During
my time as a counselor, I have been amazed at how many times people's
finances have been damaged by a "good deal." Oftentimes, even
after I tell someone that their purchase was not a good idea, they say
"but it was such a good deal." In this article, I'm going to
talk about when a good deal is and isn't a good idea.
I
have seen people buy, or want to buy, such things as houses, cars,
boats, land, businesses, etc., saying they couldn't pass it up because
it was such a good deal. Well, here is the number one rule of
"good deals:"
A good deal is never a good
deal if you can't afford it.
Sure,
taking into account the quality and price of the item, it may actually
be a good deal in general, but if you can't afford it, it is not a good
deal for you.
You would be absolutely dumbfounded by how many people have
come to me for financial crisis counseling because they bought a "good
deal they just couldn't pass up." They found out soon after
buying it that they couldn't afford it. The payments and the
additional expenses were destroying their finances and they quickly
found themselves wishing they had never gotten into whatever it was that
was such a great deal.
Here is a hypothetical
example: What if someone came up to me and offered me a
$60,000 Porsche sports car for only $40,000? Let's assume that
the deal is legitimate and legal. Should I take the deal?
I could always borrow the money. If I do have to
borrow the money, wouldn't it be a good idea since this is such a
once-in-a-lifetime, great deal? No, for me it is not a good
deal and I personally would not do it! Why? Simply
because I can't afford it. Yes, it's a great deal, but I
don't have $40,000 laying around to spend on sports cars and besides,
if I would have to borrow money to do it, that already tells me that it's not a
good idea.
But,
you say, I could just borrow
the money, buy the Porche, then resell it and keep the extra $20,000.
In fact, that is exactly the advice many broke people would
give. Unfortunately, there are even some financial advisers out
there that would give that same advice. On the surface, buying it
to sell seems like a good
idea; but, what about all the extra insurance I would have to pay while
I was trying to sell it? What about the interest on the
borrowed money? What if I became disabled, lost my job or got
laid off--how would I make the payments? And, what if the car
got in an accident after I bought it and I had to put some major money
into repairs? For that matter, what if it broke down and I had
to pay huge sums of money to get it back into sellable condition?
What if getting it sold took a lot longer than I expected?
See how many things could go wrong? See how quickly
my "good deal" could take me out financially? Remember:
Just because it's a good deal doesn't mean you should do it.
Now, what if I were rich and happened to have a few million dollars
sitting in the bank? Sure, then I could and probably should
take advantage of the good deal. Why? Because with
a few million dollars on-hand, I wouldn't have to borrow any money and
I could afford to handle all those other potential problems I
mentioned.
You can apply this same thinking to
houses, cars, boats, land, businesses, etc. Surprisingly, you
can, and should, apply this thinking to somewhat less expensive items
as well. Your finances can also be affected by "good deals"
on things like furniture, consumer electronics, vacation packages, etc.
Just because something is a good deal, doesn't mean you
should do it and doesn't mean that it is a good deal for you.
Now, what if you can afford it?
How do you know if it's a good idea?
Is it something you would normally do?
For
one thing, it should be something that you might normally have done
anyway. In other words, if it's not something you really,
truly need or want, then it is probably not a good deal for you.
If you know little or nothing about aircraft, for example,
you wouldn't buy a personal jet just because someone offered you a good
deal on it. Right? Well, apply this same thinking
to every other "good deal" that comes along in life. Believe
it or not, it doesn't even have to be a particularly big purchase.
A common example which I use often in counseling is clipping
coupons. Yes, something as insignificant as clipping coupons
falls under the rule of not buying something you normally wouldn't just
because it's a good deal. Let's say you normally buy a $1.50
bottle of generic
shampoo at the discount drug store. You see a coupon for 25
cents off on a $2 bottle of name brand shampoo. Well, yes you
did move up in quality, but you really didn't save any money--in fact,
you lost money. Instead of buying a bottle of shampoo for
$1.50, you just paid $1.75 because a coupon gave you a good deal on
something you normally wouldn't have bought. Now, I'm not
saying you should worry about spending an extra 25 cents on a bottle of
shampoo or that you shouldn't use coupons; I'm just trying to make my
point about how we get sucked into
the "good deal" mentality even on very small purchases. Just
apply the shampoo example to a more significant purchase. One
example I've seen in real life is home hot tubs. I've seen people
go nuts for a $7,000 hot tub because it was on clearance for $2,000.
The people I'm thinking of were not really thinking about buying a hot tub, but
the salesman pointed out so many benefits and the price was such a
"good deal," that even though they didn't need it and
weren't planning on buying one, these folks went ahead and got a
hot tub because it
was such a "good deal," It wasn't long before the novelty wore
off and they hardly ever even used their new hot tub anymore.
Like I said, if it isn't
something you would normally buy, it probably isn't a good idea.
Is it an actual need?
Further,
make sure that the "good deal" is actually something you need or want
before you get into it. If you have a need and a "good deal"
comes along that will meet it, then it very well may be a good deal for
you. If, on the other hand, you first see the "good deal" and
then start
thinking of ways you could use it, it is probably not a good idea.
In that case, you are just trying to make your "good deal"
into a need so that you can justify the purchase.
