Spending

When you really want to buy something like a TV, MP3 player, or a new pair of shoes, you probably don't think a lot about how to pay for it. What's important to you is getting it now. But the way you choose to pay can make a huge difference to how much you actually pay in the end.

Most payment methods cost you something. There are fees for using EFTPOS, paying by cheque, or withdrawing cash. Or if you use a credit card or store card you may be paying interest and other charges that can add up fast.

• Know your options
• Find the best interest rate
• Check the fees and charges
• Follow our 8 rules of spending

Know your options

If you can take the time when you go shopping and think about how you're paying it you could save yourself considerable amounts of money in just a few years, especially if you're paying on credit.  Your payment options are:

Cash 
Cash is almost always the cheapest way to pay for anything because you know exactly what you're paying. When you pay by cash, or any other method, you can ask for a discount although you won't always get one. 

Remember, however, that if you get charged for withdrawing the cash it mightn't be the cheapest way to pay. For example, some banks charge several dollars for cash withdrawals over the counter in a branch.  You also pay a fee whenever you withdraw money from another bank’s ATM.

There’s also the ‘opportunity cost’ of missing out on the interest you could be earning if you left the money to grow in a high-interest savings account.

Lay-by
Lay-by is less common than it used to be, but can allow you to leave your goods at a shop and pay them off when you can afford to. You aren't charged interest with lay-by and you can use it to get sale items put aside. The Ministry of Consumer Affairs website has more information about this payment option.

EFTPOS
Banks may charge 15c to 50c every time you use your EFTPOS card. Many people pay $10 or $20 a month or more.  That mightn't seem like a lot, but it adds up to as much as $240 each year. There are ways to pay no fees at all by switching accounts or juggling the way you pay – such as by cash or credit card.

Cheques
Every time you write a cheque you pay a fee. You can also be charged honour or dishonour fees by some banks should you accidentally exceed your account limit. It is important to be organised and keep records to keep track of your account balance.  Going into overdraft can lead to unnecessary interest and charges. 

Some retailers refuse to accept cheques. Paying electronically is an alternative if you're buying by mail order.

Automatic payment
Automatic payments (APs) are an easy way of paying amounts direct from your account. With APs you don't need to write out cheques or pay for stamps. An AP is usually for a set amount of money on a fixed day of the month.

Direct debits
Direct Debits are similar to Automatic Payments but are used where the payments are for different amounts each month – such as telephone and power bills.

Automatic Payments and Direct Debits can be a good way to pay and you may be entitled to discounts. Banks sometimes charge fees for setting up APs or direct debit and another fee each time a payment goes through. It's always important to know when your APs and direct debits are going out as they are the worst culprits for withdrawing money beyond your limit.

Credit card
Paying by credit card can be a good option – providing you're savvy in the way you operate your account. Credit cards usually have an annual fee. But this may be less than you pay on EFTPOS fees in a year and credit card payments are usually fee-free. If you pay your credit card balance in full at the end of each month, this is a cheap way to pay.

If you don't pay your monthly balance on time you will be charged interest – often more than 20% per year.  That means you're paying 20% more than everyone else for the same item.  Remember if you add the interest to the outstanding balance then your debt can grow very fast. What's more, cash advances (when you withdraw money with your credit card) can be expensive because you're charged interest from the day you get the money out instead of getting a month or more free credit.

HP (credit sales)
One of the most expensive ways to pay for almost anything is by hire purchase (also known as credit sales or credit contracts).  Often there are ‘interest free deals’. But they are only good if you're disciplined and pay off the entire loan before the end of the interest-free period. Interest-free deals usually include set-up and other fees, which make them more expensive than paying by cash. It can be a shock if you're forgotten about the purchase and have to start paying for it after a year.  You may also find yourself paying a very high interest rate on any amount you haven’t paid off at the end of the interest-free period.  

What's more, HP fees are often added to the outstanding balance and you pay interest on them as well as the money you've borrowed to buy your TV, washing machine or other consumer goods.  Interest rates on HP and store cards can be very high. 

Personal loans
If you really do need to borrow money to pay for things you might want to get a personal loan from a bank. These usually have lower interest rates than credit cards and HP.  It also means that you're paying with cash that you've borrowed, so you might be able to bargain the price down.  If you have a mortgage you may be able to borrow for a car or consumer goods at the home loan rate. But beware that you'll be paying interest on them for the term of your loan and that can add up to an enormous amount of money. 

Find the best interest rate

Interest rates on borrowed money can vary widely so it's best to shop around. Find the current rates for credit cards, or for personal loans and HP.

But before you sign up for any credit remember that interest compounds, which means that you pay interest on the interest.  So it's really important to get the best deal you can and pay the loan off as soon as possible – providing there aren't early repayment fees. 

Check the fees and charges

It's really important to check out the fees and charges whenever you pay for anything. If you're borrowing money, compare the deals. There may even be different options with the same lender. Reading the fine print can be tedious, but it's essential if you don't want to pay out more than you need to. 

8 rules of spending

The small everyday spending decisions you make can have a big impact on your cashflow and your future net worth. 

1. If you can't afford to pay cash, always ask yourself if you really need the item you're buying.
2. If you use EFTPOS remember if you pay fees each time you withdraw money it can add up to large sums of money over a year or two.
3. If you don't have to use the finance or lay-by offered by a shop, you might be able to shop around for a better deal or ask for a discount.
4. Always check out all the fees before signing any finance deal.
5. Even ‘interest free’ deals can have expensive fees attached.  What's more, they're often only available on full-priced goods and can be expensive if you don't pay the balance off in full before the deal expires.
6. Check out what you will pay in total with the Hire purchase calculator, or the Car loan calculator, which works for personal loans as well.
7. Use lay-by rather than credit if you don't have the money to pay now. That way you don't pay interest.
8. Save on bank fees - withdraw cash whenever you pay by EFTPOS.