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Personal Finance

Should You Buy Now, Pay Later?

Spending is usually more fun than saving, but don't lose sight of your long-term goals.

Spending $400 up front for a new 50-inch flat-screen tv may sound like a lot … but how about $13 a day for a month? A store may advertise a product this way because breaking the price of the product into smaller pieces may sound better to the customer. It's a lot easier to think you can afford an expensive product when the cost is broken into smaller chunks over time.

Over the past few years we've seen a rise in buy-now-pay-later apps, such as Klarna and Afterpay, which allow customers to purchase items and pay them off in interest-free installments. While these services offer a convenience, being able to have the product now and pay later in smaller amounts has a downside: It makes impulse spending and overspending easier.

Paying full price for something (especially in cash) may cause you to pause and think about how much you're spending. But segmenting the cost into four payments over the course of a few weeks may tempt you to take the plunge because you don't feel like you're spending the full amount.

If you decide to use buy-now-pay-later options, make sure you understand the terms of the service and always pay on time. Terms differ among providers, but late fees can be steep and may come directly out of your checking account.

When deciding whether to buy something (and how to pay for it), it's important to look past advertisements or special payment plans that may persuade you to make a purchase regardless of how it aligns with your financial goals.

According to Morningstar's director of behavioral science Sarah Newcomb, saving for most people is hard because "saving doesn't feel as good as spending." She further explains that "if what you choose is to spend, then that's because spending won out in your mental cost-benefit analysis."

But this is not to say that every single purchase we make in life has to be strictly necessary, or bring us a return or more wealth; purchases can also bring us joy, which is arguably as important. Balance is important. Checking in regularly with your budget and financial goals will you help you stay on course.

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