An old friend of mine just dropped $2,000 on a large flat panel HDTV for his den, intending it to be the centerpiece of his Super Bowl party. He sent me a picture of it along with an email thanking me for talking him out of buying a similarly-priced TV last year, given how much money he saved by waiting.
How much money did he save? Let’s calculate the two scenarios.
Buy it NOW! If my friend had plunked down $2,000 on his credit card last year, he would have faced a big pile of credit card bills.
First of all, that $2,000 TV actually costs him $2,140 after sales tax. He decides to put the entire balance on his 19.9% APR credit card and decides to pay $214 a month – 10% of the TV’s total cost.
Given that payment plan, he pays $214 each month for ten months on his credit card, then makes a final payment of $177.35 during the eleventh month, giving him a total bill of $2,317.35 for the television.
Buy it in a year! Instead, he decided to save $180 a month in a savings account for his television, a savings account that earned 2.5% interest.
After a year, my friend checks his account balance and finds that the account has $2,184.92 in balance. He empties the account, leaving him $44.92 in cash after buying the television. His total contributions? $2,115.08. (That’s his $2,160 in savings, minus the $44.92 in cash left over.)
The difference By choosing to save up for that television and pay cash for it instead of just tossing it on the plastic, my friend saved $202.27. That’s enough money to fill his gas tank five times. That money can make a car payment. That money can cover the expenses for an awesome Super Bowl party. Or, he can simply look at it as a 10% off coupon for that television he just bought.
The take home message It’s pretty simple – if you’re considering a large but non-essential purchase, start saving for it in bits and pieces in advance of buying it. This achieves two powerful effects. First, you’re going to earn some interest on your savings, giving you an extra bit of cash to help with the home stretch of saving. Even better, though, you won’t be paying interest on your credit card or payment plan – that’s simply money lost. When you add those factors together, it can easily be worth 10% of the value of the item – and it can often be much more than that if you’re saving for a larger item.
This seems like such a simple point that it should be common sense, right? I thought so until yesterday, when I stood in line at Sam’s Club behind three different people buying large flat panel televisions – and all of them paid with a MasterCard. While it’s (hopefully) true that some of them might be paying that entire bill off immediately, it does reveal that many people out there are making big, impulsive purchases.
Hopefully, they’ve saved up for it.