After all bills are paid when is it ok to finace "toys"?
September 16, 2009 6:08 AM   Subscribe

When is it ok to finance "toys"? We have a budget, all bills are paid, we are saving a set amount every month, the only debt we have is our cars and house. No credit cards. Each month we have about $900 left over. Between the both of us, we have a wish list including: a four wheeler, a vacation and cosmetic home improvements. Facts and opinions welcome. Should we save til we can pay cash? Or is it "ok" to finance, some or all of our wish list?

If you really want a monthly break down here it is:
bills: 2100
income: 4700
save: 100
allowance: 1600 (gas, entertainment, groceries etc)
left over: 900
18,000 total left on vehicle loans
posted by kgreerRN to Work & Money (29 answers total) 1 user marked this as a favorite
If I were in your position, I would open up an ING or similar account, and put that 100 + 400 into "long-term savings" (CD's or somesuch), and the remaining $500 into "Vacation/toys". I definitely wouldn't finance anything, and would save up and pay in cash since you have so much left over each month. That way you're not paying any more for your toys/vacation then you have to in finance charges, late fees, interest accruals, etc...
posted by Grither at 6:14 AM on September 16, 2009

Oh, however, if the home improvements will increase the value of your home, then that would be the only thing that might be ok to finance, as long as you find a way to do it that doesn't have a lot of fees or high interest rates, but still, it's not stuff you need, right, so maybe just saving up to pay in cash is best? Especially if you have any sort of miles program, save up for those home improvements, pay them all with credit cards, pay off the credit cards right away, and then blammo, you've probably got enough miles to cover the flight part of your vacation!
posted by Grither at 6:17 AM on September 16, 2009

I feel like this just boils down to how likely you are to stick to a plan over a long period of time. I feel like debt is a tool like any other and if you enter into some kind of financing understanding the ramifications and total financial outlay over the life of the term and intend to pay it religiously its fine. Debt only becomes a problem if its abused/disregarded/not treated seriously.
posted by zennoshinjou at 6:17 AM on September 16, 2009

I am not a financial guru, but I always lean in favor of saving before purchase. The main reason is that it gives me a real sense of how much I had to work for something. A laptop is no longer "Hey shiny" and then 2 years of complaining about bills, it's "Crap, I saved x a month for x months and this thing is gathering dust". I find as a result I make increasingly more rational spending choices.
posted by syntheticfaith at 6:18 AM on September 16, 2009 [6 favorites]

Nthing Grither, with one exception: If someone is offering you a 0% financing option (e.g., "one year same as cash", such that paying it off in one year will avoid any finance charge or interest whatsoever) AND you know you have the discipline to actually pay it off within the allotted time, then as Grither says you're not paying any more for your toys/vacation then you have to in finance charges, late fees, interest accruals, etc...
posted by DrGail at 6:20 AM on September 16, 2009

I'd definitely save much more than you currently are, and Grither suggests. To be honest, $1600 also seems like an extraordinary amount for an "allowance": I bet you could easily cut that by almost half and still be fine. The leftover from these two things could then go toward your toys fund. You could also throw more money at your existing car loans; I wouldn't finance new toys while you have the auto debt.
posted by runningwithscissors at 6:22 AM on September 16, 2009 [1 favorite]

That seems like a really small savings amount to me. So over and above your question, I'd suggest bumping that up a bit, and cut back a bit on the toy budget, but of course that depends on your overall situation, etc.

But that said, I don't think there's a right or wrong answer here, necessarily. There's a clear financial answer (which is to pay cash only, buy used, etc). The downside of that is that you end up with a lot of deferred gratification -- would you be willing to pay some interest in order to ride the fourwheeler this year instead of next? Or would the interest payments be high enough to make the enjoyment not worth the cost? That's the tradeoff you are dealing with, and no one else can answer it for you.

Personally I'm not willing to go into debt for something that's purely a toy (or a vacation, for that matter). But that's me; lots of people do the opposite and they seem quite happy for it. It's definitely "ok", as long as you are aware of the costs and the tradeoffs, and you are happy with those. It's not ok if you are still making payments three years after the toy is broken and you are full of regrets.
posted by Forktine at 6:23 AM on September 16, 2009

There's no one right answer to this question. How responsible are you? If you finance a toy, are you absolutely certain that you won't develop a pattern of debt? Why do you feel the need to pay for current toys with future money? I'm not trying to judge, but present some questions for discussion.

