The new season uncovers work around the
home that needs attention and, in many cases, people have not budgeted for these
expenses. Given that credit cards are a popular choice to access credit, it is
only natural that many people utilize credit cards to fund renovations. The
reality of this decision is that most credit cards carry interest rates from
9-19%. It is convenient, however it is not the most cost effective purchase
method. The first consideration is what will be the total cost of renovations.
If the costs are going to be excessive, consider using a loan or line of credit
where the interest rate is lower and the payment can be set. A fixed payment
will assist in ensuring that the loan obligation will be paid over a set period
in time. Placing a large purchase on a credit card while making a minimum monthly
payment will see the expense stretch into the long term, and you will pay an
exceptional amount of interest.
An example: Assume you place $6000 of home repairs on
your credit card at an interest rate of 19%. You are only responsible to pay $100 a
month. It would take you 20 years to pay it off and in total you would repay
$24,000 of which $17,829 would be interest. Take a loan out for the same amount
at 7%, and you would pay the debt off in 5 years by paying $122 a month. Now
imagine you are carrying credit card debt. Consider the example outlined and
the amount of interest charges you are paying. A loan to consolidate that debt
would be wise.
Recreational vehicles and automobiles are
popular purchases when the spring-time weather arrives as well. Consumers have lots of financing choices
when purchasing these vehicles and the understanding of the credit terms can be
quite confusing. When purchasing one of these items, always ask for a quote
broken down so you can see exactly what you are being charged. Dealers will
offer financing normally through their affiliated company, i.e. Ford through Ford
credit. The advantage of taking such financing is that it’s quick and
convenient for the customer. The downside is it allows little room for dealer
incentives which means it is more difficult to negotiate a deal. Providing your
own financing through your credit union will allow you some opportunity to
negotiate a better price. The major thing to consider when considering
financing a vehicle is the term. Most dealerships are offering up to 9 Years to pay
off a vehicle which although makes a low payment, the potential need for
another vehicle after 9 years is great. Also, the warranty normally expires
after 3 years so you may end up making a car payment and paying for
maintenance.
If you are considering a vacation and find
yourself short on funds, consider a short term loan and a savings plan. The
short term loan could assist you in paying for your current vacation and a
monthly savings plan could prepare you for the following year. Every October I
start a bi-weekly savings plan to commence saving for Christmas for the
following year. The pressure of going in debt for Christmas is removed and I
can take comfort in knowing that this expense is covered. I did the same for an
annual vacation fund, with automatic withdrawals from my account on
payday. The funds are only accessible twice a year and not available for
transactions online which removes any incentive to access the funds. I have
been doing this for three years now and would highly recommend this to
everyone.
We live in a world where everyone wants
things yesterday. We have little tolerance for waiting to make a purchase since
waiting means planning, and planning means saving. I remember speaking to a
lady one time who told me that she drove her old car until the floor rusted out
of it and she could see the pavement as she drove up the highway. The reason
for this action was she was saving for a new car; and she paid cash for it.
Today our kids have little knowledge of saving to make a purchase as they witness
their parents buying things with little hesitation continuously. I placed a water
jug in my house and everyday when I come home I place my loose change in
the jug. I advised my kids that this is our vacation jug, and by putting our loose
change in there we can save for a vacation. When it came time for counting and
rolling, although painful, they were on-side trying to get to our final tally.
It was a valuable lesson as they too held onto their change for their spending
money. We will celebrate this lesson in saving this month on our family vacation. We have a
wonderful youth savings account at Leading Edge Credit Union, so consider starting one
for your child and encourage them to learn the value in savings. Next blog will
be on those considering mortgages!!
