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Common sense tells us that it’s cheaper to pay for items with cash than with credit cards and loans.
But just how much cheaper is a cash method of payment?
Here is some cash trivia to get you thinking…
- A $2,000 big screen TV will cost you nearly $7,000 if you charge it and then pay the minimum balance on your credit card each month. In addition, when you’re done paying for your TV in 30 years, you will likely have purchased several new TVs since!
- If you go on a $4,000 vacation and pay $100 a month on your credit card, you will be done paying for your trip almost 4 years later. That mean the trip will have cost you $568.18 at 7% interest!
- At a very low interest rate of 6%, a house costing $125,000 (cash price) would end up costing you $270,000 with interest! Here are some interesting thoughts about mortgages, interest, payments and loans.
In addition to the finance charges and other fees from using credit, there are studies that show that people typically overspend when using credit. It happens automatically, without realizing that it’s even happening.
Why Pay In Cash?
Check out this Cost of Credit Calculator to see what the true cost of your credit card purchases amounts to. So, if this is true, why don’t more people use cash instead of credit?
The truth is, people don’t want to wait for the items instant credit can buy.
Plus, if people paid for what they could afford based on the cash that they actually have on hand, then they would have to settle for a whole lot less. Purchasing things on credit opens up a whole new range of possibilities and options.
Let’s say for example, you make the median income of $54,000 a year. If you saved 10% of that income for 15 years, you could purchase a house for $136,595 (based on a typical savings calculator). The same person could save for only 5 years and come up with a down payment of $31,803 and a bank would give them a home loan for at least $200,000.
It is the façade of greater wealth that comes along with credit.
The same scenario is true when paying cash versus credit for a car.
If a person making the median income of $54,000 a year saved $270 a month (which is 6% of their income), in 5 years they would be able to purchase a very nice car for $19,081. Meanwhile, it would take 7.4 years to pay off a financed car purchased for the same amount. Still, it is more likely that person would save for only 1 year and put down $3,000 to purchase the same car and then trade it in 3 years owing more on it than it’s worth.
Check out this Auto Loan Financing Calculator to determine monthly car payments.
In the end, if we paid cash for everything, the standard of living for most Americans would be much lower than it actually is.
A person making $54,000 would be living in a $136,000 house and would purchase a new car no more often than once every 5 years. This person would also have little to no debt.
Instead, a person making the same amount is typically living in a house costing more than $200,000 and trading in their car every 2 or 3 years. This person will very likely see no end to the squeeze of the debt that they owe.
More Reasons To Pay Cash
I have been a certified tightwad striving for financial freedom since I became pregnant with my first child — and I decided to find a way to stay home with him full-time. I enjoy sharing my personal experiences in my journey back to financial health and planning for a future — which will include sending 2 kids to college and early retirement.
There’s a small miss in your article… The standard of living would actually go up for the debt free family once they made their major purchases. With zero mortgage, no rent to pay, car note or any other debt payments, more of their money could be saved to pay for upgrades, placed into savings, socked away for retirement, spent on vacations and creature comforts (clothes, PDAs, whatever, etc.). This family would have more of their money available to them in the middle and long run and have a much higher standard of living down the road since they would have money set aside to live on at retirement age (or before should something happen). Your average debt free family is much happier and experiences a lot less stress – which is a factor in calculating one’s standard of living.
and for the most part are problem free in finances if they play there cards right
I agree with you. I’d like to add that inflation happens because of easy credit and low interest rates. Supply and demand raisers prices. I still want to thank Andrea for this article. I’ve been debt free for the last 3 years and I am much happier without a doubt. It is a real mindset change but I take pride in delaying gratification and it turns out by the time I do save for something I don’t want it or need it.