Monday, June 11, 2012

It's the Spending Season

It is that time of year when we experience more sunlight, warmer days, and a bounce in our step. Summer also brings about the hustle and bustle of activities that winter prevents us from completing. We come out of hibernation to eagerly commence renovations, gardening, and summer fun. These activities come at a cost, of course, so it is important to consider ways to finance activities to ensure that savings are a plenty.

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!!