This message is so basic that it doesn’t deserve the title Finance 101. My hope is that none of my regular readers find anything useful in here but that they pass it along to someone else as a public service announcement.
It was inspired by a business owner who announced a reduction of overtime. An employee told him that it came at a bad time because his dishwasher had broken and he just financed an entire kitchen package. The owner asked the obvious question, if your dishwasher was the problem, why didn’t you just buy a new one? Answer: Because they wanted everything to match. Well, that may be nice, but if you can’t afford it, then live without it! For most items (houses and cars being notable exceptions), if you don’t have the cash, you can’t afford it.
Last summer, my son built a gaming computer for which he had to earn the money (aside from a few parts he received for his birthday). He asked me to get a store credit card so he could save 5%. I agreed. As I signed up, I made him read the interest rate disclosure statement that popped up on the screen. 28.99%. Know the interest rate!
When the first statement arrived, I showed him the shockingly low monthly payment but then how long it would take and how much it would cost if one only paid the minimum balance monthly. Four years and 72% more! Trust me, my son will want to upgrade this computer long before then. It’s not enough to know the interest rate. Understand the actual costs of paying over time. By the way, it’s on the statement.
Over the past weekend, my son and some of his friends went to Six Flags. Normally, I either give him cash for an outing or, better yet, make him take his own money. But Six Flags is cashless so I let him borrow a card. I figured it would be another lesson and I had this newsletter to write. I set my card to text me with each charge. As I was going to pick him up, my phone started pinging rapidly with small charges. He was in an arcade with his buddies. Fortunately, I can text hands free so off went the message “Please stop spending.” To his credit, when asked how much he spent, his answer was pretty close. It’s easy to lose track of your spending with a card. I like to pay cash, if the money’s not in your pocket, you can’t spend it.
Extended warranty add-ons that we’re all offered when we check out are usually very expensive compared to the cost of the product. If you pass on the extended warranty and save your money you’ll have enough to replace the few items that break and be better off in the long run. I can understand buying it for an expensive laptop or tablet but no one really needs to insure a toaster against breakage. And for me, the odds of remembering that I bought the insurance and finding the paperwork when the time comes are pretty small.
There you have it, five quick lessons in Finance 001. As an act of public service, please pass this along to someone who could benefit from reading this message.
If your business could benefit from fractional CFO services, I would welcome the chance to speak with you. Please give me a call at (314) 863-6637 or send an email to [email protected]
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