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Financial Peace University Lesson 6 – Buyer Beware
Caveat Emptor (Let the Buyer Beware)
The main purpose of this lesson was to expose us to one of the “enemies” of our financial peace – the enemy that is making poor purchasing decisions.
There is an incredible amount of marketing that we all are exposed to each and every day. Of course, the main purpose of all of this marketing is to separate us from our money (more specifically it is for specific companies to get some of that money but it’s the same thing from our point of view). This does not mean all companies are evil or something like that – they are trying to make a profit and they have to sell products and/or services to do that – but we need to be aware of how we are marketed to in order to ensure that we don’t fall prey to bad purchasing decisions.
Think of all the ways you are marketed to in any given day. There is personal selling, product positioning (there is a tremendous amount of effort that goes into where the items are placed at groceries stores, for instance), TV, radio, and internet ads, and so on and so forth (warning – editorial opinion upcoming: Remember all those debates about how TV is bad for kids to watch and influences them to act poorly and do stupid things. And then the people on the other side of the debate say, “no, that’s silly, TV doesn’t influence people.” Well, I think the fact that companies spend billions of dollars each year on TV ads pretty much proves that TV does influence people – either that or all those companies are stupid). Another method that you see often is the use of financing as a marketing tool. You often see the carrot of “90 days same as cash” used to entice you to buy something that you can’t really afford right now. An eye-opening statistic from Ramsey: 88% of 90 days same as cash contracts convert to payments!! (and remember, if they do convert, most make you pay back all the interest that accrued during those 90 days!)
Ramsey then did an interesting thing at this point in the lesson; he went through a number of different product tag-lines, stuff like “melts in your mouth and not in your hand,” and basically everyone in the audience as well as our class knew the products that every catchphrase was trumpeting – this marketing stuff works!
Developing power over purchase
In the most marketed-to culture in history, how do you resist all the temptations and only make appropriate purchasing decisions? To help us do so, Ramsey detailed five steps to follow before making any significant purchase. First, what is a significant purchase? Well, it is whatever you say it is. He recommends that anything over $300 qualifies as a significant purchase, but this will obviously be different depending on your unique circumstances – maybe higher, maybe lower.
You must develop “power over purchase” by following these steps:
- Wait overnight before purchasing – maybe in the morning that gadget you “needed” won’t seem like so much of a need anymore.
- Consider your buying motives – Ramsey states that no amount of stuff will provide true contentment or fulfillment.
- Never buy anything you do not understand – I guess this doesn’t really apply to a DVD player since most people won’t understand that – but are you sure you really (really) understand how that cash value life insurance plan works?
- Consider the “opportunity cost” of your money – If you do something with some of your money that obviously precludes you from doing something else with that same money. Ramsey told this illuminating story about a friend who wanted to purchase a new car but couldn’t force himself take the money out of his mutual fund to buy it. A number of years later he saw another guy driving that same car he had wanted. The man driving the car had just purchased it used for about $5000 while the mutual fund that Ramsey’s friend still owned was worth more than $300,000. That car had a $295,000 opportunity cost associated with it!
- Seeking the counsel of your spouse (or financial accountability partner) – self explanatory (or at least it should be…if it’s not, you have some other things to work on as well!).
Following these five steps will not guarantee that you will never make a poor purchase (you’re buying stuff all the time and nobody’s perfect) but it will go a long way towards helping you to make good purchasing decisions as often as possible.
Check out my previous FPU posts:
- Lesson 1 – Super Saving
- Lesson 2 – Relating with Money
- Lesson 3 – Cash Flow Planning
- Lesson 4 – Dumping Debt
- Lesson 5 – Credit Sharks in Suits
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