The Parable of The Flat-Screen TV
Most of us know that we should try to spend less and save more. But much of the advice we hear and lessons we try to learn are abstract. We seldom hear a real story of an actual person making a truly unfortunate financial decision. I’d like to help change that. Here’s a little tale about a dear friend of mine, who I’ll call Dan. Dan was already walking a financial tightrope when he decided it was time to enthusiastically embrace the digital TV revolution. So in 2006, he threw caution (and a lot of money) to the wind and bought a new plasma TV. (See also: Massive List of Things to Do While Watching TV)
Now back in 2006, flat-screens of any kind were a relatively new phenomenon and were priced accordingly. Dan’s 42” TV retailed for $1,995. Since he was already strapped for cash and had a bumpy credit history, he purchased from a local store whose owners were willing to work with him on financing (at a 9% interest rate). This is where it gets interesting and where the details of his purchase really start to matter. To understand why this purchase was such a bad idea, we need to do some financial forensics on the real cost of the TV.
Early Adoption = Higher Price
This one is obvious, right? Today, a TV similar to Dan’s 6-year-old model retails for about $599. Through the miracle of market forces, competition, lower production costs, and the eagerness of early adopters, the price of flat-screens has fallen dramatically. If Dan had waited, he could have paid $1,396 less for essentially the same thing.
More Sales Tax Paid
Dan lived in Iowa and in 2006, the sales tax in that state was 5%. The total tax on his purchase was $99.75. Though Iowa’s sales tax had climbed to 6% by 2008, the lower price of the TV would have still had Dan paying only $35.94 in tax in 2012. The tax savings alone would have been $63.81.
Lots of Interest
Dan was paying the local electronics store 9% interest on his new TV. Since he managed to pay it off in 25 months, Dan’s total interest was $203.53. If Dan had saved an amount equal to the check he sent to the electronics store every month (about $95), he could have saved the entire 2012 purchase amount (tax included) in cash in about 6 1/2 months.
Loss of Earnings Potential
So far, Dan’s choice to purchase the TV early resulted in a higher price and that, of course, meant more sales tax. Also, since Dan purchased the TV at the height of its retail price, he was less likely to have the cash on-hand to pay, so he financed the steeper purchase price over the course of two years at 9%. But there’s another hidden cost we haven’t explored yet. Remember the $95 that Dan paid to his financier (17 months longer than he would have needed to if he’d waited and bought with cash later)? Well, let’s consider the lost potential of that money. At a 4% interest rate, the $1,615 ($95 X 17 months) would have earned a laughably small amount in interest. But what other debt, savings vehicles, or bills could that money have been directed toward? If a family makes 5 or 10 large purchases at similar or even worse terms, what’s the multiplying effect on their lives, their opportunities, and their fortunes?
In the end, Dan paid at least $1,663.34 more for his higher-priced, fully financed flat screen TV in 2006 than he would have paid with cash on the same model in 2012. Even with a fairly reasonable interest rate and paying more than the minimum due each month, Dan still didn’t fare too well in this transaction (and that’s without factoring in depreciation/resale value on such an early model TV vs. later models). Granted, I’m going purely by the numbers here. Some may argue that Dan’s viewing delight is harder to quantify, but no less important. Dan’s net loss of $277.22 per year for those six years might be mollified a bit by 42” worth of "Cupcake Wars" glowing on his wall. I hope so.
What financial decisions did you live to regret? Do you have friends or family who are still making whoppers of fiscal mistakes like Dan?