When it comes to buying the things we want, people tend to skew to one side of the spectrum or the other: either they spend way too much, and quickly find themselves wrapped in debt, or they’re so frugal as to give Ebenezer Scrooge a run for his money (no pun intended). Most people have a very difficult time finding that happy place in between, where they’re conservative with their money, and take care of their financial obligations first, but aren’t afraid to splurge on the things they want.
Regardless of where you fall in the spending spectrum, every person deals with a recurring question throughout their lives, with the answer changing every single time: how will I afford it?
While there are numerous options to get money to buy the things you want or need, a more prominent question you should probably ask yourself, instead of how, is when? Do you want to make your purchase now, or wait until later? To boil that down into practical terms, most people will use one of two options when making a purchase: they’ll either take out some sort of loan (including putting it on a credit card), or save up until they can afford it.
Both are viable options, but which one will work best for you? The following are several factors you need to consider before you decide which method to use.
Continuing what I touched on in the introduction, the first obvious thing you’ll need to think about is when you need to make your purchase. If it’s something that you immediately have to have, like the money to cover a medical bill, then obviously a loan of some sort is probably your best bet. On the other hand, if it’s something you can afford to wait for, like a new mountain bike, then you’re probably better off just saving up for it.
Time doesn’t necessarily only mean whether you can afford to wait for an item or not, but how long you’d need to wait if you opted to save. For example: you could theoretically save up and pay for a brand new home in cash, but considering that most Americans struggle to set aside even 10% of each paycheck, you’d need to save for decades to buy a new home. Obviously, a mortgage is the practical answer, and the only real saving you’ll be able to feasibly achieve is for a down payment, and perhaps your first few mortgage payments.
Can You Afford It Right Now?
When I say afford, I don’t mean could you find some way to cover the expense and walk away with your heart’s desire in your car trunk. I mean, can you make this purchase and not drive yourself into debt.
Credit cards and loans carry an inherent degree of risk, because you’re essentially buying something you can’t afford with your own income, and instead, relying on someone else’s money to cover it for you. That’s precisely what loans are intended to do, and there’s nothing wrong or shameful about taking one out, but you do need to ensure that your loan commitments won’t offset your DTI to the point that you both can’t pay your loan obligations, and disqualify yourself from future loans or financial ventures.
If this is a purchase that you really can’t afford right now, or don’t want to risk making with a financial backup plan, stick with saving for your purchase for now.
Will the Price Fluctuate?
In the long run, when was the last time you remember paying less for something than you did five or more years ago? Inflation is a curse word on the lips of many people, because it essentially ensures that, for the average joe, no matter how many raises or Christmas bonuses you get, you’re never going to truly get ahead.
For the here and now, inflation carries the risk that what you can safely save for today, you may not be able to afford in the future. Take for example a house – a home may be worth $200,000 right now, but give it a year of investment and suddenly it’s worth $350,000. Homes are an extreme example, but other major purchases like cars, college tuition, even your average grocery bill, can and will shift, not only year to year, but month to month. With fluctuations of that magnitude, you need to consider how much the price is liable to change before you can make your purchase.
If the price is primarily set in stone, perhaps if you’ve already established a price for a used car with a private seller, then you’re set: the price won’t change, and you can calculate a comfortable timeline to save your money. On the other hand, if you know you’re going to take a vacation to Japan, but the Japanese government is saying that they expect the average tourist to spend an extra $1,500 just on travel starting next year, you may be better off taking out a loan to fund your dream vacation, and save yourself money in the long run.
How Much Do You Want This Purchase to Do for You?
This may seem like a confusing question, but in essence, what I mean is do you want to buy this item or service just for it’s immediate impact, or do you want to treat it as an investment, and use your purchase to enrich your finances or eliminate debt? If you want your payment method to do more than simply secure the purchase you want to make, then you should definitely consider a loan.
Many people are discouraged from taking out a loan because they’re afraid of the commitment and responsibility a loan entails. While it’s true that you shouldn’t ever enter into a loan agreement on a whim, the reality is that a loan can do far more for you than just making an end purchase.
For example: loans carry the potential to improve your credit score, both by diversifying your credit portfolio, and by offering you the opportunity to improve your credit history – be sure to make your monthly loan payments each and every time to have a positive effect on your history. These are benefits that you can’t get by just saving your money.