Thursday, March 17, 2016

Personal Finance for High School and College Students

The following is a talk I'd like to give to high school and college age men and women about personal finance:

Yesterday I was talking to a student who asked about what kind of car I drive. I asked if he was planning to buy a car, and if he knew how auto loans work. He said no. This is a problem.

Everybody wants to take your money

Let's put that point out there in bold. Everybody wants your money. That's not to say everybody will steal it (though some people will). It's just to say that everybody wants money, and if you have money to spend, people will try to get you to spend it.

Buying a car is one of many examples, so let's dig into it. 

How Auto Dealers Try to Take Your Money

Auto dealerships know that the easiest way to part you from your money is to talk in terms of "your monthly payment". Given a $15,000 car, a $1,000 upgrade isn't going to make a huge dent in your monthly payment.  For that reason, when they're trying to sell you a fancy stereo or undercoating, they'll just tell you "it's only $20 more per month!"

Don't let them trick you into thinking this way. Imagine that you've already gotten a loan from the bank, and you have $20,000 in your hand. How much of that money do you want to spend? Would you rather walk out of the dealership with an extra $1,000 in your pocket or with chrome exhaust on your car?

The onus is on you to ask "What will this actually cost?" Ask yourself "if I was at an auto parts store, would this be a good price for what they're offering me?" Odds are, they're charging an enormous sum of money and hiding it behind financing.

How Department Stores Try to Take Your Money

The 'sale' has been a feature of department stores for years. In many stores, nearly every item is "marked down" from some arbitrary price. 

This is a trick

Just because a product is marked down does not mean that it's a good deal. It may be a good deal, but looking at the product's "original" price makes for a false comparison. You need to think in terms of the true value of the product.  That is, what would you actually pay for it. 

Here's an extreme example to drive this point home. I go to a store for some socks, and I see a pair of socks marked down from $150 to $50. This is NOT a $100 savings. Why? Because $150 is an unrealistic valuation for socks. 

I need to think in terms of "What would I actually pay for socks?" In this case, I'd probably pay $10 for socks, which means the "sale" price is $40 too high. 

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