Questions from my Gen Z kid: Pay now or pay later?
In March I answered a few financial questions posed by my Gen Z1 son. Here are a few more questions for someone who is just starting out after college. (Photo above of Reid and me at La Colaborativa annual gala in May.)
(Not a GenZer? Please forward to a friend or family member who is.)
Q: For large purchases, is it better to pay upfront or sign up for payment plans?
This is a good question for all age groups. Until recently one could borrow money at very low interest rates and then payback steadily over time but those low rates are gone. You still might be able to find a low interest auto loan through a dealer but those may not be available on every model or for every borrower. The lowest rates are usually reserved for new car purchases and those with high credit scores.
Paying upfront
This is a financial planning best practice. By paying for your purchases in full at the time of purchase, there are no interest charges, future payments to remember and you can keep saving for your next big purchase because you don’t have a loan payment. However, many people are unable to pay for purchases in full because they have other payments to make such as mortgages, rent, or utilities. Paying upfront also provides peace of mind that you no longer owe money to anyone. If you ask anyone that has ever had a lot of debt, they can tell you what an awful feeling it is to owe a lot of money. Paying upfront can be better for your financial and mental wellbeing.
How do you pay upfront? Begin putting money away today toward your future purchases. You can set up an automatic bank transfer into a high yield savings account every payday. It will grow with every deposit AND earn interest that will help it grow even faster. Once you’ve saved up enough, start a new goal and keep making those automatic payments. Never stop.
Paying over time
Many people from the poor to the ultra rich borrow money. For certain purchases, especially large ones, borrowing is necessary. For example, if you just got a new job that requires you to drive 45 minutes each way most days of the week and you don’t have much cash, a car loan may be a practical option if you don’t have enough cash to buy the car outright. Nearly all lenders will charge you interest for this privilege.
Credit cards (the Darth Vader of personal finances)
These financial companies target young people because they tend to have many wants but not a lot (or any) spare cash to make purchases. Card companies have become big global businesses and they know exactly what to offer young people to get them to sign up such as points towards airline tickets or travel, gas discounts, cash back, and many other perks. Many will sign up for the perks but then run into a month or two when their income is not enough to pay off the bill in full.
Once you start carrying a balance over from month to month, card companies will charge you interest, often as high as 26-29% for cards with the most enticing perks. Soon it can become almost impossible to payoff the balance and the card companies can collect thousands of dollars in interest charges from you every year. This can be a financially dangerous path because it can snowball into a situation that is hard to get out of. A lot of credit card debt can financially cripple a young person who is just starting out.
Buy now, pay later plans
Several new companies have emerged in the last few years offering a different way to pay for purchases. The “buy now, pay later” companies, such as Affirm, allow you to set up your own payment plan and often there are no interest charges. The companies make money from the merchants and from shoppers paying interest on some items. The service is accessed via online stores, cards and apps. However, you can still overdo it if you purchase too many items this way and become overwhelmed with monthly payments.
One thing that I don’t like about this service and credit cards is that it does not require you to do the hard work of saving first and then buying—it still caters to an impulse we all have to get the cool thing first and worry about paying for it later.
Gen Zers are faced with a dizzying array of changing financial choices from questionable sources. If you know a young adult who is interested in discussing some great ways to start out, have them give me a call. I’m here to help. You can schedule a quick call with me by clicking HERE.
Lyman H. Jackson
Lyman@PlanWithFPS.com
617-630-4978
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· Protecting your retirement plan: Why I no longer ride rollercoasters
· Inheritance tax bomb: Leaving a large IRA to adult children
· Questions from my Gen Z kid about money
1Gen Z’s come after Millennials and before Generation Alphas. They were born in the late 1990s to early 2010s, making them about 13 to 28 years old. The older end of Gen Z’s have finished college and are entering the workforce. As with most generations, Gen Z’s think about money and finances differently than prior generations.
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