4 Common Splurge Spends Exposed (And What to Do Instead)
There's no doubt about it: you work hard to afford the lifestyle you want, and splurges are an important component of a happy, fulfilling life. While many expensive purchases feel comfortably within reach by using a payment plan or making monthly credit card payments, there's always the hidden cost of financing large purchases to consider. When factoring in the additional money from compounding interest — does the typical "splurge" make financial sense?
The Splurge: The latest smartphone
The Spend Exposed: The release of the iPhone X in November 2017 revealed the priciest smartphone to date with an average retail price of $1,000.
If putting the purchase on a credit card at 24% monthly interest with a $40 minimum monthly payment, the phone racks up $400.11 in interest over 36 months. (This is, of course, if only the minimum monthly payment is made and nothing else.)
The Splurge: A fancy pair of designer brand shoes.
The Spend Exposed: Say you have champagne tastes and want to buy a piece of clothing that conveys status. You opt for a pair of Christian Louboutin shoes ( or high-end sneakers if you're a guy), which on the low-end cost ~$745.00 (plus 8% sales tax).
Putting $804.60 ($745 + 8% tax) on a credit card with the same numbers above (24% monthly interest, $40 minimum payment) would take 26 months to pay off and cost an additional $234.59 in interest, bringing to total cost for one pair of shoes over $1,000.
The Splurge: A Caribbean vacation
The Spend Exposed: What's the point of working so hard if you can't afford to get "away from it all," every once in a while? Consider the average price of a Caribbean vacation, $1,264.13 per person. If you take your sweetheart, that's a total of $2,528.26. Financing this vacation at 24% interest on a credit card would take 7.8 years to pay off and cost $3,077.22 in interest — more than the trip itself!
Vacations should be top of the list of things not to put on a credit card as they can (typically) be planned and saved for well in advance.
The Splurge: A new washer and dryer set for the home.
The Spend Exposed: Perhaps your old set broke, or you're simply in the mood for an upgrade and you choose a higher-end brand that costs $900 for the set. Putting this on a credit card at 24% would add an additional 1/3 to the cost — a whopping $300 in interest. Fortunately, many retailers will offer in-house financing at a much lower rate and with better financing terms than you can find on a standard credit card.
The Skinny: Some purchases are worth financing and others aren't. In the example of the smartphone, in the three years it would take to pay it off, 2-3 new "generations" of a smartphone could exist on the market. Financing isn't the best way to pay for something that will be nearly obsolete in just a few years' time.
However, of all the "splurges" listed above, home furnishing and appliances are great candidates for items to finance. Mattresses and washing machines have a much longer life cycle than a phone or a vacation – the daily use of these items means the money in interest is worth the spend and the items will continue to provide value even beyond their payoff date.
Another important thing to consider is the availability of low- or no-interest financing for these major purchases—sometimes up to 6 years. So, for six years, financing can cost the same as just paying cash. That's a deal too good to pass up.