Basic Math and Common Sense Can Make You Rich

In this Hub I want to deal with some basics that seem to get overlooked a lot by people that I talk with when dealing with their finances. For some reason people get a mind blog when it comes to math as they discuss financial increase, but it doesn't take a math genius to figure out if a deal is good or bad. Simple math is the key!

The bottom line is, "How much is this costing me" will determine if you are increasing or decreasing. If you want to financially prosper you have to have a consistent life of increase over time.

One of the most common jokes in finances is about the wife that comes home from a shopping spree and says, "Look at the deals I got! I saved 50% on this item and it only cost $50.00" and then the husband responds, "No, you spent $50.00!"

There is a lot of truth in this statement. What did this imaginary item do to the lifestyle of the two people. Did it move them ahead $50 because of the savings or did it set them back $50 because of the expenditure.

In all honesty both answers could be correct. Let's say that the item was something that was needed. Something in the house broke and had to be fixed. This truly was a $50 savings because they were going to have to spend $100 to get it fixed. On the other hand, let's say it was an item that was not necessary right now. This in turn was a $50 decrease because it was an expense that didn't have to be made.

There is not a right or wrong answer, but the problem is most buy out of emotions instead of based on a plan. My wife loves to shop and I love to invest. I am sure that you can imagine the "conversations" that we have had. I remember one time years ago, in January, that she spend some money that I didn't think needed to be spent on Christmas wrapping paper. Note the month, January. My part of the conversation went something like this, "Why did you do that Christmas is over!" Her part of the conversation went something like this, "I go this for like 10% of what it normally costs. We've saved a lot and we will use it next year." When I finally saw what wrapping paper cost and what we paid for it the next January I asked her, "Are you going to buy more?"

Proper planning can make you rich. It gives you the ability to decrease your outgo and can also increase your income if planned property. It doesn't take a rocket scientist to figure out that $1.00 for wrapping paper is better than $5.00 (I have no clue what the actual cost of paper is).

My point in this Hub and the illustrations I will give is to make the point that some basic math and common sense can make you rich!

What Is The Actual Cost

Many people don't evaluate the actual cost correctly, instead they simply ask the question, "Can I afford this." That question leads to a deceiving answer. Let's take a car for instance.

You and your spouse realize that you need a new car. What typically happens is that you sit down and figure out what type of a payment you can afford. But the payment is not what the car "costs" you, the true cost is the total of payments.

Let's take for example a $15,000.00 financed at 4%. The car payment on this car can be $442.86, $338.69, $276.25, or even $234.68. There is a big difference between $442.86 and $234.68. If you went down to a car lot and told the salesman that you can afford a payment of $250.00 he/she could easily walk you over to the $15,000.00 and tell you, "I can put you in this car today for only $234.68." You are thinking, "Wow! We are so awesomely blessed!"

But what will this $15,000 car cost you? $16,896.96 is the correct answer. You are going to pay $1,896.96 to the bank for the privilege of driving a $15,000.00 car that will only be worth $12,000 when you drive it off the lot.

Before you think that's a good deal, let's put some common sense to it. If your boss came to you and said, "I am going to give you a $150.00 per month raise would you be happy! More than likely you would be ecstatic. But when you buy this car you are going to spend $158 per month just in interest (averaged out). If you are paid by the hour how does a .98 cent per hour raise sound. Probably pretty good! Are you sure you want to spend nearly $1.00 per hour of your full time work week to just pay the interest on this vehicle?

I've used on example here, but take this car loan plus your clothing store credit card, and the plasma TV, and whatever else you have on credit and it is easy to figure out why it seems you are going no where and the bank has the biggest building in town.

If you truly want to increase you have to look at the total cost of what you are buying. If you make $35,000.00 per year you are going to pay over 1/2 of one year's income for what you are driving. That is ridiculous!

In my scenario above, at the end of 72 months you vehicle is now paid off and worth very little. In fact, before you paid it off you are probably going to try to get another vehicle, but let's assume that you keep it until paid off. At the end of six years you have spent nearly $17,000.00 and have a car that worth maybe $1,000.00. The net result is that you are $16,000.00 worse off then you were six years ago.