I used to finance all sorts of toys. I had a debt problem. I wasn't responsible. It took me a long time to recover from the hole I dug for myself. Now that I've eliminated my debt, I've made a pact with myself. I don't finance toys of any kind. I wait until I can pay cash. I want to take a vacation? I save for it. I want to do cosmetic home improvements? I save for them. When I pay cash, I am earning interest on the money (until I pay it out) instead of the bank earning interest (until I pay them back). Also, I mitigate the effects of being blind-sided by the unexpected. If something goes wrong, I can always pull that savings out to do something else.

Over the years, I've become a huge fan of Elizabeth Warren's balanced money formula, which says that the average person's budget should set aside 50% for Needs, 20% for Savings, and 30% for Wants. That 30% for Wants is huge. It's a big number, but it's also a big psychological boost. It's okay to spend money on yourself in the present. But I -- and many others -- recommend that you spend money you have now, not money you expect to have in the future.

Right now, my wife and I are saving for a vacation to France next year. We've also saved for home-improvement projects, a new (used) car, and more. To do this, I use what I call targeted savings accounts. I have multiple accounts at ING Direct (though you could use any bank), and each one is set aside for a specific goal. It's just a mental game, I know, but it really helps me save.

In short: Yes, it can be okay to finance toys, but you have to ask yourself why you're doing it. You're paying more for your toys in the long run when you do this, and you're incurring risk. For some people, this might make sense. For me, it doesn't. Do what works for you -- but know why you're doing it.
posted by jdroth at 6:23 AM on September 16, 2009 [4 favorites]

If you saved that $900 a month it would grow pretty quickly. Do you have anything in savings for unexpected expenses?. I personally would not take on any more debt until the cars were paid off, but then again I pay cash for cars unless there is a really good interest rate (like 0%) available. I take syntheticfaith's approach to a large extent.

In terms of the cosmetic home improvements, I tend to do those things myself and that keeps the cost down significantly.
posted by TedW at 6:24 AM on September 16, 2009

p.s. Looking at your budget, I'd encourage you to save more. It's great that you're saving $100 per month, but I think you'd find it more beneficial in the long run to save $200 or $300 — or even $900 per month. If you establish the habit now, you'll become accustomed to it, and your future self will thank you.
posted by jdroth at 6:26 AM on September 16, 2009

Agreed. The rule of thumb is to save at least 15% of your income towards retirement. Then if necessary add to that for school for the kids (if any). That being said. If you can afford the toy then by all means buy it especially if you can get a 0% financing deal. Put the total cost of the toy in an interest bearing account and be sure to pay off the total amount one or two months before the 0% deal runs out. You don't want to run the risk of missing a deadline.

Also consider adding an extra payment to your mortgage. Even one extra annual payment will save you tens of thousands over a 30 year mortgage.
posted by Gungho at 6:37 AM on September 16, 2009

We have a budget, all bills are paid, we are saving a set amount every month, the only debt we have is our cars and house.

You're better off than most people right off the bat with this situation, so keep in mind that sticking to these basics is what's really important regardless of what else you decide to do.

Between the both of us, we have a wish list including: a four wheeler, a vacation and cosmetic home improvements. Facts and opinions welcome. Should we save til we can pay cash?

Honestly, as long as your income is significantly higher than your expenses over time, borrowing money to pay for those sorts of things won't hurt you very much financially. The bigger red flag is that since you don't have cash to pay for these types of things, it probably means you don't have cash to pay for emergency expenses. If you lose a significant amount of income (such as being laid off) or have a large unexpected expense you may unexpectedly find yourself unable to pay for things. Generally you should have at least a few months expenses saved up for emergencies for those kinds of cases, because that can mean the difference between a minor rough spot financially and a total financial meltdown. I would suggest saving until you get some emergency cash saved up, and then saving up for things that aren't necessities.

income: 4700
save: 100

Although saving anything is a good start, you should probably be saving more. Right now you're only saving around 2% of your income, so it will take a long time to have a significant amount of savings compared to your income and expenses. Unless you have some sort of pension plan (which are rare these days) you should both be saving for retirement, and monthly auto-payments into a 401k or Roth IRA account is a good idea. Bumping that 2% savings to 10% and putting it into a tax-free retirement account would have a huge impact on the amount of money you'll have saved by the time you retire.
posted by burnmp3s at 6:44 AM on September 16, 2009 [2 favorites]

Unless you already have huge retirement and emergency funds, you are not saving enough. Can you save $500 per month? This seems especially important because your "allowance" is so high- it seems like you are used to a certain level of spending each month. If something were to happen, do you have enough in an emergency fund to cover 6 months? What about a year?

