Disclaimer: The statements made in this post are the opinion of the author. They should not be viewed as financial advice. Please consult with a financial specialist before making any financial decisions.
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I’m sure that in most cases if I asked you, “Would you rather have the money to buy something outright or would you rather make payments on something overtime” you would choose to have the money to buy it upfront.
That means that we all generally understand that paying for something entirely is better than buying something on credit.
But we also all get the itch to just get something or go somewhere that we want. Mix that with “no money down and low monthly payments” and it is a recipe for being chained to debt long term.
Sometimes it is really difficult to avoid the siren call of “spend money now, save money later”, but if you really want to save before you spend then here are 10 reasons that can help motivate you to stay the course.
1. Avoid Interest Payments
It should be no secret that financing things is just more expensive in general. So every time you finance something by spending before you save then you end paying a lot of interest.
There is of course a range on this. Buying a house for most people is impossible without a mortgage payment. But with interest rates being low, it can make sense in the long run to buy a home.
Next up is financing college. I would recommend against financing college if you can avoid it because financing college generally leads to poor choices. But college should lead to better opportunities to make money so you will have the means to pay it back as a result.
Then we get into the gray area. The car payment. With slightly higher interest rates you are paying more in interest and a car doesn’t make you money. You might argue that you need a car to make it to and from work, but there is a difference between a reliable vehicle and a brand new vehicle. Save up for a reliable vehicle if you can and save a bunch of money!
After that there is almost no excuse to finance. Financing your lifestyle only leads to being chained down to debt. Credit cards should be paid off in full each month to avoid interest rates that are on average 18%!
To put that into perspective, let’s say that you go on a shopping spree because you need to fill that new house you bought and you rack up $1,000 in debt. That doesn’t seem like too much, right? Your bill arrives and you have the option to pay the minimum balance of only $25. Score!
You get your finances in order and you stop spending on your credit card, but you keep paying just the minimum balance on $1,000. At 18% you will have paid $470 in interest before you’ve paid off your card!
This credit card calculator will help you figure out your payoff amount.
If you’re interested in how much a loan will cost you (get it… interested?), check out this loan calculator.
2. More Money On Hand For Emergencies
Imagine that you are so excited to buy a brand new car that you forget the importance of savings and you decide to finance it. You put $5,000 down and you now have a monthly payment of $300.
You feel good about yourself, but that $300 is eating up a lot of your extra cash each month. Still you are paying your bills.
Then your appendix bursts and suddenly you are hitting your deductible of $2,000 in one month. You don’t have the extra money you were saving up and now you have to go into more debt to pay off your deductible.
On the other hand, imagine that you decide to wait and save up for a vehicle. You know that your older car will last a few more years and it gets the job done. You have $5,000 in your bank and you are setting aside $300 a month towards your goal.
In this same situation you end up paying off your medical bill with that $5,000 you have saved and in just 7 months you are back to where you started by continuing to put $300 a month towards your goal instead of being an extra $2,000 in debt without extra money to throw at it.
Saving up for expenses puts you in a better financial position for when you are hit with those emergencies that are always bound to come up.
Now I know what you’re thinking. What happens if you put all of your money into buying the car and then you get hit by that medical expense?
You’re still better off because you have that extra $300 a month to throw at that $2,000 medical bill that you wouldn’t have otherwise.
3. Build Financial Confidence
One of my favorite concepts is the idea of the “little win”. Those small triumphs that perk you up and help you keep going.
Saving towards a goal is a “little win”. By putting aside enough money to buy a frivolous item you want like a new stereo, you get a win in just a few weeks.
That gives you the confidence to save up to buy a reliable vehicle and you get a win in a matter of months.
Then you feel confident enough to save up a down payment on a house and suddenly you are on top of the financial world because you know you can save your way to anything!
Getting those little wins is a huge deal.
Getting trapped in a cycle of debt on the other hand just keeps you trapped in a cycle of never winning and becoming demoralized.
4. Earn Interest on Your Savings
When you buy something on credit that thing is a liability. In other words it takes money out of your pocket each month in the form of interest. That is not doing you any favors financially.
But when you save money in a bank account it is an asset. Bank accounts pay out interest which, although small, is putting money in your pocket rather than taking it out. That is a win.
Now, if you are saving for something specific in the near future, I do not recommend investing that money in something as volatile as the stock market. You might not have the money you need when the time comes.
But there are ways to make your money grow faster than a traditional savings account.
You can put your money into a high yield savings account which usually pays up to 20 times the national average interest for a savings account.
Or you could put your money into short term bonds.
Or you can put your money into a CD. If you know you’ll need that money in 2 years, put it into a 2 year CD. Then put another chunk into an 18 month CD and so forth as you get closer to when you plan on making a purchase. It won’t give a lot of interest, but it will be more than your savings account.
