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THE RIPPLE EFFECT OF IMPULSE BUYING
FINANCE
THE RIPPLE EFFECT
OF IMPULSE BUYING
By Trish Van Sickle, LLQP, CSC Primerica Financial Services
Life is full of temptations. Whether it’s a new truck, a membership to the gym or a set of clubs that are guaranteed to up your game, temptation is all around us. And it’s usually combined with temptingly “affordable” finance options. But there may be plusses to not giving in.
It’s like the old saying, “Buyer
Beware.” Buy today and pay tomorrow…and the next day, and the next week and possibly for years to come. You’ll not only pay the price, the additional interest, and all the other associated costs, but
you’ll also pay the price for all the stress that comes with
overspending. What impact will those impulse decisions have on your personal and financial life?
Maybe you snatched an awesome designer jacket, or decided to furnish your home on a don’t-pay-for-a-year credit card you were offered the second you stepped in the door. No worries, you thought. I’m spending, but I’m also collecting points of some sort, so it’s worth it, right?
WRONG.
Impulse buying can have serious and long-lasting
consequences, so arming yourself with knowledge about the potential impact is the best way to protect yourself and make good decisions.
ASK YOURSELF: HOW MUCH WILL THIS COST ME IN THE END? IS IT WORTH IT?
We all make impulse buys once in a while, no matter how wise and financially mature we may think we are. Something catches our eye, we think we have to have it, and out comes the credit card.
It’s all about the spur of the moment. The shopper hasn’t planned to make a purchase and the decision is made without premeditation. Impulse buying is all about emotions and feelings rather than logic and planning. In many cases, simply seeing the product is enough to get you to buy.
Years ago, an impulse purchase would have involved being physically in a store, but technology has
revolutionized our shopping access, giving us the ability to acquire items we’ve never before been able to purchase
from home. Whether you’re at your computer or sitting on the couch with your phone, you can make an impulse purchase with a single click. In fact, hands-off technology makes it possible to simply
shout “Hey Google…” and order up whatever item just popped into your head! How crazy is that? In a heartbeat, your impulse buy is on its way to your front door.
What inspires us to trade our hard-earned money for items we feel we need – whether we truly do or not? It’s the buzz
of immediate satisfaction, and that buzz is different for each
of us, and for every purchase. Remember when you were growing up and nothing was more exciting than anticipating and receiving a gift? It felt great, didn’t it? Getting something shiny and new always feels great and the buzz never gets old!
We’ve all opened those letters from the bank that promise:
EARN UP TO 5,000 POINTS AND PAY NO ANNUAL FEE YOU’RE PRE-APPROVED FOR A CREDIT LIMIT OF $25,000. ACCEPT THIS OFFER BY …
Best of all, the letter explains, you’ll be able to turn your purchases into irresistible rewards! Buy, buy, buy, earn points, redeem those points and repeat! Your role is to keep on buying, earning more points and redeeming them for gifts, entertainment or travel. Those points will be yours to spend! After all, you’ll have “earned” them!
Just accept the offer and your new shiny plastic card will be on its way to you. And once that card arrives, you’ll have the power to make impulse purchases even more easily and quickly.
Just before you start your spending spree, however, it might be smart to take a moment to flip that pretty brochure over and read the fine print. Try to focus on the fact that the annual interest rate is 19.99 percent on purchases and 22.9 percent on cash advances. Now that’s food for thought!
Here is what you need to consider when putting that credit card to work.
MOST CREDIT CARD DEBT IS “REVOLVING DEBT”
Credit cards are the most well-known type of revolving debt, but there are other forms as well. Lines of credit – like home equity lines of credit for example – can become a revolving debt if you carry a balance.
WHAT’S THE DIFFERENCE BETWEEN REVOLVING & FIXED DEBT?
REVOLVING DEBT
The Revolving Debt amortization schedule shows the term and interest that will be paid assuming the client makes the minimum payments of 3% (or $10, whichever is greater) of the outstanding balance until the debt is satisfied. This is a typical minimum payment required by lenders. The Fixed Debt amortization schedule shows the client what the term and interest paid would be if they paid a fixed amount equal to today’s minimum until the debt is satisfied, rather than the decreasing minimum payment over the period of time that the debt is outstanding.
EXAMPLE:
The client has an 18 percent credit card with a balance of $5,000 from purchasing a new couch. The client is making minimum payments (3% or $10, whichever is greater).
THIS MONTH’S PAYMENT IS: $150
The monthly payment will decrease to a minimum of $10 as the outstanding balance is repaid.
THE PERIOD OF TIME TO PAY OFF THE DEBT:
18 years and 10 months
TOTAL INTEREST PAID*: $4,801
*assuming no additional charges, annual or monthly fees or penalties
TOTAL COST PAID: $9,801 FIXED DEBT
EXAMPLE:
THIS MONTH’S PAYMENT IS: $150
Equal to this month’s minimum payment and remains the same for the term.
THE PERIOD OF TIME TO PAY OFF THE DEBT:
3 years and 11 months
TOTAL INTEREST PAID*: $1,984
*assuming no additional charges, annual or monthly fees or penalties
TOTAL COST PAID: $6,984
By making fixed payments, this client would pay off the loan 14 years and 11 months sooner and save $2,817 in interest. This assumes the client makes no additional charges and there are no additional fees charged by the lender.
Impulse buying feels good, but it can be a difficult habit to get a handle on. Taking a moment to stop and think through a purchase, maybe even sleeping on it for a night or two, could save you lots of money in the end.
There’s no doubt that, from time to time, we’ll all stumble upon that one must-have item we can’t help but buy. Understanding the cause and effect of the purchases we make, however, can give us some valuable perspectives and help us to focus on our long-term goals, like saving for a vacation or that home we’ve been dreaming of. These are the purchases that will matter and will provide the kind of memories that will last a lifetime!
