Pay cash today or debt tomorrow?

cash todayPeople often make poor economic choices because they are overly optimistic about what they will do in the future, experts say. It’s akin to over estimating how much you can get done in a day or eating a piece of chocolate cake now because you are counting on yourself to have the will power to have only a salad for dinner.

For example, people transfer credit card balances over to cards that have low initial rates with higher long-term interest rates because they believe they will pay everything off before the “teaser” period is up – most don’t.

sneaky bills One study of a health club found that members who worked out on average just four times a month chose to pay a monthly membership fee of $85, even though the gym also offered a pay-as-you-go rate of $10 per visit.

Along with being too optimistic about our future, there is also an element monetary myopia.  Physical myopia is a refractive defect of the eye where far away objects appear blurred and near objects appear clearly. The same then goes for the money version; in the here and now, we tell ourselves that we must have this item or that experience now, we are clear about that. However, the future is a little fuzzy; we’re pretty sure we can pay the debt off  before it really starts to cost us in interest, and we are fairly certain that nothing unexpected should happen that would get in the way of our best intentions.

In an article from Wharton University, one expert says, “When people are polled about their beliefs [as to] what they’re going to do, there is a radical refusal to accept reality. Myopia may be willful in that we don’t want to contemplate undesired outcomes.”

So learning to anticipate a more realistic future is part of the puzzle of control debt. In that vein, perhaps a good question to ask ourselves when we feel the need to purchase something on credit would be, “The only thing I can be sure of is this moment. So if I can’t afford to buy this with cash today, what makes me think I can pay it off with cash in the future?”

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