There is a popular SNL skit that made the rounds not too long ago. It’s called “Don’t Buy Stuff“. Personal finance bloggers love it. It’s still hilarious even now. The skit, at one point, talks about buying items with money you save up. And where, asks Steve Martin’s character, can you get the saved money?
As you probably know, saved money comes when you plan ahead, live within your means, and set money aside for the future. The magic of saving up to buy things is that you end up with the money to make purchases, without being burdened by debt.
Avoid Paying Interest
From a strictly financial standpoint, saving up to buy things means that you spend less overall. One of the pitfalls of borrowing, and using credit cards, to buy things is that it is easy to forget about the cost of interest. Interest represents a premium you pay for borrowing money. Indeed, interest doesn’t purchase you additional goods; it does nothing but enrich whoever lent you the money.
Photo by Images of Money via Flickr
When you buy something on credit, you could pay back much more than you owe. Depending on how much you borrow, the interest rate, and how long it takes you to repay the loan, you could pay as much as four times — or more — the original cost of the item. It is conceivable that you will still be paying for something long after it has fallen into disuse.
You can save money — to the tune of thousands of dollars over your life time — if you save up to buy things, rather than buy them on credit. On top of that, after waiting to save up for something, you might decide you don’t want it after all. That means you have more money to put to work for you, by padding your retirement account or starting an income investment portfolio.
Create a Plan to Save up for What You Want
One of the best things you can do is create a plan to save up for what you want. In some cases, this isn’t too difficult. Saving up so that you can purchase a $300 video game console doesn’t take too long — you can do it in six months if you set aside $50 a month. More expensive items, such as vacations or big screen TVs, might take more time. However, it is still within the realm of possibility to save up for these items.
Look at your spending, and see what money leaks are costing you. Then, divert that waste toward your goals. You might be surprised at what you will be able to set aside. Figure out how long it will take to reach your goals. You will feel accomplish as you work toward your savings goal, and it will feel all the better, knowing that you don’t owe anything to anyone, and realizing that you are firmer financial footing.
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own personal finance blog: Planting Money Seeds.