I paid 3K for a Couch, 0% Interest, and I HATED Every Second

We had just moved to Miami from Chicago. Left behind many things including a couch I really didn’t like. Our needs included many things.  A couch was included and based off the previous couch we could expect our purchase to be with us for at least the next 10 years of our life. After some time, a couple furniture stores, endless talking if we like this couch or that one, we were finally beaten into submission. We purchased a couch. I would like to add the opposite of an exclamation point, but I’m not sure what that is. Not only did we buy a lot of couch, we put the whole purchase on 0% interest. I have been complaining about it ever since. What better time to ask the question is 0 percent interest a good deal?

We had already purchased a bed, bedroom set, night stands, and while we had planned for purchases like this with our new residence it still hurt to see all that money leave. My wife had a solution. 0 percent interest.

For those of you unfamiliar with 0 percent interest let me give you a quick run down of the good, the bad, and why banks lend you money at 0%.

The Good

• It’s Z-E-R-O percent. You don’t have to pay any interest, that in itself is magical. If someone offers you money to buy something that you can pay off easily, do it. Time value of money tells you that your dollars today are more valuable than they are tomorrow.

The Bad

• If only banks did this out of the goodness of their hearts. Even if you pay off that loan at 0%, they have high hopes that you are going to use this card or line of credit for the rest of your life. Then you know pay them a ton of interest over the course of time and make the banks filthy rich.

The Ugly

• Banks give you 0% interest because they know for a mathematical fact that enough of us debt loving Americans are going to pay late, miss a payment, or not pay off the entire balance. That’s when 0 percent interest turns into the ugly. Late fees, fees upon fees, and your 0 percent interest is now north of Canada as a percentage rate.

  

Can you imagine my fear when I heard my wife mention zero percent. I’m already deathly afraid of credit cards as I have been in what seems like every single kind of debt available to the free world.

Here’s the thing, I know that 0 percent interest makes financial sense, you know the math of it all. I however know that money is rarely all about the math.

Playing with Snakes

Dave Ramsey a famous personal finance expert likes to say you are playing with snakes. This could be the very reason I don’t like 0 percent interest, my dislike of snakes. Also can we rewind to 30 years ago.  Teenage pet store clerk can you close the curtain when you feed the mouse to the giant python snake so I don’t develop a healthy fear of snakes my entire life. Thank you from 7 year old Steven.

Over the course of the last 12 months we made automatic payments to the line of credit. Every 2 months or so I asked if we could pay it off. Just get rid of it. This month was the final payment. We successfully borrowed $3,000 for a couch and made payments for 12 months to pay it off without any late fees or interest paid.

The chart from Personal Capital shows the trajectory as we made payment after payment(use this link to sign up and we each get $20 in Amazon credit, transparency guarantee).  I shed tears, punched a wall, went through anger management, and eventually got over it because it was paid in full.

Mathematically we did the right thing. For the last 12 months we had an extra $3,000 earning over 2 percent interest in cash or over 5% in bonds or 10 percent in the stock market depending on how you look at things.

I can’t help but think are these the decisions that really make a difference? Earning an extra $60, $150, or $300 is this how I take the next big leap into a larger net worth?

There is always going to be a good, bad, and ugly to everything. In this particular instance we were able to get the good of this financial situation. In the future I will still look to pay for items in cash, debit, or credit card (Paid in full every month, of course).

0 percent interest Short term vs Long term

What I really just talked about is the short term decision. The long term is much more important than any short term nightmares my 0 percent loan may have caused.

The bigger issue is the continued habit. For example will I continue to borrow money even at 0 percent for expensive items that are not part of my regular expenses? No of course not.

In this particular case we had just sold our house and also been setting aside cash in case we would purchase a home. So cash was ready and available.

If however this was not the case we would need to make a decision, especially if the purchase was larger like a car.

Would we save up the money over time (if time permits)? Dip into our investment cash portfolio? Obtain a 0 percent loan(if available)? Sell part of our investment stocks and bonds?

The last option would be to sell any part of our investment portfolio. Remembered it’s all about time in the market. That’s the long term play here.

I would look first to pay for the item through payroll if that option was available. If not I would then move to a zero percent loan and take advantage of earning interest on my cash portfolio over the course of the loan.

A longer time horizon matters in this scenario. Also what factors in is the possibility these funds would be used to buy investments in a down market.

I think the tougher decision to made would be a loan of approximately the same amount of return as my cash investment portfolio. I’m not sure what the magic number would be in terms of interest differential.

If my cash was earning 2 percent but my loan was paying 3 percent would I automatically pay in cash?

Tough decision because again it’s the opportunity cost to buy in a down market. I would also have to consider my sincere distaste for having debt.

Long term not having any debt and keeping your investment portfolio in tact for the long haul is the answer.

Is 0 percent interest a good deal?

Like most of personal finance it depends on your personal situation.  As someone who is opposed to debt in most situations I would avoid 0% interest as it’s likely to give the false presentation that you are creating the correct financial habit and that’s the bigger long term mistake that we should all avoid.

When I work with clients as a money coach, it’s about creating sound financial habits and while mathematically 0 percent interest is the correct move, psychologically it’s the wrong move.  Especially for those who are in debt like many of my clients are.

Those in the pursuit of financial independence the answer would be different as many of the sound financial habits have already been created and creating an optimized approach is going to bring the largest benefit.  Would you want me to look at your financial situation in your pursuit of financial independence?

However 0 percent interest has it’s place.  That answers the question is 0 percent a good deal.  I walked through a couple of examples where I would consider borrowing money with the only requirement to make payments on time and in full before the length of the loan.

Just remember don’t take some guy you hear on the radio’s word for it or some random money coach on the internet.  Do your own research on your personal financial situation.