John and Deborah are a young married couple with decent jobs, bringing home $5,000 a month. Tired of their hand me down couch, they responded to a newspaper ad which claimed, “Easy Payments: 24 Months Same As Cash!” Once they saw … and sat on the leather couch, they knew it (and the matching love seat) were meant for them. And that new dining room suite was perfect for family gatherings (no more card tables and folding chairs!). Yes, the furniture did seem a bit pricey, but their payments would only be $375 a month. “It might be a little tight, but we can make it work” they agreed. “After all, we aren’t going to be paying any interest for two whole years.”
Does this sound familiar? Do you justify your purchases because you can make those “easy payments”? Listen up: you are digging a hole that is going to eventually swallow you. Easy payments do not make life good; they are a recipe for ruin.
Let’s look at John and Deborah’s finances a bit closer. With their $5,000 income, they pay $1,200 for mortgage and escrow, $600 for two “easy” car payments, $250 for TV and computer (more easy payments), $200 for kitchen appliances (easy payments again), $150 on various credit cards (even more easy payments) and now $375 for furniture. That leaves them $2,225. Not bad. But they pay $400 a month for health insurance and another $500 for utilities, cell phones and satellite TV. Gasoline is $400 (they both commute) and they spend another $800 for food (they eat out a lot). That $5000 is now down to $125. They did say that things would be a bit tight, didn’t they? Did I mention that they have no savings?
Here are the problems with easy payments:
- They keep you in debt forever.
The reason the payments seem easy is because they are stretched out longer, ensuring that the debt will not go away.
- High interest
The longer any payment is stretched out, the more interest you pay. For example, they could well be paying $250 interest (not including the mortgage) on all of those “easy payments” every month, and if they ever hiccup on the furniture payments, the interest (24.99%) will kick in for the entire 24 months: a penalty of about $2500.
- They mess with your mind.
Did you notice that John and Deborah didn’t even consider how much they were paying for the furniture? With “easy” payments, your mind is shielded from the actual debt as you focus on what you can think you can afford monthly.
- You can easily get in over your head.
Obviously, John and Deborah are a train wreck waiting to happen. But they are not atypical. The phrase “easy payment” sounds…well, easy. Don’t fall for it.
How easy payments can wreck your finances:
- Wrong priorities.
Of course easy payments are not the real culprit. John and Deborah signed up of their own volition and are responsible for their decisions. However, easy payments tempted them to go into debt for furniture instead of learning to save and pay cash. The bigger picture is that they strapped themselves so tightly that they aren’t able to save for an emergency fund or invest for retirement. Their priorities are out of whack.
- Life will happen.
Our couple has no margin in their lives. What if:
- A car breaks down? They would use plastic to fix it, thus succumbing to more debt and bigger payments.
- Deborah gets pregnant? The option of being a stay at home mom is not on the table. Besides, babies bring on more expenses. Where will the money come from?
- John or Deborah has medical issues which prevent them from working? They could lose their furniture, get one or both cars repossessed and be facing a foreclosure on their house.
- Either of them has a job layoff? Similar scenario as medical issues.
What should John and Deborah do?
- Realize they are in crisis before it gets worse.
The time for action is now. They are already in a crisis and need to realize it. Action will never happen until those who need to act are motivated to do so. They need to move from la-la land to reality. Some healthy anxiety is needed now.
- Get out of debt.
They must develop a plan to get out of debt and they must be willing to live sacrificially until the debt is gone. For example, they could sell one or both cars and drive clunkers, quit eating out and get rid of satellite TV. One or both of them should consider getting a part time job until the debt is gone.
- Build emergency fund.
They should build a small emergency fund before even starting on debt reduction, then build a big one (at least 3-6 months of expenses) after the debt is gone.
- Think long term.
Imagine John and Deborah three years from now. Both decided to get part time jobs and although they are tired, they are also very happy. All debt other than their house is gone and they are making great progress on their emergency fund. They have learned their lesson and are committed to never borrowing again. They have a great peace in their lives and , although they haven’t started a family yet, they are discussing the possibility of Deborah staying home when that event takes place. Their future is bright.
Does John and Deborah’s story bear any similarity to your own? If so, where are you at: In crisis? Working on debt? Out of debt? Any tips for other readers to help them on their journeys?