As to financing, I would wait and pay cash. But say you save $500 a month, and put that other $500 into a high yield savings account or CD (I know, high yield doesn't really exist right now, but work with me). In a year at even no interest, you have $6000. That's a great vacation in hardly any time at all!
posted by ohio at 6:47 AM on September 16, 2009 [1 favorite]

You should save until you can pay cash. Never take on any debt unless you absolutely have to. The added worry of debt will negate whatever fun you may otherwise reap from your toys.
posted by Afroblanco at 6:48 AM on September 16, 2009 [3 favorites]

Put it aside for a rainy day or until you have enough to pay for your toys in cash. No need to finance something that is not considered a "need". Why go into debt over something you do not have to have to live? In the meantime you could do something with the extra that will help you see a return.
posted by Mastercheddaar at 7:26 AM on September 16, 2009

For discretionary spending, consider which discretionary items represent a sort of investment, and which will be a long term expense and / or an item subject to depreciation. A four wheeler has maintenance costs and the opportunity cost of storage and reduces in value over time. A vacation has none of these drawbacks - it will be shorter in nominal duration but still provide the long term benefit that any positive memorable bonding experience has.
posted by idiopath at 7:27 AM on September 16, 2009 [1 favorite]

Personally i'd never finance a "Toy". If I can't pay cash for a holiday then I cant' afford a holiday. its that simple.
posted by mary8nne at 7:47 AM on September 16, 2009 [5 favorites]

Are you completely leaving out the 401k/roth type of retirement saving? If not, then address that first, then additional saving, and then think about your disposable income. I'd also think about building up an emergency fund before buying luxury items.
posted by mikeh at 7:56 AM on September 16, 2009 [1 favorite]

I would encourage you to separate gas and groceries out of your "allowance", as these two things are more likely to be necessities. You need to eat, right? And I assume you use the gas to make trips that are necessary, for the most part? After you put these things aside, how much do you have left over from allowance?

I would suggest that if you finance anything, you should pay for half of the financing by making cuts in your new allowance (the grocery and gas free one) and the other half can come out of your cash surplus.

I agree you need to save more, by the way. $500 a month would be a good goal to achieve. But I think you might be better off continuing to save $100 a month and put the extra $400 a month towards paying off your higher interest rate car loan. Once you get both car loans paid off, then you should be putting aside $500 a month in an employer match program (if you have one), or if not, in a Roth IRA.
posted by Happydaz at 7:59 AM on September 16, 2009

Speaking as someone who shoveled herself out of a five thousand dollar credit card debt not too long ago, I am agreeing with almost everyone else that if you don't have the cash to buy it then you can't have it. Incurring debt if you don't need to is incredibly risky, and you ultimately end up paying a significant amount more on it due to interest etc. It also opens yourself up to being a little too free wheeling with debt and getting more and more things you possibly cannot afford which starts into a debt spiral very very quickly (which is what happened to me.)

the other benefit to setting aside x amount each month for some item is that once you have reached the goal and no longer need to save for it you can take that money (that you are already in the habit of setting aside and won't miss) and put it straight into a savings account (or against existing debt)! I also agree with burnmp3s that you should probably be saving more if possible. 100$ a month is okay and definitely better than nothing, but like they said it will take a very long time to amass any amount of savings.
posted by gwenlister at 8:03 AM on September 16, 2009 [1 favorite]

Have you thought of asking Suze Orman via her Can I Afford It? segment?
posted by mmw at 8:04 AM on September 16, 2009

How secure are your jobs? How secure is your pay? We made some miscalculations, with negative consequences, because we assumed our pay would go up, not down. Then the economy tanked and we took 10% pay cuts. Also, I agree with ohio and runningwithscissors that your allowance seems ridiculously high unless you have a whole bunch of kids.
posted by desjardins at 8:42 AM on September 16, 2009

Another aspect to consider is the wisdom of signing up to a significant committment in the current employment market. If you are the least bit worried about your or your partner's job, you need to make sure that you don't end up with a millstone should one job disappear. That doesn't necessarily mean no credit, it just means being a little more careful. For example, if you buy a new car on 95-100% credit, it initially depreciates much more quickly than the outstanding loan will shrink. If you are forced to sell it soon afterwards, you will still be paying an outstanding balance on something you no longer have. On the other hand, if you pay 1/3 or more upfront, you can be relatively confident that you can sell it for enough to cover any loans on it. Same goes for other physical assets. For a holiday, I would wait until I had the cash.
posted by Jakey at 8:42 AM on September 16, 2009

is it "ok" to finance, some or all of our wish list?