What if you can afford the $234.68 per month, but instead of doing the above you held off for six months and saved this money. At the end of six months you have $1,408.08. You then found you a decent $1,400 car and continued to save the $234.68 per month. In a year you would have $2,808.96 and a car that is maybe worth $800. So you upgrade to a $3,000.00 car after you sell your existing car for $800.00. You now have a better car and $608.93 still in the bank. You are now able to drive this car for 18 months while you still make your car payment to yourself. At the end of the 18 months you will have $4,833.17 plus a vehicle that is worth around $1,500.00.

Once again you sell your vehicle for $1,500.00 and upgrade buying a $5,000.00 vehicle. You now have a nicer car and $1,333.17 in the bank. You drive this vehicle for 24 months while still making the payment to yourself. At the end of two years you have $6,965.49 in the bank plus a vehicle that is worth around $3,000.00.

Let's compare the two strategies. In the first I had after six years an old car maybe worth $1,000.00 and no excess cash. In the second scenario after only four years I had a vehicle worth about $3,000 and $6,965.49 (without calculating any interest I earned) in the bank. That is a $25,965.49 difference in my financial life. All I had to do was give up a little ego and drive a lesser car for a little while.

Wow! It's amazing how much a little common sense make change our life.

Protect Yourself Now! (Not on your life!)

I remember when I was in finance we would make loans and sell people Credit Life Insurance because we were looking out for them. You don't want your family left with this debt if your were to die, would you?

It always amazed me, especially when a single person or a married person but they were the only name on the loan would purchase this credit life insurance. In essence what they were doing was paying to protect me. If that person were to die I basically had no recourse on an unsecured loan. Why in the world would they pay for insurance that I was making a 60% profit on the premium to protect me if they should die?

People don't realize the profit margin that is packaged into warranty packages. The reason they have such high profit margins for the sales representative is because they pay out so little. If they pay out so little that means the probability of it benefiting me is very low. If the probability of it benefiting me from this is so low why do I want to buy it? I don't!

When I bought my iPhone they wanted to sell me a warranty. If memory serves me correctly it was about $8 per month or $96.00 per year. This is on a phone that has a one year warranty already, so for the first year (or first $100) I am basically only increasing my coverage for water damage. I've had a cell phone since they were in tote bags. But let's just take since the year 2005. If I paid on average $5 per month I would have paid $720 in coverage I would have never used. I paid $199.00 for my phone. Is this stupidity or what?

Yes, there have been people that have benefited from these products. I recently read a Facebook post of an acquaintance that jumped in a pool with their phone in their pocket and was able to get a new one. But in reality how often does a person does something so stupid?

You may have benefited from a warranty or two, but if you are in the habit of buying these I can guarantee that you have lost overall and if you haven't you are like the lottery winner - an anomaly.

What are products that steal your wealth?

  • Insurance on rental cars
  • Extended warranties of any kind
  • Gap insurance and other products offered by car dealerships
  • Insurance products tied to loans -- life, disability, etc
  • Burial and funeral products

When I went with my daughter to buy her first car for $16,000.00 they had $4,000 worth of insurance and warranties they wanted to sell her. That's an increase of 25% over the purchase price of the car. On top of that the premiums are financed which means that you are paying interest on the premium. It's crazy and it will make you poor.

Summary

Most people are poor and struggling by self inflicted wounds. If you will just do some basic math and figure out what something is costing you and apply some common sense instead of acting emotionally or fear based decisions you can save tons of money and not find yourself in a financial trap.

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Comments 3 comments

The Rising Glory profile image

The Rising Glory 4 years ago from California Author

@psychicdog & @tipstoretireearly- thanks for stopping by and commenting. I appreciate it.

Sorry psychicdog can't help you on the wife :-)


psychicdog.net profile image

psychicdog.net 4 years ago

great hub RG - thank-you for the sound advice - can you write your next hub on how to explain these things to a sceptical wife!!!LOL


tipstoretireearly profile image

tipstoretireearly 4 years ago from New York

Very few people would buy extended warranties if they decided based on math rather than emotion. Good advice!

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