To
demonstrate this point, let's look at the ridiculous purchase of
a private jet we mentioned just a minute ago. Do I
need a personal jet? No--It sure would be fun to have one,
but I don't need one. Do you need a personal jet?
Probably not, so in our cases the "good deal" on a private
jet would not be a good deal for us. If, on the the other hand,
you are the owner of a Fortune 500 company and your company has been
looking into getting a private jet in order to get upper management to
last-minute meetings around the country, then it very well may be a
good deal. What's the difference? The difference is that
there is a legitimate need, it is something that might have normally been
purchased and
as the owner of the company, you can afford it.
The "after-cost."
Always,
always consider what I call "after-cost" when making a decision about a
"good deal." After-cost, means the expenses that will come
along after you buy your "good deal." In the example of that
private jet, there's fuel costs, insurance, maintenance, hiring a
pilot, airport fees, storage, etc. With a car, the after-cost
would be payments, gasoline, maintenance, insurance, taxes, etc.
With a vacation time-share, the after-costs are such things
as travel expenses, dues, taxes, payments, etc. With a house
it's taxes, insurance, maintenance, utility bills, yard-care equipment,
etc.
Many times, the after-costs can turn a good
deal into a very bad one. I have seen people buy a house
because it was such a "good deal" only to find that after repairs,
maintenance, renovation, taxes, insurance, utilities and so forth, the
house ended up costing them full market value or more. "Their
"good deal" evaporated and they were stuck in a house they couldn't
afford. I have also seen people buy a luxury car because it was a
"good deal" and after payments, poor gas mileage, increased
insurance costs, increased repair costs, etc., they had to sell the car for what they paid for
it and lost out on the extra money they had to put into it.
Even
if an item is being given to you for free, you still must consider the
after-cost. If someone just gave you a private jet, could you
afford all those extra expenses that go with it? I surely
couldn't; so even though the jet were given to me for free, it would
still not be a "good deal" for me. Same goes for a car--if
you can't afford the after-cost, then even getting the car for free
would not be a good idea.
Regardless of
what the "good deal" may be, always consider the after-cost.
Patience...patience...patience...
One
of the biggest dangers of "good deals," is that people tend to
justify making the purchase simply because it is such a "good deal" that
they just can't pass it up. If there is something you truly
want or need, and it really does seem to be a good deal, make sure you
aren't taking advantage of it out of impatience or before you are
really ready. I usually see this happen when it comes to
buying a house. You should never buy a house unless you are debt free, or nearly so,
have your emergency savings
in place, can easily afford
the payments and can afford all of the after-costs.
I have seen too many people buy a house before they were
ready just because the house was such a "good deal."
Oftentimes they end up settling for less because of their
impatience. They may, for example, buy a $150,000 house for
$110,000 because it is such a great deal. The house is a bit
smaller than they would like and in a neighborhood that
isn't what they really want, but the house is such a great
deal that they feel they would be fools to pass it up. Then, after all
of the the after-costs, they have pretty much paid full price for a
house that is smaller than what they really wanted and in a
neighborhood that isn't what they really wanted. They are
also now financially stressed trying to meet all of the new expenses.
If, on the other hand, they first get out of debt, have three
to six months worth of income saved up for emergencies, save up a nice
down payment, and then
go shopping for a house, they don't even really need a good deal--they
can afford to buy a house they want in a neighborhood they
want. They can go ahead and pay full market value for a $200,000
house for which they can afford the payments and the after-costs.
They end up living in a bigger, nicer house in a nice
neighborhood and, because they are out
of debt and have their savings
in place, they are not financially stressed. If they did find
a "good deal" after they were ready to buy a house, they could have gone ahead and taken advantage of it if
they had wanted to, but they didn't let a "good deal" get them stuck in
a smaller home in a less desirable neighborhood. They are much better
off now because they were patient and waited until they were really
ready to buy a house. If they had taken that "good deal," they would have been
settling for much less.
A childhood story.
Let
me kind of sum it all up with a little story my father told me when I
was a child:
One day, a young boy was walking down the street and saw a
man selling green sunglasses. The sunglasses easily cost $2 a
pair at the store, and the man was only asking $50 for a box that
contained at least a hundred pairs. "What a great deal,"
the boy thought. So, he ran home and gathered up
all of the money he had saved from birthdays, Christmas, mowing lawns,
allowance and
the like. The amount was just enough to buy the box of
sunglasses. The young boy ran back into town and handed the
$50, his life savings, over to the man who then promptly handed him the
box
of sunglasses. When the boy got the box back home, he dumped
it out and counted 112 pairs of green sunglasses. "What a
deal," he thought, "$224 worth of sunglasses for only $50!"
He promptly picked out a pair for himself and put them on.
Then, he set out to sell the other 111 pairs. The
boy quickly discovered that there just didn't seem to be a market for
green sunglasses; in fact, he didn't manage to sell even a single pair.
"Mmmmm," he thought, "maybe that's why the man was selling
them so cheap." The "good deal" on the green sunglasses
resulted in the boy spending money he couldn't really afford--all of
the money he had, in fact--on something he really didn't need and now
no longer even wanted. The only thing he really got out of it was
the
pair of green sunglasses he picked out for himself--sunglasses for
which he basically paid $50 and would have only cost him $2 at the
store.
Just because
something's a good
deal, doesn't mean it's a good idea.