Well, do the math.

Before you consider financing something, sit down with a calculator and the interest rate and find out how much the thing you're about to buy will really cost you if you finance it instead of waiting.

If the toy still sounds worth that amount, then go ahead and finance it. If it doesn't, then don't.

(I'm in full agreement with everyone else who says you're not saving nearly enough per month, though. Again, do the math.)
posted by ook at 9:01 AM on September 16, 2009

What are your goals? Financial security is one of my goals, so being debt-free, including car and, eventually, home, is a goal. You don't say how old you are, how much you're putting into retirement, or how much you have in savings and retirement. Having several months' financial cushion is often recommended. As a nurse, you're likely to have excellent job security; is your spouse's job equally secure?

I recommend building more savings and more retirement contribution into the budget. Toys are in the entertainment/leisure budget. Financing entertainment really adds to its cost, so I try not to.

It sounds like you want permission to reward yourself for being financially sensible. The primary reward is the lack of financial crisis in your life. It may not be highly visible, but your financial common sense is rewarding you well. Plan out your planned toy expenditures. Knowing that you're putting 300/month towards that vacation in Aruba will help you stay motivated, and going on a paid-for trip will be all the more enjoyable.

And, since you're obviously very sensible, if you found a great deal on a toy, and that deal would not be available in 6 months, and it would save more than the cost of financing, then it's a pretty smart move. Esp. if you have a cushion for emergencies.
posted by theora55 at 9:53 AM on September 16, 2009

What you don't list, but should think about, is how much you have in reserve. My decision tree would look something like this:

1) Do I have a healthy long term savings plan in operation? (At the rate you're going, when can you afford to retire?)
2) Do I have a sufficient emergency fund? (How many months at half income could you keep afloat? How about no income?)
3) When do my long term debts go away. How much am I willing to sacrifice to accelerate that process? How happy will I be when they are gone?
4) How much more will it cost me to finance something than wait and pay cash.
5) How much joy will I be able to derive from said thing between now and the time when I would have been able to pay cash for it?

In your shoes I'd throw everything extra into liquid savings for a little while (a savings account or the like) with the goal of having enough socked away so that you could cover at least three months of your needs from savings alone. Then I'd take the excess and throw a third of it into savings, a third at paying off the cars and/or house faster and a third in the toy fund.

When you have a solid reserve and the price of financing your toy minus the toy fund is greater than the result of the emotional calculus you did in step five, go ahead and finance your toy.
posted by Kid Charlemagne at 11:15 AM on September 16, 2009

Home improvements are not necessarily toys. You are investing in the largest investment you hold, which is your home. If done correctly the improvements will pay dividends in the sale price of your home. If you are looking to sell your house in the short term, then I firmly believe that it is OK to finance the home improvements since the interest is tax deductible and the loan would be discharged in short order.

For the rest, pay cash.
posted by crazycanuck at 4:35 PM on September 16, 2009

kathrineg - I agree, if you are not willing to sell your house to discharge the loan then don't take the loan. However, there are situations even in today's economy where doing the loan would be the right choice. For example, if you are selling your house to move for another job or to get out from under the expense, it may well pay to get a loan to shore up the rotting deck and get rid of peeling exterior paint. It makes a difference as to whether your house languishes on the market.
posted by crazycanuck at 5:18 PM on September 16, 2009

The only things I ever had to finance in my life (and I come from pretty simple means) were my college education and some of my living expenses my senior year in school - which was a mistake. However, I had graduated from high school 1.5 years early to work full time to save for college, and worked 30+ hours a week during college and full time during all my breaks to help pay for my schooling. So by senior year I just wanted to take it a bit easier and enjoy some of the things my dorm-mates did (take-out Chinese on the weekend, a night out at the bar here and there, more time just relaxing), and that meant credit card. On the one hand I'm glad I did it, on the other, if I could have seen how long it would take to pay off a few thousand dollars of credit card debt at the time that I was accruing it, I never would have in the first place.

