Friday, February 25, 2011

Flipping the Spending Circle

In the old days, or so I'm told, people used to save up for something before they bought it. Sometime between the good old days and now though, society has shifted to a buy now pay later model. Don't pay for 3 months, credit card use, etc, etc. Unless you have at least a quarter million lying around, you probably still need a mortgage for a home, however, I believe its possible to save first and spend later.

The problem with all our borrowing is that there is a cost to it called interest. Even if you don't see it, its there. For example, I'm paying for a car with 0% financing. However, if I had paid cash for it they would have taken $2,000 off the price. So, that tells you even at 0% I'm going to pay $2,000 in interest over the 5 year loan.

Not only is there a lot of self-satisfaction in having the money to buy something outright, there are also a few extra benefits. One, you earn interest instead of spending it. Don't think of it as just what you're making, but also what you're saving. Getting 2% instead of spending 6% gives you an extra 8% in your pocket. Less taxes of course, but that is what I'm using the TFSA for currently. Another benefit is that you think about what you are going to spend your money on. It may turn out that when you do this you don't actually need it. I'm sure there are other benefits, but the biggest one for me is that you'll always be able to afford your payments this way. If you lose your job or some other financial difficulty strikes you'll have savings to pull from and won't have debt to pay other than a mortgage.

I've talked about it before, and this wasn't exactly a new goal, but is one that I've been working on for awhile. The frustrating thing is that there always seems to be something new coming up. Something that I hadn't budgeted for that forces me to search for ways to get the money together. The most recent example of that was my wife's CRNBC dues coming due this month. The good news is that it becomes easier and easier to do as time goes on. The only real challenge left in this goal is to figure out how to pay cash for the next car, but I'll discuss that more later.

The biggest challenge I faced was trying to catch up. Using credit cards meant I was using this months income to pay for last months bills. Which also made the budgeting a much more challenging process. We eventually got caught up by using our tax return, which alleviated a lot of my stress.

So now I look forward to Christmas and vacations knowing, the money is already in the bank waiting. It was a tough goal, years in the making, but I think we're basically there. Things still crop up, and they probably will continue to do so, but they happen much less frequently now. So hopefully this is encouraging to anyone else trying for the same goal. I definitely think it is worth it.


  1. I admire anyone who can save up enough money to buy things outright! I know it can be done, people are still doing it today, but we haven't had that luxury all the time. But hopefully we will be able to eventually. What helps is not buying things that aren't NEEDED at that moment, and planning ahead. It's the sudden replacement items that get us though, like the new tires we needed just before Christmas! BLAH!

    Good luck with your goals, too.

  2. I'm glad you commented, because you made me realize I still need to work on building up a contingency fund. When I started working on this goal, I kept running into unplanned expenses. They weren't unexpected, just unplanned. After all, I knew my property taxes were coming up, my tuition would be due, etc. So I've now got those all covered. I also have a car maintenance fund for oil and repairs. Even haircuts and Christmas presents are planned for.

    However, I haven't really focused on any other contingencies. TV and appliances will all break down and need to be replaced eventually and I haven't budgeted anything for that. Or tires for that matter as you just mentioned.

    I think the general 3 months of income saved is excessive, but I should put something aside. I'll have to work on this and blog on the process.

    Thanks for the comment and good luck to you as well. Its not easy, but I wouldn't trade the piece of mind for anything, so stick to it!