The Parable of The Flat-Screen TV

by Kentin Waits on 13 July 2012 8 comments
Photo: Wonderlane

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.

ARTICLE CONTINUES BELOW

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?

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Guest's picture
NancyH

Thank for this analysis! I love it. We have two old-technology TVs and have been waiting restlessly for one of them to break down before we buy a new HD flatscreen model. We have cash that could be used for the purchase, but whenever I get hungry for a crisper picture, I wait one more day and one more day, putting off the shopping trip. Afterall the TVs work. One of these old TVs we actually acquired free as a hand-me-down when a relative displaced it with a flatscreen. I'm going to save this analysis to reread whenever I get particularly antsy to spend without need. More such analyses, please.

Guest's picture
Edward

I'm 100% sure that Dan now has envy every time the 52" models go on sale for $500. Sadly, when you jump on the bandwagon at the start, your model has little resale value a few years later. So, he can't even make a decent amount on selling it to upgrade. His plasma would be without all the bells and whistles and SD card slots and USB ports and probably only 2 HDMI ports and... and...

Guest's picture
Dave

Oh yeah, I know this feeling. In 2003, maybe 2004, I simply had to have a plasma TV. 42". Now, that was at least partially for space - the way my house was built there was no room for a normal TV without blocking off one entire route through the main space, and we were tired of having that be the case with our previous TV - but it being SO early adoption, that plasma was $4400. Whoof. My 20s were an opulent time compared to today.

When it started dying in 2008 or 9, I sold it, for a paltry tenth of its original cost. And bought a 46" LCD for just under 2k. TV and gaming consoles, though, were a huge part of our home life then. Nowadays, not so much. I'd gladly sell the 46" and just use my wife's 32" in its place (which isn't even being used at all), but she does still love the big TV for watching movies on.

Guest's picture
Guest

If I was Dan I'd go out and buy a brand new 80" flat screen just to piss (my so called friend) Kentin Waits off. Go for it Dan, enjoy your life, enjoy watching big blockbusters on a massive screen right on your living room, you only live once. I learned a long time ago NOT to be controlled by number crunching myopics who want me to wait 10 years before I go out and do the things I want to. Life isn't about being sensible, its about being HAPPY.

Guest's picture
Guest DKK

The article assumes there is no value in having the TV (or other item) to use during the 5 years when he could save the money. Using the above approach one can never by any technology becuase if you wait 5 years it'll be chaper. Of course by then the newer equipment has made the older obsolete, so you need the newer, but you should wait 5 years so you can buy that cheaper?

Now if Dan really was strapped buying something he couldn't really afford is a differnt issue. But the "waiting" and placing zero value on the use of something is false.

Kentin Waits's picture

Hi, and thanks for your comment. I don't think five years (or six, in this case) is a magic number by any means. I do, however, realize that there's a precipitous decline in retail costs after the first or second- generation items have entered the market. And yes, per the article, Dan "was already walking a financial tightrope when he decided to embrace the digital TV revolution."

Guest's picture
bryan

Buying a cheap iron at a yard sale, with a frayed cord...turn it on and immediately smelled smoke, it almost burnt my house down, worse $10 i ever spent!

Guest's picture

I made the same mistake with the LCD TV that I bought more than a year ago. We just moved into our new house, and I was really excited about having a new TV. I bought it on installment, so it was more expensive than it's usual retail price. A few months after, the exact same TV is being sold at a cheaper price - at a rate that I can actually afford to buy it in cash. :(