The consumption smoothing theory in economics posits that individuals aim to maintain a stable standard of living over their lifetime, balancing income fluctuations through saving and borrowing. Rather than spending excessively during periods of high income and cutting back drastically during low-income phases, people distribute their consumption more evenly.
According to this theoretical model, people would seek to model out their lifetime earnings and spread out their consumption to add up to the lifetime total. As such, credit and investing facilities are important. When people have an abundance of cash, they want to put it aside to save for a future day. In case these savings are insufficient, they can tap on credit lines and borrow when cash is scarce.
Buy-Now-Pay-Later (BNPL) is a financial “innovation” that allows people to make payments in instalments. Many of you reading this may have used this since its inception in 2021.
The reason why I put innovation in double-quotations is because there is very little that is new. Not just the fact that people have been buying big-ticket items in instalments – though BNPL opened the gates to much smaller items. It is the fact that credit cards offer the already. Credit cards allow you to buy the item at what is effectively a complete deferment, instead of splitting it into instalments. If you buy an apple for $2 with a credit card, you essentially borrow $2 from the bank and pay it back in a month’s time. BNPL splits the $2 into small instalments, maybe $1 over 2 months. They are essentially the same tool, helping to defer payment into the future.
The reason why I would encourage you to use BNPL is only because there are VC-backed incentives in order for them to grow market share. These are akin to the miles that you receive from using credit cards. Yet, these are rapidly fading. After all, how these companies make money is through late payments – where they can tack on high rates of interests and myriad penalties. I very much prefer to be subsidised by taking advantage of the incentives/cash advance instead of subsidising others by paying for exorbitant rates of interest.
In any case, you should only use these tools if you have the money to pay it back on-hand. Personally, I keep tab of how much I’m spending every month on these tools and ensure that my bank balance never falls below that amount, so I can pay it off immediately.
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