The Way You Spend Your Money is Unique to You – But Making Responsible Decisions is Good for Every One.
There are many ways to gain control of your financial future, and to have the financial freedom to reach your goals and lifestyle aspirations. American consumers live in the world’s largest example of a free enterprise economy. And personal consumption expenditures make up the lion’s share of that economy – consumer spending makes up 70% of the gross domestic product (GDP).
Ways to Pay.
Two hundred years ago, U.S. citizens frequently traded goods and services in return for other goods and services – an economic idea called bartering. You may still do this today. For example, if you’ve traded your neighbor a car wash for the temporary use of their lawn mower, you’ve bartered. If you’ve borrowed two eggs in exchange for a dozen cookies, you’ve bartered.
But today, money is the primary way of getting what you need. And in most cases, money takes the form of cash, checks or credit.
Cash is the banknotes and coins that you can spend anywhere on just about anything. It’s money you have right now to spend right now.
A check is a promise of money that you have, but not in your pocket. A check is a piece of paper that is a substitute for having cash in your pocket. It assures another person or business that you have money in the bank.
Credit is a promise to repay money that you do not immediately have. It’s a way to pay based on the trust that payment will be made at some point in the future. Credit can be honored through a physical object (i.e. a credit card) or a financial instrument (i.e. loan document).
The Difference Between Credit Cards and Loans
Credit cards and loans differ in several ways. There are many variations associated with credit products, so we’ll explain some of the basic differences.
Credit cards are unsecured loans, which means that the debt it is not backed up by property or assets that you already own. The debt is revolving, meaning that you will make at least a minimum monthly payment, and you will accrue interest each month on the remaining balance. Credit cards are good bets when you need to borrow for the short-term and can pay most or all of the balance each month.
Some loans are based on a one-time distribution of cash for a specific purpose. Typically, you make equal payments, called installments, for a certain period of time. Each payment will include repayment of a portion of the amount you borrowed and a portion of the interest you owe. Personal loans may be secured by property you own or they may be unsecured. These loans are useful, for instance, when you need to pay your debt over a longer period and/or want the convenience of predictable payment amounts.
Note that there is also a type of personal loan called a revolving line of credit or open-ended loan that enables you to be approved for a set amount and then borrow repeatedly against the remaining available credit limit. You can use as little or as much of the loan as you need, making it a more flexible option than an installment loan.
Which Way is Right for You?
There’s no right or wrong way to pay for goods and services you need. But there are differences in the way you have to plan your finances to account for each payment method.
- When you pay with cash, you no longer have the money that was in your pocket.
- When you pay with a check, you have to keep track of the amount of money that will be deducted out of your bank account because of the promises you made.
- When you pay with credit, you have to plan for the repayment of debt – using money you make in the future to pay for goods and services you have already acquired.
When you become a customer of Flexstar Financial Solutions, it means you have chosen to apply for and use credit from the retailer where you received goods or services. As we mentioned, there are no right or wrong reasons for choosing how to pay. But if you’re paying by credit, it’s useful to think about your ability to repay your debt. Maybe one of the following applies to you… or maybe there’s another reason why you chose to obtain credit that makes sense to your financial plan:
- You have money in savings that is earning interest
- You live on a fixed income but want to maximize immediate purchasing power
- You anticipate a predictable level of income in the future that is higher than your current level of anticipated expenses.
It’s Your Financial Life.
Flexstar Financial Life intends to provide you with information resources and financial education tools* that enable you to better understand the financial decisions you have before you, from the way you pay for goods and services to almost every aspect of financial planning for yourself and your family situation. Our information does not imply legal advice, and we can’t guarantee its accuracy or relevancy for every situation you face. Important financial decisions should always be made with the support of an attorney or financial advisor.
But we do want you to think and act on your consumer purchases with an understanding of how it may affect you or your relationship with retailers and creditors. Understanding and responsibly managing your financial plan, your family budget and other aspects of your financial life form the building blocks of smart spending. We don’t have all the answers, but we’ve heard many of the questions – and we’ll do our best to address as many as we can, right here.