Cash vs Installment: Which one?

In this article, I want to talk about: When you buy something, should we pay by cash or credit/installment? Which one is more profitable?

Well, for me personally, it depends on what kind of stuff that I buy. To not over complicate things, I will divide it based on:

-??????? Stuff that I buy

-??????? Benefit from each payment method (Cash vs Installment)

Installment

There are so many benefits that we can get when we buy something on installment. The perception that “if we use credit card to buy something, it may cause our expense becomes uncontrollable” is not 100% true in my opinion. In today’s society, credit card is super helpful. However, there is a special warning for it: Ensure that you don’t overspend the limit & never pay late. Here are the benefits that I feel when I pay on installment:

1.????? I can accumulate point reward/ miles

When we use credit card, there are so many banks that will give us point reward. We then can exchange the point reward to other benefits. Every bank may give different reward as they have different policy also.

Moreover, this is my favorite part anyway, we can get miles by transacting through credit card. The conversion from our transaction to the miles is varied among credit card. For instance, the credit card that I use give 1 miles = IDR 10k conversion.

2.????? Additional discount

There are numerous discounts if we use credit card for shopping. For example, when we eat in a restaurant, there’s 20% discount if we pay by credit card or when we go to convenience store, there’s also discount through credit card and so on and so forth.

These kind of discounts will definitely help us to reduce our regular expenses.

3.????? We can control our expense better

One more benefit from credit card is, we only need to pay once in every billing cycle (once a month). Furthermore, we can also track that within a month, what are our expenses? Where was our money going to? Finally, you can monitor your expense periodically.

On the other hand, if we still use cash, especially when you are too lazy to record your spending, we will definitely forget about our expenditure in the past. This won’t happen if we use credit card as we can see them all in the billing statement.

One “hidden” advantage of using credit card is, when we always pay it in time, we can achieve high credit score. If your credit score is good, let’s say when you want to propose KPR (bank credit for buying a house), it will be easier because your credibility is good in front of the banks.

4.????? You can use your cash to generate more profit

I also like this one. When you buy something on credit, doesn’t mean that you don’t have the money to pay it on cash. Nevertheless, if you pay something on credit, you will have the opportunity to utilize your cash to generate more cash. This principle works best for stuff that has high value such as property.

These are the typical occasions of when I usually use my credit card:

Grocery shopping, eating, electricity billing, hobbies, renting, traveling expense, etc.

Buying a property

When it comes to buy a property, I prefer to use installment rather than pay in cash for it (especially if you'll rent the property). Remember, the property that we rent will give us recurring income. This recurring income can be used to pay the interest to the bank. Roughly speaking, we can get the property “freely”. Maybe some of you will ask like “Why not pay it in cash? It will be cheaper if we pay it directly to the developer instead of to the bank, and we can immediately enjoy our recurring income from rent”. The answer is: Like I explained previously above, one of the benefits of paying in installment is: we can use our cash to generate more cash.

There is a concept that you may heard before that “Cash is King”. If you buy stuff that has high value with 100% cash, the cash will go to waste. Why? Because you can use the cash for investing/opening a business instead. Hence, I prefer to pay in credit rather than to pay in cash although I have the money for it. I'll be more than happy to put my cash in the stock market instead since not only it is more liquid, but also I can receive dividend periodically + I may also get capital gain. Most of the time, the % that I earn from the stock market is way higher than the bank % interest rate.

When should we pay by cash?

We cannot deny that there are so many people out there find difficulties in handling their credit. For instance, this can happen to people that cannot control their consumptive behavior + they late to pay their credit card bills regularly or they don’t pay it in full amount. This is a big problem. As a result, if you still cannot control it, I would not suggest you to have credit card.

I have my own preference on when I will use cash and when I will use credit card. When I buy something that is consumptive or non-productive, I tend to use cash. Why? Because it will go to waste if we use credit card on buying something that is not productive since it won’t generate more income for us. However, I understand that sometimes, we feel that we really really want those stuffs. A bit advice: It is unwise if we buy something non-productive on credit. For example, you use online credit/ pinjol to buy non-productive stuff. If there are emergency needs in the future, you will even loss more money. ?Other than that, for me personally, I need to have at least 10x cash from the price of the consumptive stuffs that I want to buy before I actually purchase it.

Once upon a time, someone asked me: “What if I want to buy something consumptive, but the needs to buy it are for something productive?”. Okay, let us use this example: imagine that you buy an iPhone for creating some contents at Tiktok. In my opinion, it is fine as long as you know measurement. You know that the iPhone value will depreciate over the time. If you want to buy it in cash, look at the potency first, do you really need an iPhone to match your standard or you can substitute it with another smartphone that is cheaper? If you really need that iPhone, then just go for it as long as it benefits you and can make you more productive. Remember to always separate the spending on something productive vs consumptive.

So guys, which side are you in? Credit or cash or mix? Let me know your thoughts.

“Like Warren, I had a considerable passion to get rich, not because I wanted Ferraris – I Wanted independence. I desperately wanted it” – Charlie Munger (1924-2023)

Rest in Peace Charlie.

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Merry Christmas & Happy New Year 2024