Financial Principles 101: File under Duh-uh.

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Image courtesy of Stuart Miles/ FreeDigitalPhotos.net

Have you seen this clip from Saturday Night Live with Steve Martin: Don’t Buy Stuff You Cannot Afford?  If you haven’t, it’s a quick two minutes and I find it absolutely hilarious.

To me, the funniest part about his entire sketch is pretty simple, people really do look at their finances in the way this couple, played by Steve Martin and Amy Poehler.  Obviously, not in such simple and direct terms.

If you look at the nature of credit cards as an example. Many households and individuals take this approach with money.  They sense a need (most likely a want), buy the item then put it on their credit card and plan on paying it later, when they have the cash. As this becomes ingrained as a habit, the minimum payments end up being made.  This is the one of the most effective ways to throw away your hard earned money.

Let’s use an example of a $2,000 vacation put entirely on your credit card.  The card has a rate of 7.99% and you start making the minimum payment of $15.  If you continue down this path, when all is said and done, you will have paid the credit card company $4,943.00!

Here’s a quick tip that helps me: When I’m in a mood where I want to purchase something before having the money.  I remind myself that if I put it on a credit card without a clear plan to pay off the balance, the item I’m looking to buy is costing me double the price.  That vacation package was a steal at $2,000 but it’s a ripoff at $4,000.  I could have gone to Europe instead of Arizona!!

The two other mental triggers that help me:

1. Will I survive without it (medical surgery? no.  A new blender? yes.)  NEED versus WANT.

2.  What mood am I in?  Studies have shown time and again that mood alters our buying habits.  If I don’t absolutely need it, then I sit back and wait for two days to reduce impulse buying.  I try not to buy things when I’m in a tired or bad mood.  Rest will make me much happier over the long term than a new CD.

Hope that video gave you a chuckle!

 

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