What shopping trend does Suze Orman consider the ‘gateway to overspending'?

What worries Suze Orman about BNPL plans

BNPL programs are generally structured to only require 25% down at the time of purchase. You’ll pay off the remaining balance in another few payments every few weeks — all with no interest (provided you make your payments on time).

“When you only have to pay $25 immediately for a $100 purchase, your brain starts playing tricks on you, and tells you that this is such a great deal, because it’s only costing you $25,” she explains.

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The science of overspending

“What seems like a great deal can actually be a gateway to overspending,” explains Orman.

In the FCAC report, 15% of respondents noted that they had to make unfavourable trade-offs in order to make a payment on time, including delaying the payment of another bill, incurring an overdraft on the bank account, exceeding their credit card limit or having to take out a loan or cash advance.

In addition to overspending, BNPL options can lead to other financial issues, especially since knowledge about how these payment plans work can be confusing for the average consumer. That same FCAC report found that 44% of respondents found it difficult to understand the impact that missing a payment can have ont their credit score, 36% don't understand how to resolve a dispute, while 21% found it difficult to understand the penalties or interest charges related to missed or partial payments.

Missing a payment will not only result in a late charge, but they can also negatively affect your credit score.

What Suze Orman suggests instead

First, Orman suggests assessing whether the purchase is a need or a want. When it’s a want, she encourages you to answer the following question: Can you actually afford it?

“It’s not just a matter of being able to make all the payments on time,” she writes in her blog. “The bigger issue is what you might be able to do with those dollars if you didn’t use them to buy that want.”

Instead, Orman has a few suggestions of the financial goals you should prioritize before caving to purchasing decisions you can’t realistically afford. Her list includes:

Prepare for emergencies 

Orman says the recent years of economic instability, health concerns and global supply chain insecurity highlighted the need for each person to set aside a robust emergency fund. She recommends having a full year’s worth of living expenses set aside and advises people to avoid relying on easily-accessible debt and, instead, stash your cash in a saving account. By putting your money aside — preferrably in a high-interest savings account — it's easily accessed but will continue to grow, so you don't lose purchasing power due to inflation.

To find a high-interest savings account that meets your needs, check out the Money guide on best high interest savings accounts. Good options include:

EQ Bank:

Scotiabank Momentum Plus Savings Account

Simplii Financial High Interest Savings Account

Deal with your debt 

Even if you’ve just been buying essentials, charging to your credit card can result in expensive interest piling up. If you’ve been relying on plastic to make a purchase, rein in your debt — and pay it off sooner — by folding your balances into a single lower-interest debt consolidation loan.

More: Debt consolidation loans, compare the top providers

Save for retirement 

While we’re all just trying to get through today, don’t forget to ensure you have a comfortable tomorrow by contributing to your retirement account. An important part of planning for the future may also mean investing in an affordable life insurance policy to ensure your family is set in the long-term, too.

Unexpected vet bills don’t have to break the bank

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Other options if you need to make a big purchase

If money is tight and you’re planning to make a big, necessary purchase in the near future, you have a few options to make room in your budget.

• Ensure you’re getting the best price on insurance. Shop around for the cheapest policies. You could cut a couple hundred bucks off your bill just by comparing policies online.
• Invest what you can spare. Even if you’re a total novice with investing or you don’t have much to put into it, there’s an investing option designed just for you.

Like many financial influencers, Orman is a fan of automatic saving. One way to manage this — and grow your investment account — is by downloading an investing app that will help you turn your spare change into a real portfolio. One option for Canadians is the Moka investment app.

— with files from Romana King

Sources

1. Yahoo Finance: Canada Buy Now Pay Later Business Report 2024: (Feb 19, 2024)

2. Government of Canada: Pilot Study: Buy Now, Pay Later Services in Canada (2021)

3. Suze Orman: Great deal or gateway to overspending? (Apr 15, 2021)