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.³ “The bigger issue is what you might be able to do with those dollars if you didn’t use them to buy that want.”

More: How to find the best credit card for your needs

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 banks to save money. Good options include:

EQ Bank: This online-only bank offers one of the best high interest rates on savings and deposits in Canada. Customers can expect to earn on every dollar saved. For instance, save $10,000 in an EQ Bank savings account and you earn $400.

Scotiabank's Momentum Plus Savings Account: As one of the Big 5 Banks, Scotiabank is a reputable traditional bank with plenty of in-person branches. Right now, new clients can earn 6.05% on every dollar deposited into this savings account, for the first three months, before the standard earn rate drops to 1.30%. On a $10,000 emergency fund deposit that's approximately $250 in interest income. Better still, there are no fees and no monthly minimum required on the account.

Simplii Financial High Interest Savings Account: This online-only bank never charges monthly fees and offers some of the best bank promos. Until July 31, 2024, new clients can earn 5.9% on eligible deposits for five months, before it drops to the regular 0.40% earn rate. On a $10,000 emergency fund deposit that's approximately $290 in interest income.

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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Plus, their optional wellness plan covers things like routine vet trips, grooming and training costs, if you want to give your pet the all-star treatment while you protect your bank account.

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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.

Moka is an investment and savings app that allows users to invest in stocks, exchange-traded funds (ETFs) and mutual funds, rounding your purchases up to the nearest dollar and invests the spare change on your behalf. Just set up your goal and deposit plan and for a small monthly fee — between $7 and $10 per month — Moka takes care of the rest for you. The best part is that a Moka account lets you take advantage of professionally managed portfolios, while helping you find extra cents and dollars to boost your savings. In no time, you’ll be racking up some serious coin.

— with files from Romana King

Sources

1 Canada Buy Now Pay Later Business Report 2024 (Feb 19, 2024)

2 Pilot Study: Buy Now Pay Later Services in Canada (Nov 18, 2021)

3 Great Deal or Gateway to Overspending (Apr 15, 2021)