Saving money makes you money while spending money upfront takes your money.
5. Make Money Off Of Credit Rewards
Credit cards can either be the worst thing that you have ever done to yourself or a great way to earn rewards like free cash or flights. It depends on how you use them.
If you decide to charge things to your credit card and just pay for it later, you will be paying multiple times what it is worth in the end.
But if you save up your money, use a credit card to buy something for the rewards, then pay it off immediately, you get free money.
Saving in advance is one of the best ways to ensure that your credit card balance is never higher than your means. I would even suggest living off of last months income to ensure that you have exactly how much money you intend to have.
6. Maintaining a Lower Debt Ratio Increases Your Credit Score
There are a lot of factors that go into your credit score. I won’t go into them all right now, but the amount you owe compared to your total available credit is 30% of your credit score.
So by keeping the amount of debt you have compared to the amount of credit you have low, you are actually working towards a higher credit score.
Keeping a balance on your credit card from month to month and letting that slowly balloon will only hurt you.
Add a couple of car loans and student loans and your credit score will go down significantly.
This is another reason it is a good idea to have credit cards available, but not use them to finance your life.
7. Make Less Regrettable Impulse Buys
Impulse buying is a problem for pretty much everyone. I fall for it when deal with a salesman.
The reason it is so easy is because we can buy things on credit. The solution? Stop buying things on credit.
If you decide you want something with a credit card in hand then you will get it before your brain has time to react. That is an emotional decision and you’re probably making the wrong one.
On the other hand, if you come across something that is appealing and you decide to start saving up for it you can test whether you really want it.
If you still want it after one week, or one month, or sixth months, etc. however long it takes to save up for it, then it is potentially a good purchase.
But if no longer “need” it before you finish saving, then you’ve saved yourself from a poor decision.
8. Easier To Budget For Expenses
If you have trouble tracking your spending then this is an especially important point. Actually having the money on hand to make purchases will keep you on budget all the time because you can’t over spend.
The best example of this is Dave Ramsey’s envelope system. Basically, you put actual cash into an envelope labelled for each part of your budget. When you run out of money in any of those envelopes that’s it, you’re out of money.
So saving up your cash and holding it on hand to make a purchase keeps you from going over budget.
9. The Benefits of Delayed Gratification
Different studies have shown that the ability to delay gratification, in other words to wait for something we want, has a significant positive impact on our lives.
The most famous of these is the Stanford Marshmallow Experiment. I won’t get into specifics here, but they basically showed that you are more likely to be success if you have the ability to delay gratification.
While some people are naturally better at delayed gratification than others, I believe that it is something that everyone can learn to do.
Saving money to make a purchase is practicing this patient habit of delayed gratification.
By doing so you set yourself up to be motivated by long term benefits instead of short term band-aid solutions. You’ll end up with healthier financials and a happier life by doing this in general.
There is no way I can prove this to you right now, but it is true. So just go with me on that.
10. Having a Savings Goal Pushes You Harder
Are you stuck in the debt pay down grind? How motivating is it to take a large chunk of your pay check, put it towards your debt, and watch your debt hardly move? Not very, right?
Debt pay down is extremely important, but it is also a slog. So getting into debt is just setting you up for a less motivated financial life.
Saving, on the other hand, is highly motivating. As you watch your bank account grow and see yourself creep towards your savings goal each month you get excited.
Wanting to get what you really want even faster then pushes you to find even more ways to cut costs.
So you are living well below your means and raking in cash each month because you are motivated to get where you want to be.
That is the power of saving.
Is It Better To Spend Or Save Money
There are so many reasons it is better to save money before you spend, but the problem is the world seems to have been created to bully you into going the other way.
Don’t listen to them!
I give you permission to forget advertisements, ignore your “luxury friends”, and tune out social media envy to live your life on your terms.
Save first, spend second, and create the best life for yourself.
What are some reasons you like to save before you spend? Is there ever a time you should spend before you save? Tell me about it in the comments below.
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A list of definitions used on this blog can be found here.
Liability: Things that take money out of your pocket. This includes all of your monthly and yearly expenses. You will often hear that a home is your biggest asset (the opposite of a liability), but it takes money out of your pocket each month in the form of a mortgage, taxes, and insurance, so it is a liability.
Asset: Things that put money into your pocket every month (or year). Sometimes equity in your house is also included as an asset, but I prefer not to include it. A car loses value every year (depreciates) so it is NOT an asset.
High Yield Savings Account: A savings account that pays interest above the national average. Usually this is much closer to keeping up with inflation although it is a bit lower than that. While rates vary, around 1% is a high yield in 2020.
Credit Score: A weighted score calculated by three independent companies that is used to determine your credit worthiness, or how much someone should trust you to repay your debts.