Are we getting the “delayed gratification” thing right?Submitted by Dorval & Chorne on April 2nd, 2019
"Delay payments, not gratification." The tagline of Afterpay, the latest company sweeping the retail market by storm, making online shopping even more enticing...
By Keagan Kinsella | April 2, 2019
Think back to when you were a kid. Do you remember some item that you desperately wanted and your parents said the only way you’d ever get it is if you bought it yourself? At 12-years old, how are you going to ever be able to afford that iPod Shuffle?! By saving your money of course! Lawn mowing, babysitting, doing chores around the house…all that work leads up to that exciting day when you can walk into Best Buy and finally make it your own. As an adult, it changes just a bit, as the excitement of purchasing groceries isn’t quite the same. But there are those “splurge items” that come across every now and then, and the way we think about those type of things is changing…
For many, that splurge item is shoes (come on, admit it!). The other day I was on DSW.com, looking at a certain pair of sneakers.. Right next to the $84.99 price tag, I saw the following…
I had never heard of Afterpay, but I was curious as to how it worked and, “what was the catch?” What I found is they are a third-party company any retailer can utilize to help their products become more “affordable” to their customers. Their motto is, “Shop now. Enjoy now. Pay Later.” You can purchase up to $1,000 worth of goods though your Afterpay account, and the bill is broken into four equal payments that are due every two weeks. There is no interest charged in the process. Hmm…
And apparently it is more common than I was aware, with more than 25,000 retailers now contracting with Afterpay. The appeal to retailers is that they’ve seen order sizes increase 20-30% since providing Afterpay as a payment option. This means people are spending more now, since they have the option to pay less (now)… much like a credit card.
From a financial planning perspective, this made me want to take a closer look at the pros and cons and see if this service might be more dangerous than it sounds.
- If you do not like using or have access to a credit card, it is a convenient way to do online payments through a retailer
- More flexibility than obtaining a loan, if you are able to make payments on time
Instead of making a list, I think it will be better to share an example of a couple we recently met, whose financial situation demonstrated the Afterpay-mindset:A husband and a wife came to talk to us about financial planning… They both have decent incomes, but their main difference is the husband has student loans, and the wife has a large savings account which she actively puts a portion of her paycheck towards. When asked about how they would pay for things like an expensive new cell phone for example, she said she would use her emergency reserves, while he said he would turn to his credit card to make the payments fit within his cash flow, and eventually pay it off later. He said when he uses his credit card for splurge items that he doesn’t currently have money set aside for, he feels a sense of guilt. On the other hand, his wife said that she just pays for it and moves on, feeling good about things.
I think this is a great example of what we like to refer to as a scarcity versus abundance mentality. Having saved for something makes you feel good because you have an abundance of resources, and you can think more about making decisions or purchases that bring quality of life. In contrast, the scarcity mentality means that even if you want to make those same decisions, you have to use other people’s money to make it happen, which leaves many feeling a lack of independence. We often use the metaphor of “being your own bank” which means saving in a way where you can buy something and pay yourself back instead of paying interest to a credit card company.
Nowadays, with just about anything being available instantly, like using a credit card, quickly Googling a question, or having your groceries delivered to your door — it seems like the idea of delayed gratification is going to the wayside. In fact, on Afterpay’s website, the tag line reads, “Delay payment, not gratification.”
There are some concerns about delaying payment, mainly…what if you don’t pay? With Afterpay charges late fees of up to 25% of the purchase cost, or $68, whichever is lower. Having this option available makes it scarily-easy to purchase a whole bunch of shoes you can’t afford in a lump sum, but you can afford the smaller payment now.
I can’t rule Afterpay as “good” or “bad” because it really does depend on how you use it. My goal is for you to have a better understanding as to how services like Afterpay work, but also for you to realize that while it may be “cool,” to delay payment for instant gratification, it might be a tempting tool that can lead to trouble if you use it in a way outside your means.
Think back to when you were 12-years old, buying that iPod and experiencing the feeling of satisfaction that comes with the idea of knowing you worked hard to buy something you really wanted. While life may be more complicated today, incorporating little bits of financial planning in everyday life, (like saving with the mindset delayed gratification), can positively impact your quality of life!