Nate and Danielle answer a listener question about spending decisions and how to decide if you should finance something or save for it and buy it outright.
I just started listening to your podcast and love it! Your method/philosophy makes much more sense to me than other methods I’ve done in the past. Some things I’m interested in learning about is how you decide which expenses you finance and which you save up and pay for out of pocket, how you budget for unexpected expenses related to kids, and how you decide where to save and where to splurge.
We generally try not to finance most of our purchases as a couple. The only thing that we have financed right now, other than the house, is our car. It is at 0% interest and by financing, it allowed us to put money in other places. When we first got married we financed a TV from Sears. That was 10 years ago and we still have that TV today. We financed the TV because it was 0%, and the $600 we purchased it for was a much larger chunk of our bank account. We ended up paying $50 a month for a year to pay it off and just to be clear, we could have purchased it in full when we got it. It was just easier for us to do smaller chunks over a year than everything at once.
Danielle generally does not finance anything. Nate, on the other hand, likes to finance his tech items. He makes extra money selling online courses and uses a portion of that money to pay for tech toys and for things to help him create more courses. If for some reason the online courses stopped producing money, he would still be able to pay for them out of his budget. By financing at 0%, he is able to free up money for other things.
As far as deciding what to finance and what not to, we try to save up for things that we want to buy. For items that are of an immediate need or that we can fit into our budget without hurting our goals. An example that comes up as recently as yesterday could be that we woke up to our refrigerator not working. Luckily Nate was able to tear it apart and fix it, but if it was truly dead, we would’ve financed a new fridge. Again, we want to make clear, that if we had to, we could buy a fridge in cash right now. Our objective with financing is to not take as much money out of our pocket and instead do it in smaller chunks. We never finance unless it’s at 0% when it comes to credit cards. We hope to never have to finance a car again.
We may not have always made the best choice when it comes to financing. Some of our bigger items have been solar panels, cars, and renos on the house. We discuss in another episode that our solar panels and electric car (0% interest) were purchased more immediately because we wanted to take advantage of tax incentives. The housework could have waited (and perhaps should have) – this was a splurge, we decided to spend the extra $600 to get it done sooner. In the end, we never finance something in which we couldn’t handle the monthly cost if one of us lost our jobs (or even both of us – we have a good crash fund).
When it comes to kids, we have a budget for him. Anything that we spend on him from toys to doctors visits goes on there. If we overspend one month on him, we make it up the next month. If it was something major, it would come out of our miscellaneous expenses.
Finally, when we decide to save vs. splurge we almost always opt for saving. Splurging for us is getting the $6 half-gallon of ice cream instead of the $3 one. We probably splurge on our trips as well, but Danielle plans out so much that we are able to save a lot of money during those trips. It really comes back to our goals. We set short, mid, and long term goals. When we are looking at a purchase we evaluate it against our goals. Our long term goal right now is to pay off the house in the next 10 years. Our mid-term goal is to buy tickets for our vacation and short-term goal is to stabilize our budget with the recent increases in daycare costs. Those three things are what we judge everything against when making spending decisions.
The big thing with splurging is understanding how it impacts your budget. If you’re splurging on expensive restaurants each week and you’re not meeting your goal of 15% into retirement, then maybe that’s not an area to splurge. On the other hand, if you’re out on your anniversary and you want to go to high-end place maybe you do it – if it kills your going out budget, put some on the gift or misc. budget.