Younger folks describe big spenders as “living large.” With that definition in mind, you could say that I am the epitome of living small. I also fancy myself an expert on seeing through financial deals to the substance of what is being offered. I look askance at funky sounding deals. You might call it “reality living.”
Let’s start with a basic economic reality. Use of money has a cost. Money must be rented much like leasing a copier or an automobile. The cost for using money is interest. There are no exceptions to this rule. The cost is clearly stated or it’s an invisible opportunity cost. Either way, money is a valuable asset and its use exacts a price.
Well then, what about 0% financing? What a joke! Every seller must recover his cost plus a profit or follow the whooping crane into extinction. Since the use of money isn’t free to the seller, that cost must be recovered somehow. Obviously, the price of the merchandise is increased to cover the cost of financing. There can be no other explanation and to believe otherwise is proof of lunacy.
So, intelligent shoppers will factor in the hidden cost of financing when comparing alternatives and not be sucked in by the euphoria of getting something for nothing.
On the homefront
Let’s move along to home mortgages. I could hardly believe my eyes recently when I saw an ad for 50-year mortgages. That’s 50 years, as in 600 monthly payments! You would pay for the house four or more times in interest charges over that period.
Consequently, that $200,000 house in the nice neighborhood will end up costing over a million bucks by the time you get it paid off, if you live that long. What this absurd option encourages is buying more house than you can afford by lowering the monthly payments. Much better to buy a less expensive house and finance it over 15 years and have some prospect of actually seeing it paid off before your funeral.
Speaking of funerals, one of the kindest things one can do for their family is plan their own funeral. Buy the grave plot, prepay for the funeral and leave specific instructions about how you want the service to be conducted. I recently had occasion to benefit from such thoughtful planning when my aunt passed away. She had done all the planning and it was quite a relief just to follow her instructions.
On the plastic
I couldn’t possibly address the subject of finances without bashing away at credit cards. I have made no secret that, in my opinion, credit cards are the bane of our existence. I was truly shocked, which is not an easy task, to see that McDonald’s and other fast food restaurants now allow payment by credit card. How long are you going to finance that Big Mac? How about a 50-year mortgage on supper? Your combo meal will end up costing more than dinner at the University Club by the time the interest charges are paid. And don’t ever be a moment late with any credit card payment of that juicy 6% advertised interest rate will skyrocket to 29% or more.
I am equally irritated by some ads that only provide the monthly payment amount, particularly for farm tractors and equipment. The advertised package includes the tractor and several pieces of equipment and the monthly payment. The number of monthly payments isn’t even provided. Similarly, some automobile advertisements now provide only the monthly payment amount. I saw an ad on the way to work that offered any car on the lot for $250 a month. Please!
How much do they want for the stinking merchandise? That’s what I want to know. How do I know if I want to buy if they won’t tell me how much it costs? Do they think I’m so imbecilic that the question of cost won’t enter my mind? Did I fall off the cabbage truck? Did you?
As a society, we are being suckered into believing that committing our entire paycheck to satisfying monthly payments of one sort or another is the natural, red-blooded American thing to do. It is not. Just think about it. We buy bigger and bigger houses to store all the stuff we bought but now don’t want. We rent storage buildings to store even more stuff. What if we just delayed buying some of the stuff that is destined for storage anyway until we could pay cash? Maybe, just maybe, we might not buy all that stuff if we were spending real money rather than just agreeing to another 0% monthly payment.
Thought for the Moment
Life is about becoming more than we are.— Oprah Winfrey
Joe D. Jones, CPA (retired), is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.