Thanksgiving may still be nearly two months away, but at some retailers it’s already starting to look a lot like Christmas. WalMart has been bringing holiday items since the end of September and will cut prices on popular gift items starting this month.

Along with the holiday cheer, the retail giant hopes to bring back an ancient way of paying for goods. From October 17 through December 16, WalMart shoppers will have the option to reserve their purchases.

Layout plans, which became popular during the Great Depression, allow customers to make incremental payments without interest, while a retailer retains the products. 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 plastic money binge over the last few decades, backup plans went largely unused and were abandoned by many stores as an unnecessary and outdated service. Now, however, customer interest in the plans is increasing and stores are responding. Kmart, which has been offering installment plans continuously for more than 40 years, expanded its program last year, as did Sears, which began offering installment plans on appliances. Toys R Us introduced a layaway program for the 2009 holiday season.

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

Layaway plans are not free. Most retailers charge a $5 to $10 fee to start a layaway and another fee to cancel it if payments are not made on time. But that’s still a lot cheaper than carrying a balance on a credit card. By putting payment first, layaways also prevent consumers from racking up charges they can’t 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 starting in 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 rise, total credit card debt as of July is down 18 percent from the September 2008 peak of $972 billion, according to data from the Federal Reserve. (one)

However, not everyone sees the new savings as a good thing. Individual frugality, on a national scale, leads to sluggish demand, lowering corporate profits and prolonging economic downturns. Economists call this the “savings paradox.” The Federal Reserve has been quick to fight the saving trend by pushing interest rates down. The Fed wants to make sure that businesses invest, homebuyers buy homes, and consumers consume. He is not in the least concerned with encouraging savers to save.

But, if there is a saving paradox, there is also a spending paradox. Spending cannot be a sustainable path to economic growth or recovery when those who spend do not have the money they are spending. Eventually, the bills come due, usually with hefty interest payments added. People buying things they couldn’t afford, especially houses, was one of the main factors that got us into the recession. Buying more things we can’t afford, either as individuals or as a country, won’t get us back on track. True prosperity must be built on solid foundations.

The best way to manage individual finances is to save regularly and only make non-essential purchases when you have the funds to do so. However, for those who lack the savings skills to do it on their own, set aside plans offer a relatively healthy way to budget and save. Here’s hoping this season’s layaway shoppers learn lessons in savings and delayed gratification that they can apply year-round.

Amid the economic gloom and political gossip, we could all use a little Christmas cheer. The revival of layaway plans and better spending habits can help us buy some joy that we can comfortably afford.

Source:
1) CNN Money, “Credit Card Debt on the Rise, Again”