Magic69

Something I think can make a big difference to a person's or family's financial health is their decisions on what to buy now with credit versus what to save for and pay cash.

The easiest trap to fall into is buying small ticket items with credit cards (think clothes, entertainment, small electronics or anything else less than $1,000 that you might buy on a credit card). It is easy for us to make lots of small purchases and not realize how quickly all the small amounts add up to a big amount.

So let's look at an example to see what the real cost of buying now on a credit card could be, compared to simply saving for a little while and then paying in cash (or the equivalent).

1. Buy a new smart phone on credit ($200)
2. Buy some new clothes you really want ($200)
3. Buy a couple video games ($150)

Let's assume, just for fun, that it takes a year to pay off the $550 spent. If our credit card has a reasonable interest rate of 15%, then the cost of credit for one year would be $82.50. That's more than another video game worth of expense to you, which could be saved if use a strategy of saving up and then spending instead of spending before we have the cash.

Beyond that, it is habit forming to buy stuff on credit instead of paying cash (and by cash I mean anything where we pay immediately instead of adding to our debt level). So the more we buy stuff on credit, the more we pay in interest. And the more we pay in interest, the more we could be saving and using to buy other things. So ultimately, we end up simply paying for the privilege of having something now instead of a few months from now.