Years ago when I was in college — a time when my friends and I were excited to get our first credit cards — a friend recited an old saying about debt. I imagine he heard it from his mother or father or some wise elder. He said, “The purchase should last longer than the payments.” Unfortunately, I didn’t always follow that advice. I erred. I got into debt and paid enough credit card interest to wish I had taken those words to heart.
If you’re making payments — that is, making payments that include interest on debt — for something that is long gone, then quite clearly: you’re doing it wrong. Paying interest on money borrowed to purchase nondurable goods, things that are quickly consumed and forgotten, is the worst kind of waste. Pay interest to finance a vacation? You need to take a staycation. Pay interest on clothing you buy? You need to shop at Goodwill or wear what you already have. Pay interest on movie, theater, or concert tickets? You need to go to the local library and borrow books or DVDs for free. Pay interest on restaurant meals? You need to eat at home. Pay interest on the groceries you buy? You need to buy less-expensive groceries and eat oatmeal once or twice a day.
What about paying interest for things that you can still have and use (durable goods) after you’ve made all the payments? Paying interest isn’t a good thing, but sometimes it might be reasonable if it’s something you really need and if the interest is affordable. However, you should avoid as much as possible. Pay interest on purchases of home electronics (television, stereo, cellphone, etc.)? Pay interest for furniture purchases? It would be better to do without or find something you can afford without needing to borrow. Pay interest for a car? Maybe, if the interest rate is low enough and it’s the least-expensive car possible. But remember: Even durable goods depreciate. Every day, they are worth less than the day before. Used televisions and other electronic entertainment devices are nearly worthless. You can find them for free on the curb. Used furniture, same story. Used cars are worth less every mile you drive them and every day you own them. It’s always far better to save and pay cash for items like these.
The only things you should maybe pay interest to purchase are things that are both durable and have some chance of appreciating. For most people that means real estate (e.g., the house they live in) or a profit-making business.