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When debt becomes a carrot, not a stick

Aug. 13, 2014
Paying Off Debt, Personal Finance
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By Adam Funk

Learn more about Adam on NerdWallet’s Ask an Advisor

My wife really wants a new, king-size bed. So we went to a store to shop for one.

When my wife realized the bed would cost much more than she anticipated, the salesman offered us a plan of interest-free payments for 15 months. My wife got excited and said that we should do it and that the payment plan will motivate her to work overtime to pay off the debt.

WHAT?! Has debt become a greater motivating carrot than the object being purchased? What ever happened to working extra to save and then buying once you can afford to pay cash?

I recall sitting in on a small-business seminar put on by the local chamber of commerce when I was starting a new company. The marketing topic was pricing strategy, and how you can help your customers buy your goods and services when they can’t afford it.

If you sell something cheap, people can pay cash. But if you sell things that are more expensive than say $10, which most people don’t usually carry in their wallets, then you should set up a merchant account so you can accept credit cards. If you sell something even more expensive, you should offer a payment plan yourself or through a third-party bank.

Our society has mastered these techniques. If you want a new bed or appliance, the store will offer you a payment plan. If you want a new car, the auto company can finance it for you. If you want to go to college, the college admissions office will help you fill out your federal aid forms and help you get a student loan. If you want a new house, the real estate agent will put you in touch with a banker who can help you get a mortgage.

So if you are in debt, you probably did not get there yourself — you had some very helpful hands along the way showing you how easy it was to afford things you couldn’t afford.

Formalized debt is still in its infancy and has evolved so much in just the last 100 years. Kmart and Sears became household names because they made the layaway plan famous before formal banking credit. Ford created the middle class, not because it built a car the middle class could afford with cash, but because it figured out how to offer financing so middle-class people could make payments to buy it.

Our middle-class society is now propped up by the premise of living with monthly payments for everything. You can choose to fight that monthly wave, or ride it instead.

Understand that a wave can come crashing down if you’re not prepared. To avoid that crash, build savings for times when your income falls off so you can continue to stay atop the monthly payments. Of course the best way to be prepared is to not build up a huge wave of monthly payments in the first place.

Financing is a tremendously useful tool for things you really need, but please use it wisely and sparingly.  I personally don’t want to go back in time and live off the land; I like my middle-class lifestyle and luxuries.

Honey, I love you. But let’s wait to buy the bed until we can afford to pay cash for it.