0% interest on financing means free money! Or does it?
I saw a motivational coffee mug the other day that read “Don’t settle for good enough.” As the mug sat there on the shelf like a ceramic John Maxwell, it struck me how important this message really is to investors. When we work with clients at Anchor, one of our first goals is to help individuals assign a purpose to their money. That often leads to moments of delayed gratification because when money has a purpose, it’s easier to hold off on a purchase that doesn’t help them achieve their long-term goals. Needs comes first, wants second. I like to think that what is happening in these moments is that they are passing on good enough and holding out for great.
There are plenty of distractions in the world that threaten to take investors out of their positive money habits. The biggest culprit is the 0% interest purchases. The promotions typically go something like this; finance a large purchase and pay no interest on the payments for a fixed period of time. Make all of the payments before the deadline and the interest remains zero. Boom, FREE Money! These promotions are dependent on the consumer adopting that mindset, there are a few misconceptions that can lead to some bad money habits and prolonged debt. Avoid these mental traps when considering a larger purchase with zero interest purchase.
My money actually goes further because it can sit in an account and accumulate interest instead of going to the store all at once.
The principle behind this thought is not wrong, but the reality in it is not as promising. Interest rates for most savings accounts are really low at the moment, so during the duration of the payment period, your money will accumulate very little interest. Definitely not enough to warrant assuming new debt.
Financing is the only way I can afford it.
Do you need to afford it or do you want to afford it? When I discuss these types of promotions and purchases with clients, they are often concerned that if they miss this opportunity it may not present itself again. Here’s another thought, wait a bit and save enough money to pay the full purchase amount at once. When you borrow from yourself, the interest is always 0%!
I am taking advantage of the store’s generosity.
You are not shopping at the Robin Hood of retail. Stores don’t offer zero-percent financing as a benevolent act of service to their customers. They have to make their money somehow in order to stay in business. These promotions typically benefit the store in one of two ways, either the debt holder doesn’t pay off the purchase in the allotted time, causing the interest rates to balloon to something unaffordable. Or the promotion incents the purchaser to make a larger purchase than they normally would.
I have the money discipline to make the payments on time.
For individuals who have put in the work and assigned a purpose to their money, this is probably true. If you have the discipline to make the payments on time, you also have the discipline to save up for the full purchase instead of financing it!
Everyone is susceptible to the pitfalls of a promotional offering that—on the surface—seems to save you money. These promotions often incent someone to spend more money than they normally would. The same goes for free shipping promotions, if you have to spend more to save then you’re not really saving at all.
If you are considering financing a purchase with zero interest or if you’ve already made a purchase and find yourself with more debt than you’d like, let’s talk about some simple ways to help regain control of your financial journey.
Rianna Caswell, Wealth Advisor and Shane Stuart, Wealth Advisor