Tuesday, November 6, 2007

Knowing When to Spend, and When to Save

Many young people today struggle with something I’ve blogged about before—the need for instant gratification. After all, this is America—we want it when we want it, and we want it now, even if we can't afford it.

People fail to realize what a purchase will actually cost them in the long run. Here are a few hot items most young people can’t afford but purchase anyway:

(1) The toys we deem necessities for survival: iPod, PS3, cell phone, high speed internet, cable TV, etc…
(2) Eating out: appetizer, main course, drinks, dessert, etc
(3) Driving a fancy new car

I see some different issues here, that all lead back to the same problem—most people don’t know the difference between a want and a need, nor do they have the ability to spend money on the right things—or those that add value.

Starting with the items on the list, here is my breakdown:

Question #1

iPod: I purchased one. Expensive, yes; however, I use it every time I work out, so it adds value to my life. Well worth the $199-$299 price tag.

PS3: I don’t own one, and I never will. I still have a Super Nintendo, which on rare occasion, I play just for old time’s sake. But to sit in front of the new gaming systems for hours on end is beyond my comprehension. I can’t think of a bigger waste of time and money. $499 for the system; $50+ for each game; and the increase in fat cells from loafing on a sofa all day. Sorry gamers, no value added.

Cell phone: I own a cell phone with a basic plan that includes text messaging. Being away from my fiancée sucks (simply put), so the ability to communicate with her, my family, and other friends across the country remains essential. I added the text plan because throughout the day it’s nice to send and receive small messages when you can’t always be with someone. Do I own an iPhone or a Blackberry? No, because at this point in my life it will only distract me from other learning. Not to mention the huge increase in monthly expense.

High-speed internet/cable TV: Yes, I have them both. For me, high-speed internet is a must because it saves time while learning. I don’t wait for web pages to load, and I value my free time—value added. I don’t watch much television because I think it’s a waste of time, but I do watch some select channels. I enjoy watching hockey games and The History Channel, so I’ll pay the money for cable TV, although I wish there was a five channel package!

From the list above, I challenge you to do the same. Find out the things you need versus the things you want. There is no problem spending money as long as you pass the quick litmus test: (1) know what each item will cost you in the long run (opportunity cost, continuing service, etc), and (2) ask yourself if the item you are purchasing will somehow add value to your life.

Question #2

Why do people feel the need to go out all the time? Personally, now that I live on my own, I would much rather cook something at home. Furthermore, it costs a lot of money to go out once a week. A decent dinner for two with all the additions we love in a dining out experience amounts to roughly $50. You can cook a nice meal at home for around $10, not to mention the leftovers that usually give you another meal or two. I know people that eat out 2-3 times per week—scary when you do the math for one month.

Don’t get me wrong here; I enjoy going out on occasion. However, if you’re someone that can’t figure out where your money goes, keep a simple budget, and you’ll probably be shocked to find how much you spend on food and drinks.

Question #3

I will freely admit to you that I’ve made some mistakes when purchasing vehicles. However, I’ll never do it again! There are advantages to leasing a new vehicle; however, for most young people buying a reliable used car is the most economical choice, especially as oil nears $100 a barrel.

For all you fancy car owners, I’m sorry, but I just don’t get it. I drive a 2001 Olds Alero, nicknamed the “old man” car. I have never gone crazy over vehicles, and I never will. However, there seems to be a disconnect in society—own a fancy vehicle and you become more important. What? This may be true if you’re a professional athlete attending a world class dinner party in a tuxedo where they valet your car. I argue that a $400-$500 a month car payment is nothing but a waste of hard earned money. Now add fuel costs and insurance and your probably living beyond your means. A simple rule: If you can’t afford to drive the fancy car, odds are it won’t help your social status either.


Michael said...

Brian, you raise some very valid points about spending money. As an adult that has built his own home, I can contest that foolish purchases can have an effect on ones self. However, it all depends on the individual. I for one WANT to work in the gaming industry. In order for me to know about competition, it is very helpful to see the game and play the game myself to see how well the game was developed and then marketed and in what ways.

You also mention that you have text messaging, as a current T-Mobile sales person, I will be the first to say that this is a want, not a need. Text messaging is a luxury added on top of another luxury. I still view cell phones as a want, and not a need. If I had a choice, I would not own a cell phone, but family and work require me to be accesible at all times. Since it has grown on me, I have developed the want for my e-mails delivered to my handheld.

I will very much gree on tthe purchasing of a new car, but lets not forget to mention the 2 choices of newer purchases. First, we have the option to lease or to purchase. I have always chosen to purchase my vehicles. Leasing may save a few bucks every month, but you will have nothing to show for it. I have purchased a gas saver 2001 Ford Focus when I was still in High School and is now paid off and I will drive it for hopefully another 5 years. My wife's car however was a 2 door cavalier that was not reliable. So we purchased a newr Equinox. The other point about purchasing newer vehicles is that they do not need to be BRAND NEW. Both of my vehicles were rental vehicles that had under 9,000 miles with a full pledged warranty still. This saved over $10,000 combined in purchasing these vehicles. They may have had a few scratches or very minor dents, but they perform great. And if anything shall happen, the warranty will cover it.

Eating out is another big thing. But lets skip over the dinner part and approach the main topic many peopel do - drink. Imagine how much money some people will spend when going out to the bars! Some people can spend in excess of $100 a night on drinks, and I know some of them personally.

I will agree overall people need to watch what they spend. Also, to watch what they use their credit cards on. If you don't have the cash to buy it now - DON'T BUY IT.

Brian Reese said...

Thanks for the comment, Michael.

To clarify text messaging: the added feature is not completely necessary for communication. However, text messaging adds value to my life because it allows me to communicate on a different level than just verbal. I have no problem spending the extra $4.99 a month because for me--it's worth it. This is the part that young people must understand when making purchases. Although I agree with you that text messaging is not a need, I am willing to spend for it because of the added value.

I didn't do a great job closing the argument about buy vs. lease and new vs. used when dealing with vehicles. Please read my post from October 10th. I have been burned a few times buying a higher mileage vehicle for the discount, only to spend thousands of dollars in the shop for new brakes, tie rod, etc.. If someone can afford to purchase a new vehicle, and enjoys the added comfort of an extended warranty, by all means go for it. Just understand that the moment your drive it off the lot, you've lost money. Moreover, with dealer holdbacks, you might have paid more than you should have. The description of your two slightly used vehicles will undoubtedly be my next purchase.

I didn't focus too much on drinking, but definitely an absolute waste of money when you wake up the next morning!

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