By the day I had made that last oppressive credit card payment, I had cut up all my credit cards save one for emergencies (never had to use it, from that day on everything went on the debit or I went without). A few years later I got a corporate credit card through my new job, which I got points for using, and could use for both my personal spend as well as my business spend. So everything started going on the credit card, with the caveat that while my business expenses were covered by reimbursement, everything I spent personally had to be covered monthly by my discretionary spending amount, and never cut into my savings amount.

3.5 years after getting that job, I resigned at a pretty lucrative time and took a payout that, combined with years of diligent savings and debt avoidance:

a) brought me to the end of my student loan days. As much as I wanted to pay off the loan then and there and be beholding to no man, my financial adviser of course told me to keep the relatively small amount at a very low interest rate, and invest the money elsewhere at higher rates. And so I did - the important thing is that I've been in the black ever since.

b) paid for the car I would need to buy in my next job, in cash. That felt good, I'll be honest. Being able to go through the whole car-buying headache with the knowledge that when it came to the last evil stage of financing - I wouldn't need that. I already had it. I pay rock-bottom price for my car and walk away with it as mine - no other man owns it, I will never pay a cent of interest for it. And when I sell it, every dollar of the selling price will go back in *my* account.

c) left me with more than enough for a size-able down-payment on a house. Which I will never use for that.

I've since resolved to never pay for anything on credit again, ever. I don't think it will be easy, especially if I ever do need to buy a house, but with what I'm working with in the bank and the market now, I'm fairly confident that - barring something horrible and unforseen - with more hard work and diligent savings, I will buy my first real estate in cash. That is to say - like my car, I will never go in to debt to own a house. I will never deal with the financing head-ache. I won't even have to get a credit check run on me, as far as I can figure, because I won't be bringing credit into the picture - I'll pay on the spot with a check for funds waiting in my account.

I remember once when one of my friends' dads was telling me about how he had never bought a thing on credit. I remember at the time thinking how ludicrous that was, but also how awesome it would be to be able to say that. Or at least - in my case - be able to say: I've never bought anything on credit since I finished college. The idea seemed crazy and outlandish at first - everyone has a mortgage and car loans, right? That's how we live. Its normal. Only the obscenely rich can afford to live without those things. But here's the catch:

I'm not "rich." Never have been. Rich kids don't have to pay their own way through college. I've had a job pretty much every day of my life since I was 12, I've been diligent about getting whatever work I had in front of me done, and I've tried hard to save and not buy anything I can't pay for in cash at the time (since college). That's it. And I'm no rocket scientist, either - I got decent grades, went into entry-level business (industry, not my own company), and stuck at it. At the beginning of this year I left a 6-figure salary to work in a non-profit sector at a significantly reduced salary, but that's also when I bought a car in cash and doubled my savings. I'm not making as much now but I still think its within the realm of possibility that I may not ever have to live with debt again.

Your question is titled: After the bills are paid when is it ok to [finance] "toys"? With respect, I don't think you're asking the question right...or perhaps better stated: you have an incorrect premise. Your bills aren't paid. I mean sure, they're paid on a monthly basis, but you still live in a house owned by someone else, and drive cars owned by someone else.

Throw everything you possibly can at your highest-interest debts. Keep paying the minimum on any debts that have a lower interest % than you can win back in the market on higher %-return investments. Suck it up for a few years of just-saying-NO to the extravagant toys and vacations and whatnot. I did this for less than a decade - the 8 or so years following college, and when I go on vacation to Zanzibar next month, I'm paying for it in cash. When I got my DSLR and the related lenses, I paid for them with the points from the corporate credit card (when you pay for everything in cash - the points almost work like the reverse of debt-interest - *I* got paid out rather than a creditor). When I bought my car I owned it the same day. And someday, perhaps, if I can defer gratification just a little longer - I might be able to say the same thing about a house. Hell, after that, a 4-wheeler and a vacation and home improvements would seem almost like minor expenses, I'd bet.

You can have it all now, but its not really yours. You can wait, work hard, and have it all a bit later, and a good deal more as well, when all that you've earned stays yours and compounds interest. I'm now rather rabidly convinced this is possible.
posted by allkindsoftime at 7:31 AM on September 17, 2009 [3 favorites]

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