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Cash is King

TrafficSwarm member since November 2012

Are you kidding? I owe what? The surprise of our debt always takes us back when we get the new bill each month. Are you surprised by your debt? Many people are. I often ask, "Does the short term joy of buying offset the long term anguish of dealing with high credit card interest rates"? Most people would say no. Paying high interest rates on the purchases that you made months or even years ago makes no sense. One way to look at interest paid is to see it as an increase on the price of the purchase you made. For example, you found a huge flat screen television on sale at your favorite electronics store. The normal price is $3000, but today it's on sale for $2700. That $300 savings means a savings of 10% off the purchase price. If however, you finance the television by making payments over 18 months, using simple interest formula, face amount of the note x interest rate x time, which is expressed as a fraction, $2700 x .23 x 18/12, you spend an additional $891 for the television. If you added that cost of interest, $891, on the cost of television when you bought it, you simply wouldn't buy it because it would be too much. The true price would be $3591.00. The $300 reduction in price, a 10% savings for the sale is lost when you pay the 33% increase incurred when financed at 22% interest. (Yes, credit card do charge that much.)

The idea of spending less than you make really does work. In the example above, the common sense of the shopper showed is very important. The shopper used good common sense when they waited to buy when the television was on sale. However, they forgot one element. It is a very important element. That element is the amount that shopper will pay in interest. It is easy and fun to do the homework of shopping for best price, but we can't over look the other important consideration of how much we'll pay overall which is not as much fun. How do we avoid the extra expense? There are a couple of ways really. One, hold off buying the television until you can buy it outright. I know, I know. You're saying, “the football season starts next week, and we won't have a new television to watch it on.” (They may say this even though they have another television to watch it on.) In that statement lies the real heart of the matter. No one wants to wait, so they opt for instant gratification. Add that to the idea that we don't plan of financial lives very well will equal household financial grief. Two, savings is the answer. Cash in hand is king.

The idea of spending less than you make really does work. An old friend of mine used to say that financial advise is “gutter talk” because that's where it belongs. Each individual must form a financial plan that works for them. They may find that a budget helps. And each individual that finds a p

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