Layaway Makes a Comeback at Wal-Mart

It may still be almost two months to Thanksgiving, but at some retailers, it’s already beginning to look a lot like Christmas. Wal-Mart Stores (WMT) has been bringing in holiday merchandise since late September and will be cutting prices on popular gift items starting this month.

Along with the holiday cheer, the retail giant hopes to usher back in an old way of paying for goods. From Oct. 17 to Dec. 16, Wal-Mart shoppers will have the option of putting purchases on layaway.

Layaway plans, which became popular during the Great Depression, allow customers to make incremental, interest-free payments, while a retailer holds the goods. In contrast to the buy-now, pay-later world of credit-card purchases and store financing, layaway shoppers pay first and receive their purchases only after the last payment is made.

During our binge on plastic money over the past few decades, layaway plans went largely unused and were dropped by many stores as an unnecessary and obsolete service. Now, however, customer interest in the plans is rising, and stores are responding. Kmart, which has been offering layaway plans continuously for over 40 years, expanded its program last year, as did Sears, which began offering layaway on home appliances. Toys R Us introduced a layaway program for the 2009 holiday season.

In 2009 and 2010, Sears also offered another throwback payment plan: the Christmas club. During the Depression, many banks offered Christmas clubs (sometimes also dubbed “holiday clubs” or “Chanukah clubs”) that allowed people to set aside small balances for special expenses, like gifts or vacations. In the modern Sears version, consumers got reloadable store debit cards, to which they could add funds in payments of as little as $5 at a time, with the reward of a 3 percent bonus on money socked away before Nov. 15. So far, however, it seems there will be no 2011 Christmas club.

Layaway plans are not free. Most retailers charge a $5 to $10 fee to initiate a layaway and another fee to cancel it if payments are not made on time. But that’s still far cheaper than carrying a balance on a credit card. By putting payment first, layaways also prevent consumers from racking up charges they cannot afford.

The revival of these plans is the mark of a new era of frugality. Consumers are finally realizing that they are better off without the “holiday hangover” of interest payments in April for purchases from November. The recession and the credit crunch taught consumers a lesson that accountants and financial planners never could – that even when you can spend what you don’t have, you shouldn’t. Despite a recent upsurge, total credit card debt as of July was down 18 percent from the September 2008 peak of $972 billion, according to Federal Reserve data.

Not everyone, however, sees the new thrift as a good thing. Individual frugality, on a national scale, leads to sluggish demand, cutting into company profits and prolonging economic downturns. Economists call this the “paradox of thrift.” The Federal Reserve has been quick to fight the trend toward saving by pushing down interest rates. The Fed wants to make sure that businesses invest, homebuyers buy homes, and consumers consume. It is not the least bit concerned about encouraging savers to save.

But, if there is a paradox of thrift, there is also a paradox of spending. Spending cannot be a sustainable path to economic growth or recovery when the spenders don’t actually have the money they are forking over. Eventually, bills come due, usually with hefty interest payments added on. People buying things they couldn’t afford, especially houses, was one of the major factors that got us into the recession. Buying more things we can’t afford, whether as individuals or as a country, will not put us back on track. True prosperity must be built on solid foundations.

The best way to manage individual finances is to save on a regular basis and to make nonessential purchases only when you have the funds to do so. For those who lack the saving skills to do that on their own, however, layaway plans offer a relatively healthy way to budget and save. Here’s hoping this season’s layaway shoppers will get lessons in saving and delayed gratification that they can apply year-round.

Amid the economic gloom and political backbiting, we all could use some holiday cheer. The revival of layaway plans and better spending habits may help us buy some cheer that we can comfortably afford.

About Larry M. Elkin 525 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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