It has happened to all of us at one point or another, we see something that we want but do not have the cash in the bank to buy it. When I was in 3rd grade, it was Power Rangers toys. When I was in middle school, it was a big screen TV. When I was in high school, it was a PlayStation. Today, there are many items ranging from flat screen TVs to cool furniture that I would love to buy. However, my income is mostly spoken for to go to school. While my credit card is tempting, there is another way.
First, lets think of the downsides of buying a $400 TV with a credit card. If you are not going to pay it all off right away, you will be paying for it for years, with interest! For that $400 TV, you could pay hundreds more in interest. That seems like a dumb thing to do. While it is fun to have the TV, it is not worth paying more than it costs to own it.
With “reverse credit”, you pay for it ahead of time. There are two main strategies to do this: the envelope method and the bank method.
The envelope method is the “old school”, all cash way to approach the purchase. If you are live mostly with cash, this is the method for you. Put a designated amount in an envelope (in a safe place) every payday. Be it $10, $20, $50, or any other amount you can afford, start stashing away cash. When you get to the $400, take it to the store and come home with the new TV.
For people like me, there is another method. I do everything online and pay with plastic. To save up without putting cash away, you need a sub-account to separate your TV money from your regular living expenses. I recommend using a sub-savings account at ING for this.
Because I already have an online checking and savings account at Capital One 360 (formerly ING Direct), I can quickly open up a secondary savings. Do this by following the “open a new account” procedure for a savings account. Your new sub account will be linked to your current accounts. You can even give it a fun nickname like “Future TV”. Ramit at IWillTeachYouToBeRich.com has several sub accounts for different future events and goals. This list of accounts is from Ramit himself.
Once the account is open, setup a recurring transfer from your checking account (where you are getting direct deposit) to fund your goal. You can make this automatic so you never even have to think about it. While the money is being saved, the bank is paying you interest. That is a much better deal than paying the bank credit card interest, don't you think?
Once you hit your goal, make the purchase from a credit card and pay it off in full from the sub-savings account or transfer the funds and use a debit card to buy it. Just make sure you are getting rewards for the purchase.
Alternatively, you could make a regular deposit to a rechargeable debit/gift card, but there are usually associated fees unless your bank will do it for free.
Have any of you ever tried this before? Please tell us about it in the comments!