A Few Easy Payments!

Some marketing genius figured out many years ago that $10 a month for three months sounded like less than $30. Since that time, we have been trained to pay for almost everything in “easy monthly payments.” Today’s monthly payments are likely to last for more than 3 months. It is common to buy furniture and appliances over 36 or 48 months and some car loans now run as long as 84 months!

Variations of this plan are everywhere. Some folks now offer items on a rent to own basis. That means making payments for many, many months before there is any hope of actually owning things. And increasingly, vendors are “selling” products that you never own! You can pay a monthly service fee for computer software or movies or games and never own a thing. Still, this is tempting, because $9.95 a month sounds like so much less than $1,194 for ten years.

All of this means that people are less likely to save for anything. Everything we buy, lease or rent becomes another monthly expense and very often, it is an expense that will never end. If we want cable TV, satellite radio, broadband Internet service, health insurance, fitness center membership or a newspaper, we need to plan on a monthly expense forever. Even after we die, the vendors will be billing us for service until we can prove that we are dead. Still, there is no waiting while we save so we can get everything right now.

As much as we may long for the good old days when people could buy things and own them, we can’t expect things to go back to the way they were. The current economic model for nearly everything requires regular monthly payments. This is certain to put a strain on the budget for most families as more and more of their income is taken by regular payments. Unfortunately, there isn’t a simple answer to this problem, but there are things we can do to limit the damage.

The Budget Doctor’s prescription for dealing with payment and service plans:

1. Never be in a rush to sign up. Look at your budget and figure out how you will pay. Make sure this purchase is very important to you. If you sign up for anything on a payment plan on the day you learn about it, you have acted rashly.
2. Always have an exit strategy. How can you cancel this service? When are you likely to cancel? Nothing lasts forever and if you are still paying for Life magazine or AOL, you need to review your payments.
3. Carefully manage payments taken directly from a bank account or charged to a credit card. If you forget a payment, charges you authorized can lead to over limit fees and other expenses. Follow all the steps and read your statements monthly.
4. Prioritize your payments. If you lose income or have an emergency, what do you give up first? You must be prepared to limit expenses and this likely means stopping some services. Most people would put water ahead of Internet service and cell phone above cable TV, but you must be prepared to decide and act quickly.

When someone tells you that a payment is “only” $50 a month, remember that $50 a month is $600 a year and that you would have over $8,200 in ten years if you put that into savings at 4%!