This post was guest blogged by Dan Tanner of dan-ruth-tanner.com
Here in America, where everyone has credit cards and automatic teller machines (ATMs) and the Internet make banking and purchasing a 24-hour/7-day-per-week proposition, people are supposed to be somewhat sophisticated, or at least not completely naÃ¯ve, financially. But that is not the case, and as a result our economy is in crisis, not just from the cost of the war in Iraq and Bushâ€™s deficit spending and the imbalance of trade, but also because people consistently make bad choices against their own self interest. The home finance market meltdown is but one example. Sure, everyone in the picture â€“ borrowers, lenders, brokers, bankers, traders, bond insurers, and even politicians â€“ share in the blame, but none of it could have happened if the borrowers had exercised common sense in the first place.
Dominicans can learn from the miserable American example. My wife Ruth and I have weathered hard economic times and avoided these pitfalls. Both of had parents who were tempered by world wars and the Great Depression, and passed on to lessons that we heeded and which Iâ€™ll now share. Remember these three rules:
- 1.Know the difference between what you want and what you need.
- 2.Be patient.
- 3.Nothing is free.
Iâ€™ll illustrate these rules by giving examples:
Know the difference between what you want and what you need. My mother had an older brother and one younger. My older uncle did well in business and would make loans to his younger brothers and sisters if they needed money. He would always ask what the money was being borrowed for. It had always been for some real need; a rent payment, to pay a doctor, etc. Payback of the loans was always a matter of honor. A payment might be missed, but that was infrequent.
It was never stated, but well understood, that if for some reason a loan could not be paid back, my older uncle would not be putting his younger relatives and their families out on the street â€“ he was not like a bank. One day his youngest brother asked for a loan and when asked what it would be for, he replied that he wanted to buy a TV set. My older uncle refused him the loan, telling his young brother that he did not need a TV set, he merely wanted one. Too often, people canâ€™t make that distinction, and then they canâ€™t wait for what they want, leading to the second rule.
I read two accounts recently of bad things that happened to people who could not wait for what they wanted. In one, a family bought a house for $155,000 in 1996. Since then, that family borrowed $330,000 against that house (yes, over twice its price). The home equity loans often came with a low introductory interest rate. When the interest rate was jacked up later, the family couldnâ€™t pay. Now theyâ€™re in foreclosure and losing their home. Theyâ€™ve lost everything they put into it, will lose all they got by borrowing to purchase, will have no place to live, and bad credit. What on earth were they thinking?
The second family did something equally stupid, borrowing not against the equity in their home but by stealing from themselves. They had retirement savings. When you save for retirement you are paying your older self. Remember, when youâ€™re older you will probably have neither the time nor the ability to earn. You must pay your older self in advance and resist the temptation to use that money until you retire.
This guy used his retirement savings to buy diamond jewelry and camera equipment and to lease a fancy BMW automobile at $550/month. (By the way, leasing a car is always a bad deal unless the lease is a tax write-off as a business expense, but thatâ€™s another story. He now has no retirement savings, no time to build retirement savings up again, and also has a huge tax bill in penalties for using his tax-deferred retirement savings early â€“ and he has pawned the diamonds and camera equipment at about 10 cents on the dollar, and terminated his car lease. What a fool! He didnâ€™t know what he wanted and what he needed and couldnâ€™t wait. That brings me to the final rule.
Nothing is Free
When someone offers you a low introductory interest rate or no payments or interest for some long period of time, rest assured that either the price is way too high or youâ€™ll end up locked into usurious interest rates in the future. I also came across an account last week of a woman who just had to have a Nintendo game. The game retails for about $400, but she couldnâ€™t wait, did not know that she didnâ€™t really need it (she claimed it was for her 3-year old, but no kid that age can use such a game â€“ anyhow, it is far better to read to your child), and believed the rental storeâ€™s pitch that she could have it for only a small monthly payment. But if you do the math, sheâ€™s end up paying about $2,500 for it!
Weâ€™re buying kitchen cabinetry to bring to the home weâ€™re building in Dominica. Two stores offer the same products, and one has a no interest or payment for one year offer â€“ but its price is about 20 percent higher. Money has time value (that is called interest) and nothing is free.
I learned from my parents, and my wife learned from hers, and I also learned in a sociology course in college about â€œdeferred gratificationâ€. Thatâ€™s just a fancy academic phrase for the ability to wait for what you want, work for that goal, save for it, and not spend on things until you could afford them. Deferred gratification is, we were taught, the biggest enabler of upward class mobility.
Think about it
Which is more important, that flat screen TV that you can have now for monthly payments, or tuition; when the latter is likely to enable you to far more easily afford what you want and save for retirement too? So, keep your eye on the prize and live by these rules: Know the difference between wants and needs, be patient, and remember that nothing comes for free.
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