Financial Tip # 6 - A Cheap Trick

If you weren’t alive in the 70s, perhaps you’ve never heard of the band, Cheap Trick. They wrote a song in the late 70s called “I want you to want me.” The lyrics, sung in a soft seventies pop sound, go something like this: “I want you to want me, I need you to need me, I’d love you to love me, I’m beggin you to beg me.” I am not a fan of Cheap Trick or this song, but there is a lesson here. The singer understands that wants and needs are different.

We’ve taught our daughter an important question to ask. Whenever she says something like, “I need an iPod,” we have her ask the following question. “Is it a need, or is it a want?” Now, as a parent, it sometimes sucks to teach your kids something like this because the day WILL come when I say, “I need a new …. (fill in the blank)” and she will promptly respond, “Daddy, is it a need, or is it a want?” Don’t kids know that they should be quiet and not question their elders?

This is an inconvenient but terribly important tool in your financial tool box. The rule in our house is that we discuss any purchase over $50 and take a breather on anything over $100. Large purchases require (in most cases) a three-day waiting period where we talk about it, pray about it, and question whether this is the right choice. I have to be honest here, it wasn’t always like that. We used to spend willy-nilly on whatever we wanted and then immediately prepared the rationalization about how we really needed it.

What really brings this home is the process of having a yard sale. As you drag all the junk out of closets, from under beds, up on shelves, and off the back porch; you really get an idea of how much money you have wasted over the years, buying on impulse. Retailers know this about us, that’s why infomercials actually stay on T.V. People actually DO buy the New and Improved Electric Dog Polishers or the Amazing Milkahol Device that changes ordinary milk into gasoline for your car or the Moptastic that cleans your floors and can also be used to brush your teeth!!! You see the ad for this and you begin to go into a trance. “I need that!” you suddenly exclaim, “I don’t know how I ever got along without one!” You promptly call the telephone number on the screen before the time runs out so that you can take advantage of the $5.99 savings and free shipping. “Heck,” you think, “I’m probably making money on this deal!”

But wait, there’s more.

That object ends up in your garage only to come out when time for the next yard sale. You then look upon it wondering why in the hell you ever bought that stupid piece of junk. Sometimes, you even throw it in the trash because you don’t want the people coming to the yard sale to judge you.

I know. I’ve been there.

If you want to control your finances and ever truly get ahead in life, you have to ask yourself this one question. “Is it a want or is it a need.” Needs get taken care of first.

Air, food, water and medicine first. Feed your family. Take care of medical needs.

Shelter is second. Pay your rent or mortgage.

Keep the lights on at home. Pay your electric bill.

Save for a rainy day. Savings are important so you don’t get faced with emergency financial decision.

Give. Tithe. Donate some to help others.

Provide for your family’s future. Retirement. College. Etc.

Once your needs are taken care of, then, and only then, do you consider wants.

It is amazing how much money we waste, culturally, on junk. Buying bigger and better televisions, a newer and more powerful computer, a newer and shinier car; these things consume us and consume our money. This is one of those places where you have to be brutally honest with yourself. Every dime, dollar and nickel you waste on useless junk is multiplied in its damage, because it is money that you cannot invest and earn interest on in the future.

If you want to be financially secure, learn this Cheap Trick – know the difference between needs and wants. Ask the question “Is it a need, or is it a want?” and then base your spending decision on the answer.

Disclaimer: I am not a trained financial advisor, I just play one on this blog. Seriously. Get good financial advice in life. My information comes primarily from personal experience, working in consumer lending in the banking industry, and watching friends, family, and parishioners struggle. But, much of this is common sense, most people just don't use their common sense when it comes to financial matters.

Financial Tip # 2 - Don't Ask A Barber if You Need A Haircut

Don't Ask A Barber if You Need A Haircut

This cowboy wisdom can be applied throughout your financial life. Don’t ask a realtor how much house you can afford and don’t ask a banker how much of a loan you need.

Don’t get me wrong, good advice is a thing to be treasured, but you always have to consider what someone’s motivation is. Are they working for your benefit or for theirs? When it comes to your realtor and banker, you don’t usually have to wonder.

This housing boom and the following bust came largely because people trusted their banker and real estate agent on what they could afford instead of educating themselves and proceeding with caution.

The biggest issue is that they base what you need on what they think that you can afford.

Let’s look at a little banking term called DTI (Debt to Income). This is a ratio of how much money you have going out the door compared to how much you have coming in the door each month. It seems like an easy concept until you consider that different banks, mortgage companies, finance companies, credit card companies and other lenders look at this amount differently and NONE of them look at it realistically.

Here is our example today:

Mr. Jones has a job where he makes $50,000 a year. After taxes, 401k, insurance, and other payroll deductions, he actually brings home about $37,000 a year. Divide that by 12 and you get a monthly income of $3083.

Let’s say that Mr. Jones is a normal guy and has a car payment of $420 (average American car payment) and car insurance payment of $145 (average American car insurance payment). He also has a home phone bill, cell phone bill, gas, water, and electric bills totaling $600 per month. Let’s not forget cable television and internet of $120 per month. Groceries are about $300 a month and he eats out a few times a week totaling another $200 a month. He also has credit cards with a total minimum payment due of $115. His rent at this time is $1000 a month. That brings him to a total of $3083 coming in each month and $2780 accounted for in spending each month. This doesn’t take into consideration that cup of coffee at Starbucks every morning, his medicine and clothes as well as other extraneous impulse buys.

To calculate his Debt to Income ratio, you divide his debt ($2780) into his income ($3083) to get 90.2%. That’s very high. Of course the rent would come out when he buys the house, but then he’ll have a house payment, plus property taxes and mortgage insurance, so that will likely be higher. Let’s say that totals $1200 a month. His DTI is now 94.1% He’ll have no cushion in case of emergency. Kind of scary, Huh? No lender in their right mind would offer this guy a loan. Except…

Different types of lenders and banks look at his DTI differently. Most don’t count utilities. So that automatically knocks off the $600 a month from their calculation. They also don’t think about groceries and payment history as well as that cup of starbucks every day, medical expenses, etc. So that knocks off another $500 a month from their calculation.

Then, the kicker: Most of them use Gross income, not Net income. So they take the $50,000 per year and divide by 12. Now the calculation works like this:

$50,000 divide by 12 = $4167. Total expenses used in calculation: $1880. $1880 divide by $4167 = 45.1% DTI!!! Now he’s looking good. Heck, he can afford way more than a $1200 a month payment now. Let’s get him into a bigger home. Incidentally, I think that politicians use this same methodology for balancing the budget.

As a consumer, it is YOUR job to be brutally realistic about your finances. Look at your real budget. Include those cups of coffee from starbucks. Don’t forget medical expenses, cell phones, and utilities. Groceries really do cost money and so does eating out all the time.

Calculate your own DTI before deciding what you can afford and don’t trust your banker or realtor on this. You don’t need as big of a house as you think you do.

I’m not telling you that your banker or realtor is dishonest, only that they are working in their interest too and you need to be aware of that. Don’t shut off your brain and blindly accept what they say.

Think for yourself and do the math for yourself.

And be careful where you get a haircut.

Disclaimer: I am not a trained financial advisor, I just play one on this blog. Seriously. Get good financial advice in life. My information comes primarily from personal experience, working in consumer lending in the banking industry, and watching friends, family, and parishioners struggle. But, much of this is common sense, most people just don't use their common sense when it comes to financial matters.