by Tyler Townsend
Q: Credit card fees are astronomical and there is so much talk about bankruptcy in the news. How can our family avoid the credit crisis?
A: Perhaps the most important financial decision a family can make is whether to be a saver or a borrower. Savers spend within their means, and they put money away each month. Borrowers rely on consumer debt to help fund their lifestyles. The financial impact of being a saver versus a borrower over the course of time is impressive. You can help your family become savers and enjoy the financial success this decision allows.
When savers put money into investments each month, they allow this money to grow. One thousand dollars invested today can purchase two thousand dollars worth of goods in the future. On the other hand, when borrowers take loans, they agree to pay a fee for the use of the money. Borrowers devalue their current money—one thousand dollars today cannot purchase one thousand dollars worth of goods.
After making the decision to be a saver, the most important
step is to accurately estimate available income. After putting
away for long term requirements such as retirement and children’s
education, the family must design a lifestyle that fits the
remaining income while still allowing for routine savings for
future non-recurring purchases such as a new television, automobile,
home repair or vacation.
To be sure, this isn’t an easy decision to implement! But don’t
worry, the first year of being a saver is the toughest. After that,
once the family gets ahead with their savings, they will pay less
per month into savings than they would otherwise pay towards
credit cards.
To illustrate, we will examine the purchase of a $2,000 big screen television. The saver pays cash for the television and then continues their savings program to replenish their bank account. Assuming a money market account paying 2.8 percent, the family will save $165 a month for a year to pay the $2,000 back into the account where it will be ready for their next purchase. The borrower, on the other hand, buys the television using a credit card. Assuming a 15-percent APR, the borrower must make payments of $180 a month for the next year. This $15-per-month difference may not sound like a whole lot. But when considering this is just one purchase of many that a family will make each year, the power of being a saver over a lifetime can be easily imagined.
Being a saver versus a borrower is a decision that requires some amount of discipline to implement. But once the habit is created and the family gets through the first year of building their cash account, the rewards will begin to show. Best wishes for your family finances!
After 11 years of business consulting, TylerTownsend joined Townsend Financial in the spring of 2007, providing independent, fee-only financial planning and investment management services to families and small businesses.
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