldn’t have been a good time.
September 26th, 2009 at 8:22 am
Personally I think financing takes all the fun out of whatever it is.
September 26th, 2009 at 8:36 am
We never finance fun things. Last winter we knew that a really fun event was coming up in August, so I took on special projects at work and earned enough extra to finance the trip. Soon after that trip, we had a surprise cutback in income. We’re glad we don’t owe anything now for our fun in August.
September 26th, 2009 at 8:37 am
I think it depends on many factors. How much does it cost? How long will it take to pay it back? Why can’t it wait?
I had been wanting to buy some comic books for months (close to six months actually). We knew we wanted them. When they went on sale with 25% off as a limited time offer, we discussed it, and bought them.
It wasn’t a huge purchase, but it was double our entertainment budget for a month. Meaning that we’ll pay it back next month.
In our eyes, it was worth it, since we would be paying it back after only a month, it was 25% off for a limited time only, and we had been planning to buy them all along.
In most other cases, I like to save up first. But if there is a very good price that will expire before I’m done saving up all the money, I’ll consider buying it now, if it results in money saved.
However, I would never take a trip on credit, for instance. I wouldn’t be able to enjoy it. The graphic novels we bought, we won’t touch until we have paid for them. That’s also part of our rules and prevents us from slipping: whatever is bought on borrowed money can’t be enjoyed until it is paid for.
September 26th, 2009 at 3:30 pm
@Jenn, how much is the $20,000 RV really going to cost you? You’ve got the interest and the maintenance. My sister and I bought an RV (paid cash), and we’ve been enjoying the heck out of it. But it’s a money pit. We pay for covered storage, insurance, AAA RV (it’s worth it!), the RV space at the campgrounds, and the problems that always seem to come up. For example, you need new tires every 5 years whether you have put miles on them or not. We blew a tire and in addition to the four new tires we had to buy, we had to repair the drawer that the tire destroyed when it fell apart. We recently found out we have dry rot, which will cost about $3000 to repair. Luckily, when we travel, we split everything 50/50, but when I travel with my husband, it’s expensive to pay for all that gas.
You can be thrifty and still be a “ball of fun.” We just pay cash for our fun.
September 26th, 2009 at 7:23 pm
My opinion: financing should be reserved for durable assets, preferably appreciating assets. Financing anything else is simply robbing your future self to pay for current consumption.
September 27th, 2009 at 12:06 pm
@Kevin #29 wrote -Financing something really just means you’re willing to pay more to have it now. That’s it.
No, financing something means you are taking on the risk that you won’t be able to pay the debt off when something major changes in your life for the worst. You get laid off in the worst recession in history and go through your emergency fund before you get a new job. Your child gets a horrible illness that insurance doesn’t fully cover. Obviously we could all think of more examples.
If you paid cash for toys or fun these scenarios are not going to lead to you having to stay in a job you hate because of money, or debt collectors calling you, garnishing your paycheck, etc. If you finance stuff it’s much more likely something like that could happen.
September 27th, 2009 at 4:11 pm
@Kevin et.al, financing isn’t always bad and it doesn’t necessarily mean you are willing to pay more to get something now rather than later. it’s fine to finance fun if you can afford it. personally, i do it all the time if the opportunity cost is less than taking money out of investments. the key here is that i have the cash, and it is far costlier to use the cash on say a 0% finance rather than taking money out of investments that are earning more. i have no qualms about it. I just bought a new car financed. i have the money to pay in cash, but why would I since my interest rate financing is far below what i’m earning on the cash?
i would disagree about once in a life time opportunities. if you can’t afford it, you can’t afford it. if say a family reunion is that important, then your family ought to be pitching in. however, not everything is as black and white. perhaps your parents are dying and the only way to get there is by charging it…if that’s the case, i’d be looking to minimize the cost. once in a life time “fun” things though are never ever once in a life time, because how the heck do you know the rest of your lifetime?
September 27th, 2009 at 5:02 pm
In the case of the origial requestor, with $18,000 car debt - no way.
Slightly off topic, but KC @16 makes a very valid point about financing at 0%, which is it actually can end up costing you less. This is because of the difference in the value of the cash now vs the value of the cash in the future. Say you had the choice of paying $1000 for something now, or $1000 for the same thing in a year’s time, using 0% finance. Say for the sake of illustration that you could invest your money now for 5% net pa. That means you would only need to put away $952.38 in order to pay that $1000 in a year. This is called the present value of a cashflow.
KC, your dad did a very smart thing financing the car - not just because of the above, but because it’s a lot easier to find $420 a month than to build up an emergency fund.
This does all depend on it being a true 0% finance deal - many I’ve seen around here lately have had $5/month “service charge” which stick in my craw, but IF it is, and IF you are essentially a good budgetter with little debt and not just buying more ’stuff’ for the sake of it, the 0% deals are great.
September 28th, 2009 at 9:51 am
Sometimes the best emotional decision is not the safest financial decision. Finally well after two years of illness, my husband and I decided to finance a trip. The trip is in Spring 2010. We know the airfare will be paid off next month & expect that most if not all the trip will be paid off by the time we get back. We’re in good financial shape - not great. We have a somewhat small emergency acct, good job security & health ins. & no car debt. I think there really can’t be any hard & fast rules on this if people want to both enjoy life and have financial security. It all gets down to risk tolerance, how well you can balance competing desires (fun vs. financial solvency) & your own honest knowledge of how you handle debt. I also think it is important to put a cap on how much and how often you are willing to finance fun. This trip, its about half our emergency fund which we will be rebuilding as we pay off the trip. I think that is probably too much for most people. But we are extraordinarily lucky and grateful that we have job security and wonderful health insurance that paid 95% of my husband’s cancer treatment. For other people, they might only want to finance $100 of fun.
September 28th, 2009 at 5:20 pm
I’ve heard too many horror stories to bother with the “you’ll come out ahead” financing games. For example, friends of mine bought a washer and dryer at 0% for 18 months, psyched to earn the interest and then pay off the balance near the end. When they went to get a mortgage, the bank was pissy about that item on their credit report, and in the ensuing rush to get everything straightened out, they were outbid on the house. Not worth it!
September 28th, 2009 at 5:24 pm
By the way, JD, an empty room to me says pool table, not furniture. :p
September 28th, 2009 at 5:50 pm
Good times and building memories are an investment of sorts, so I’m not completely against financing it, but only part of it.
If you’re going to finance a cruise around the world for a month, followed by five years of paying off credit cards, then the glow of the trip will be replaced by the drudgery of the deeper/longer hole you’ve dug for yourself.
As always, in all things, moderation.