In an earlier budgeting tip I made the point that it’s important to distinguish between wants and needs when making a budget. It’s important to make sure core necessities such as food, shelter, clothing, and utilities are paid first before addressing other desires.
Something which I feel is related to this idea is we should only buy necessities on credit while things we want should be saved up for and purchased once we have enough money in our bank account. This may seem like a simple concept, but it has some nuance to it and it’s an area where I see people get into trouble with their finances.
I’m of the opinion that people should take whatever financial steps they need to in order to get their basic needs met. This might include, for example, using a credit card to buy groceries before having enough cash in the bank to buy food. People need to eat and that’s something I’d recommend using credit for, if cash isn’t on hand, and then working to pay back the credit card bill later. There’s nothing wrong with using credit cards or a line of credit to purchase food, life saving medicine, or shelter. These are necessities we should purchase now and then pay back in the future. Preferably before the interest payments kick in.
Where I feel people get into trouble with credit cards (or other debts) is when they start buying things they want rather than things they need. It doesn’t take long for people to run up high credit card debts by buying extra clothes, taking vacations, buying new furniture, or gaming consoles. These are all things we might want, but they’re not things we need. Because they are not necessities I recommend not buying them on credit.
Instead, I recommend saving up for items we want and then buying them with funds we’ve accumulated in a bank account. Having a separate savings account for things we want is a good way to maintain a healthy budget. At the end of each month, if there is money left over after buying things we need and should have, then any additional money can go into a separate savings account. This account should slowly grow over time and then be used to buy things we want for ourselves. A stereo, a new phone, a holiday vacation, new outfits, a car… All of these things are items we should save up for and then buy once we’ve accumulated enough money.
Saving to buy something we want rather than buying it immediately on credit does a few things for us:
- It helps us avoid paying interest on large purchases. Credit card interest rates are high and paying off credit cards can be expensive. If you spend six months to a year paying off a purchase made with a credit card you may be doubling the total cost of the item due to the interest payments.
- Credit cards should be used for necessities and emergencies. Using them to purchase things we want eats into money we could use in emergency situations.
- Forcing ourselves to save up for things we want is good self-discipline and helps us identify things we really want versus things we might purchase on a whim. Using credit cards and virtual cards on a phone make it very easy to spend money, easier than if we were using cash, and this lower barrier makes people more inclined to spend money. Saving up to buy things makes us stop and think about what we’re doing and whether a purchase is really worth it.
- Having a separate savings account with some extra money in it is useful in many scenarios. Even if we’re not saving for something specific, having a few thousands dollars in a savings account is often useful. It will help in emergencies too, such as suddenly needing car repairs or fixing something in the home.
One of the easiest ways to stay out of debt, and avoid the pressures which come with being in debt, is to always save up for items we desire and then buying them with money from our savings account. This avoids debt, high interest payments, and helps weed out purchases we’d only buy on a whim without really desiring.
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