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4 Things You Should Always Pay Cash For

Conventional wisdom suggests that whenever financing a major purchase, you should rely on debt. We are taught from a young age that buying cars, education, home furnishings, and vacations is an acceptable practice. Today, I would like you to take a look at the prevailing wisdom and consider making these purchases using cash. I’m challenging you to think outside the box on this one. Don’t scoff when you read the first one, keep an open mind! Here is a list of four things that you should never buy on credit:

1. Your Car

You’ve always been taught since your teen years that automobile purchases should be paid for by financing them. Millions of people finance cars through local dealerships, commercial banks, and credit unions. While these may all seem like good alternatives, the best option is to pay cash for your automobile. Paying cash saves you from paying interest on an asset that is going to depreciate. It also frees you up to earn a positive return on your money. You are probably thinking, how can I buy that new Range Rover if I have to pay cash? Good question! Either you are going to pay cash for it or you are going to buy a less expensive car model. It really hits home when you have to pay $30,000 in cash as opposed to when a salesmen says just make $500 monthly payments for 5 years. The only time when making monthly payments is appropriate is when you are paying 0% interest, and often these gimmicks last for only a period of time but the interest rates increase drastically.

2. Your Kid’s Education

Sending your kid to college is a priority, but it shouldn’t sink your retirement plans. Too many people have to use loans to finance their child’s education. They either borrow from their 401(k)’s, leaving their retirement plans underfunded or they leave their kids saddled with massive student loan debts. You can avoid both of these options by starting a 529 plan or a Coverdell educational savings account. Saving for your kid’s college should start from Age 0, Day 1. This is the easiest way and gives you 18 years to pay for your child’s education.

3. Your Summer Vacation

Keep your credit card in its holster during your summer vacation. Airline tickets, hotel rooms, meals, entertainment, rental cars, and shopping sprees are all paid for using debt. Think about the months of work that it will take to pay off your vacation funded by debt. How can you avoid paying for your vacation on credit? Start saving for your next vacation one month after your current vacation has ended via a “vacation savings account.” If this doesn’t work for you, you can adjust your vacation plans to your budget. Instead of that vacation to the Hawaiian islands, you could travel to a resort lodge or cruise for discount fares online. Remember, your vacation shouldn’t break your budget. And contrary to what you may think, vacations are not a necessity, they are a luxury.

4. Your Home Furnishings

Did you just buy a new house and can’t wait to furnish it? New homeowners often spend all of their savings on the home down payment and closing costs, leaving them little money to decorate. First-time homeowners use store credit to buy new furniture and appliances. The new homeowner now has to tackle mortgage payments and installment loan debt along with miscellaneous home expenses. This is a recipe for disaster. Avoid going into debt with home furnishings by furnishing your home in stages. You could do the bedroom first and the living room the next month. This allows you to furnish your entire house with no debt. There’s also a lot of great furniture on Craigslist, and your friends/family members might have pieces they are looking to unload or sell as well.

We often finance luxuries with debt, and this is the habit we must stop. It’s a luxury to have nice, new furniture. It’s a luxury to have a new car, and it’s a luxury to take an expensive vacation. When you start financing life’s luxuries with debt, that is when you can really get into trouble with debt. Avoid this trap, and you’ll continue to build wealth at a young age and be far better off in your retirement years than your friends who went on 4 vacations a year and always drove a new car.

(Photo credit: alancleaver_2000)

Mark Riddix is the founder and president of an independent investment advisory firm that provides personalized investing and asset management consulting. Mark has written financial columns for Baltimore and Washington, D.C. area newspapers and is the author of the book, "Your Financial Playbook."