Paying for life’s big expenses

Over the course of our lives, there are certain major expenses that most of us will face. These expenses are often tied to something exciting, such as a taking a holiday, buying a new car or renovating your home. There are also less exciting expenses that can crop up: emergency medical bills, your car breaking down or a cross-country family emergency. Whether these expenses cause you joy or grief, you still have to figure out how to pay for them.

There are a variety of options to choose from when it comes to paying for a big ticket item, including your savings, a credit card or a personal loan. The option you choose will depend on your financial situation, how quickly you need the money and how quickly you intend to pay it back if you need to borrow the money.

Here are three of the most common strategies, each with their own pros and cons:

Savings

Using your savings is a tried and true method for paying for a big (or little) expense. If you’re diligent with your budget, you’ll likely have savings available to cover things like an emergency or another big purchase. If you’ve set a savings goal to buy a new car or cover your overseas holiday, there’s nothing like the satisfaction that comes with reaching your goal.

Pros of using your savings

• Quick access when you need it, you can transfer between accounts and use your debit card or BPAY.
• You’re spending your money, and won’t have to pay back any interest.
• You can enjoy a sense of satisfaction knowing that you reached a savings goal.
• You know that you’ll be able to cover an unexpected emergency.

Cons of using your savings

• It can take time to reach your savings goal and you might not have enough time to save the full amount.
• Once you spend the money in your savings account, you’ll need to start building it up again.

You can see that pros outweigh the cons with this strategy; there is little downside to using your savings for a big expense. Still, dipping into the savings account isn’t for everyone, and there is nothing wrong with borrowing the cash when you need to.

Look for a savings account with the features you need, such as a bonus interest rate and easy online access. Accounts that limit the number of withdrawals you make and when you can make them will help you on your way to achieving your goals.

Credit card

Like using your savings, a credit card gives you fast access to extra funds when you need them. You can use your credit card to make a large, urgent purchase such as a last-minute plane ticket or to cover an emergency repair on your car. The catch with a credit card is that you will pay interest on the balance if you don’t pay it off in full during the billing cycle or interest-free period.

Pros of a credit card

• You can set a spending limit so you’re always in control of how much you can spend.
• A good tool for managing your personal cash flow and building your credit score.
• Interest-free periods to help keep overall costs down.

Cons of a credit card

• Usually high interest.
• Easy to get carried away with how much you’re spending if you don’t keep an eye on the balance.
• Late payment or annual fees that can cost you extra.

There’s a 50/50 split with this one. Whether or not you should use a credit card will largely depend on how disciplined you are with your spending, what you’re using the credit to buy, and how quickly you can pay the balance off. Generally speaking, you should be able to pay the balance off in full every month to avoid interest accruing and costing you more in the long run. If you can’t pay the balance off in full, make sure you factor regular payments into your budget so you can pay the balance off as quickly as possible.

Personal loan

A personal loan is a flexible way to help make large purchases. From the loan type – secured or unsecured – to the loan term – how long you have to repay the loan – you’re largely in control. You can use a personal loan calculator to figure out your regular repayments based on how much you need to borrow, the interest rate and loan term.

Pros of a personal loan

• Can be used for a variety of purchases including renovations, holidays or even debt consolidation.
• Funds are paid in a lump sum and, depending on the type of personal loan, may be paid directly to the vendor.
• A structured repayment plan so you can budget accordingly.
• Usually lower interest than a credit card.

Loan terms can vary between one and five to seven years which can lower your monthly repayments (remember, the longer it takes to pay off, the more interest you’ll pay).

Cons of a personal loan

• No additional benefits that can come with some credit cards.
• There may be associated fees, including an application fee or early termination fee if you pay the loan off sooner than your contract states.
• Often not as quick to access as your savings or credit card. You’ll need to apply for the loan and go through the lender’s application process.

There are many benefits attached to a personal loan. Personal loans give you the flexibility to make a big purchase now, and pay it off over several years in line with your income and budget. Unlike a credit card, you’re only borrowing a set amount so there is less chance of going deeper into debt. It’s also important to remember the difference between good debt and bad debt, and how debt can be used to get ahead.

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