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The question of saving money for a large purchase is tied to a series of either/or choices. Cash or credit? Save or borrow? Now or later? Many people believe they should save up before buying to avoid debt. Surprisingly, experts say there is actually no easy, one-size-fits-all answer to the cash-versus-credit question. (For more, see Credit Card or Cash?)

Saving Money for a Large Purchase vs. Debt

Saving up to buy a big-screen television or washing machine often makes sense, because by not going into debt you avoid interest that adds to the bottom-line price. But what if you need that washing machine right away because your current one just broke down? What if after a year of saving the washing machine has gone up in price more than the interest you would have paid to charge it? What if the washing machine is on sale for no money down and 0% interest for 12 months?

Reasons to Save

Saving up and paying cash may make it possible to negotiate a better price for a non-emergency big-ticket item. “Cash up front” is a tried and true bargaining tool with a long history. Although savings account interest rates are not optimum, any interest coming in is better than interest going out, making saving at least modestly preferable to going into debt. Saving for a down payment – on a car or house – allows you to use that down payment to reduce the overall cost of borrowing.

Sometimes people are forced to save because their financial situation won’t allow them to take on more debt. It may be better to put off that large purchase until you have the money in hand. (For more, see Should You Pay in Cash?)

Reasons to Borrow

There are, of course, times when it makes sense to go into debt. One of the most common reasons, mentioned above, is urgency. If an appliance fails, you need a replacement, and if you don’t have sufficient savings to buy it outright, debt may be your best option.

A pending price increase or special sales opportunity – even when it’s something that isn’t an emergency need – could also push you into a decision to charge the item. It’s important to make sure that the savings, even with interest, is more than the savings you would realize by paying cash.

When a purchase represents something that will likely appreciate in value, buying now and going into debt might make sense. Examples would include paying for college or buying a home. The same would apply if you decided to borrow instead of taking from investments, savings or a retirement account. In those cases long-term gains on investment or savings, not to mention the potential damage to a retirement account, often make borrowing a better option.

The current climate of extremely low interest rates may also make buying on time a better choice. This is especially true if you feel interest rates might take a significant hike before you are able to save up enough to make the purchase. Just be aware that if it's a credit card you're using, those interest rates still aren't all that low.

The Charge-It-and-Pay-It-Off Option

There is one way to have the best of both worlds. That’s when you charge a large purchase on a credit card, then pay it off immediately or within a specified 0% interest time range. You may get rewards, in the form of bonus airline miles or points or even cash back. These could represent an additional discount, and you would still avoid paying interest. Credit cards typically feature extended product warranties, travel insurance or other consumer protection benefits. If you charge and immediately pay off the charge, you get the benefits for free. Be careful of some interest-free offers, however: Why Deferred-Interest Promotions Are a Trap explains why.

Credit Caveats

It’s important not to max out credit cards or accounts. Late fees, over-limit fees and other costs can quickly wipe out the advantage of any savings. Don’t fall into the trap of failing to honor your plan to pay off a large charge because you want to accommodate another big purchase. This is how access to credit can quickly become suffocating debt. Make sure you actually have enough in the bank to pay off the balance by the end of the month or 0% interest period. If you can’t do that, avoid charging the purchase.

The Bottom Line

When deciding whether to save or borrow, start by asking yourself how quickly you need the item. If it’s not an emergency, saving up is often the best option. If it is an emergency, review your borrowing options and choose the one that costs the least. If it’s not an emergency, but you’ve concluded that buying on time makes sense for one of the reasons listed in this article, double-check to make sure you are right before proceeding. Finally, especially when contemplating going into debt, make sure you have a plan for paying off that debt if the unforeseen happens, such as a cut in take-home pay or losing your job.

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