Pay Now or Pay Later?

Decisions, decisions.

Notice the title of this post isn’t “Buy Now or Buy Later.” That’s because you’ve long ago made the decision to buy. Now, you’re trying to decide how long you should wait to pay for it.

Should we pay now or later?

Recently my wife and I were doing a little furniture shopping. We had been saving for a new couch and recliner for our living room for a while, and we had finally reached our goal.

Strolling through the store, I saw a couple talking to a salesman. He was putting their information into a computer, getting ready to process an application for credit. I realized that these people had no intention of actually paying for their furniture that day – they had decided to buy and charge it to a store account.

Then I saw another such couple. It occurred to me that maybe saving up for a purchase puts me in the minority of customers at this little furniture store.

You mean I have to pay for it?

You see, when buying an item, you have to pay for it. The money has to come from somewhere. I don’t think some people get this simple truth. Your credit card company or the store where you’re shopping will gladly give it to you today, but you’ll pay dearly for this money in the form of interest.

Paying later ensures that you’ll always pay more than the asking price. It also means your obligations will increase every month. Essentially, you’re relying on your future self to consistently make on-time payments until the debt is paid off. The problem is, our future selves aren’t very reliable.

The alternative to paying later is paying now. But this is tough. It requires you to sit out of the game for a while until you’ve saved up enough to make the purchase. Who wants to do that? It’s not the glamorous thing to do, and it certainly won’t win you any awards.

But it does offer you some benefits

First, it allows you to remain debt-free. We all know the benefits of being debt-free.

Next, it allows you to earn interest on your savings instead of paying interest to someone else. Your decision to pay now completely transforms the equation. You go from paying more than the asking price and being a slave to your paycheck, to having control of where your money goes. From the back seat to the driver’s seat.

It allows you time to shop around, compare features and prices, and make sure you’re getting the best deal. Do you really need the $300 blender, or will the $60 one do the job just as well? Could you find a discount code to get it down to $50? What’s the price on Amazon? Take time to think about which features you really need.

Finally, paying now gives you time to practice good old-fashioned delayed gratification (DG). As you approach your savings goal, you’re constantly denying yourself the pleasure of having the item. The more you flex your DG muscle the stronger it gets.

Either way you’ll have your item. Paying now, with your own money, sets you free from debt and ultimately puts you in control of your finances.

Photo by smithfurniturestore.com

9 thoughts on “Pay Now or Pay Later?

  1. I like this, “Next, it allows you to earn interest on your savings instead of paying interest to someone else.” This is a good point and often overlooked when we are constantly going from one bill to the next..

  2. I think you should definitely develop a cooling off period/system for yourself when you go shopping. Maybe go shopping in two stages, over two weekends. The first weekend to browse and identify, then wait a week before buying, or possibly more. Chances are that week’s cooling off period will give you the space to decide if you actually wanted or needed the item. Cue massive savings over time!

  3. I know I am in the minority here, but I always buy my large furniture on credit! And the reason is because I always get the store’s 0% Interest free, 3 or 4 year plan. This allows me to invest the money I would have otherwise spent and basically pay 0% cash over the next few years. If you think about, why drop $5000 now on something that won’t appreciate when I could just put it into my IRA and let it grow over the next 3 to 4 years. Meanwhile I’ll just add the small equal payments to my monthly payments to which I’m paying 0% interest for. If you do the math you come out ahead. THE ONLY TRICK is that you can’t mess up and miss any payments, and you MUST pay it all off before the 0% interest term expires. For that, I set up auto payments and regularly check them to make sure they go through. Like I said, it works for me, but I do not recommend that everyone try this. You have to have credit card paying skills of steel for this to work.

    • Hmm…I didn’t think about this angle. You are right – the money you could earn over 3 or 4 years in a CD or something similar is better than paying upfront, IF you have 0% financing available to you. But I don’t think we all have the skills of steel that you have MMD 🙂

      And just to be safe, I’d make the final payment 90 days before the due date just to give them plenty of time to process it.

  4. Like you mentioned, this is a simple principle many people don’t believe (or don’t understand). It actually took me awhile to come to this realization myself. I think it’s because society as a whole generates this idea that we “deserve” things or that we can charge anything and everything and worry about the payments later. Or in some cases that we never have to pay for them by filing bankruptcy or asking for loan forgiveness.

    • If people just realized that charging something to a credit card is like taking out a loan. When they realize that, we need to put them on a “cooling off period” that Objective Wealth talks about above. Then they can think about whether they really need the item!

  5. Pingback: Friends of the Family: Dirty Laundry Edition » The Family Finances

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