A budget helps you lay out your expenses for the month and year ahead. You can avoid the trappings of credit card debt and payment programs by planning for upcoming purchases.
Even zero percent interest sets you up for trouble. While you aren’t paying more for the item, you are pre-spending your monthly income. This is dangerous for a few reasons. You’re still on the hook for payments even if you have a change in income. Additionally, you restrict your ability to save for and pay for things you want in the future, because you are still paying for past purchases.
Let’s look at an average family in America where the median income is around $60,000. This family takes home around $4,000 a month and tries to live within their means by keeping basic living expenses (mortgage and utilities) to 25% of their take home pay. This means the family has $3,000 a month for everything else. Let’s look at how quickly that $3,000 can be eaten up by payment plans.
This family has two cars on 0% interest payment plans. One car is $300/ month and the other is $250/ month. Each member of their family of four has iPhones again bought under a 0% interest payment plan. Each phone costs about $35/ month. The parents bought a new mattress and couch during a sale. Each is on a 48 month repayment plan at 0%. They pay $125/ month and $62.50/ month for the couch and mattress respectively.
Each of these payments alone felt comfortable with a $4,000 monthly budget, and they aren’t paying interest on any of these purchases. However, this family has now pre-spent $1,877.50 of their take home pay each month between basic living and payments. This leaves very little flexibility in their budget for groceries, dining, children’s activities, travel, and saving. Additionally, the family will quickly fall behind on payments should anything happen to their income.
By budgeting and paying for your purchases in full, you give yourself more month to month flexibility.
What have you bought on a payment plan that you later learned a lesson from?? I’ll go first... possibly bought a brand new car on 0% interest only to decide to move to NYC sans car a few months later 😳 Live and learn! - 18 minutes ago