Paying for Your 5-Year Project

So you’ve set a budget and have a shopping list of what you aim to acquire with your annual spend. Great.  Now you just have to go acquire it. And pay for it, of course.  Unless you are planning some serious shoplifting. Which is not to be recommended.

How you execute your acquisition plan will depend of a number of variables.  Do you need to purchase in a few big bursts or are you more likely to buy very gradually? The latter is relatively simple. The former may require a little more thought.

I tend to shop around sale times which means that December–January, April, and June–July are when I acquire most wardrobe items.  Unfortunately, like most people, I am hardly flush with cash in January in the immediate aftermath of Christmas.  Moreover, if significant parts of my annual spend come near the beginning of the year I am therefore seeking to spend income that I will not receive till later in the year. Spending tomorrow’s money today is a sure path towards financial ruin.

One simple way forward is to use money from savings which can then be replenished later in the year. Personally, I am not a fan of this approach. Savings are difficult enough to maintain in our household without me dipping into them for my 5YP.

My general approach to saving is to treat it as an expense. Once I’ve moved money into a savings account it’s gone. I therefore can’t use it unless it is for the purpose for which I have been saving. Moreover, by taking money out of your savings you reduce the already measly amount of interest you will earn.

I prefer to use a credit card to pay for my 5YP if I need to acquire items now but pay for them later. In light of my earlier Personal Rant About Personal Debt this might be surprising.  However, there are a number of benefits to this.

  1. Since I use online sites regularly, it is far safer to use a credit rather than debit card. If you become a victim of fraud then it is the credit card company which will be immediately out of pocket whilst your money remains safe in your account.
  2. If you pay by credit card you can claim your money back from the card company if the seller fails to honour the contract, or the item is faulty, or if the seller wrongly describes it, or if the supplier goes out of business. Technically this applies only to amounts in excess of £100. However, most credit card suppliers will honour claims for lesser amounts.
  3. Using a credit card can improve your cash flow. The best credit cards offer an interest free period of up to 45 days before your bill is due. This means that even if you have the money sitting in your bank account it could be worth using a credit card to make a purchase because your money can continue to earn interest for up to a further 45 days.
  4. Many credit cards come with some kind of incentive or reward scheme. So you are rewarded for spending money that you were going to spend anyway. My Capital One credit card pays me 1% cashback for all my expenditure on it.  My M&S Money card offers me money off vouchers for M&S. All of this on money I would have spent anyway.
  5. I tend to keep a 0% purchases credit card which charges no interest on purchases for the first 12–15 months. This is usually available only as an introductory offer so it means applying for a new 0% credit card once per year or so and then closing the account 12 months later.  However, it means that if the perfect item comes up on sale in January when I am skint I can acquire it safe in the knowledge that I can pay for it in June without any additional cost or without dipping into savings.

However, there is a caveat and it is an important one. You should always say a big fat NO to paying interest on your credit card. Nor should you pay any fees of any kind, whether membership, late payment, withdrawal, transfer, or payment protection. To do so will largely negate any benefit of using the card.

This is why credit card companies make introductory offers and operate incentive and reward schemes. They gamble that they will make more from us in interest charges and fees than we will take from them in incentives.

The trick is to make sure you take the incentives and benefits from the card without paying a single penny in interest or fees. This requires that you pay your credit card bill in full and on time every month, unless you are enjoying an introductory 0% purchase offer, in which case you need only make at least the minimum payments. If you’re not able to do this that then you are better off staying away from credit cards altogether. Stick with a debit card or cash.

Giving a little thought to how you pay for your 5YP can help you streamline your acquisition plan and smooth out cash flow troughs between income and expenditure.

So what do you think?

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