Why Overpay for Everything?
Not to come across as a smart aleck, but if your aim is to pay too much for everything you buy and needlessly double your household expenses, there’s an easy way to do it: Buy everything with a credit card, and make only the minimum monthly payment. Here’s an example.
How to Pay $1,615 for an $800 Clothes Washer
Let’s say you buy a new clothes washer for $800 and pay for it using your credit card, and let’s be optimistic and say your interest rate is a “low” 18%. Now let’s assume you make the minimum monthly payment asked for by your credit card company, typically about 2.5% of the balance. The result?
→ You’ll pay a total of $1,615 for your $800 washer, including $815 (yes, more than the washer’s price) in interest to the credit card company.
→ 131 months, or 10 years + 11 months, will pass before you pay off the $800 you borrowed from the credit card company.
Woe to Thee Who Misses a Payment
Now what happens if you miss a payment or two sometime during the nearly 11 years you’re paying off the washer debt? More than likely the credit card company will raise your interest rate. The company might raise your rate even if you don’t miss a payment. (Ever hear of Universal Default?) It may have that right, as explained in the fine print (and it’s all fine print) of your credit card agreement.
What About That Washer?
So what do you do when the washer goes kaput? You use your savings (either an Emergency Fund or Planned Savings) to pay cash for a replacement and keep for your family the interest expense you’d pay if you borrowed money for the washer. This is why saving is so important. (You’d probably be better off going to a laundromat for a year while you saved for a washer instead of putting a replacement washer on a high-interest credit card.)
The Simple Moral of This Little Story
Without savings, you’re at the mercy of the credit card companies and others who are eager to lend you money at very high interest rates no one can afford. And once you’re in their high-interest debt trap, it’s very tough to escape. So much of your income is going just to pay interest, you have little left to pay down debt balances after paying your other bills.
What’s Your Strategy?
Have you been able to sock away some cash in case of unplanned large expenses? Or do you just deal with these sorts of things as they come up and hope for the best?