If you’re like my wife and I, sometimes you just like to get out and go on relaxing drive. Sometimes we’ll go into the mountains for a nice quiet scenic drive, other times we’ll just explore areas of our city we haven’t managed to get to. Occasionally, we’ll travel to the uppity areas and gawk at the mansions, with their well-manicured lawns just waiting for my dog to discover the holy grail of lawn pooping places.
As fun as it is to day dream about having a 10,000 sq ft. mansion that we’d get to spend hours vacuuming every week, for me, it’s all about the cars. Being a car guy, I never miss an opportunity to attend a car show. There’s nothing like drooling over a brand new Ferrari, Lamborghini, Dodge Viper, or my personal favorite the McLaren. Knowing that the chances of me ever personally owning one are about equivalent to that of me benching 400 lbs and looking like the Terminator, I love to get up close and personal to those beauties, even if it’s only for a brief moment. I had that opportunity to do just that this past week.
As fun as it is to day dream about having a 10,000 sq ft. mansion that we’d get to spend hours vacuuming every week, for me, it’s all about the cars. Being a car guy, I never miss an opportunity to attend a car show. There’s nothing like drooling over a brand new Ferrari, Lamborghini, Dodge Viper, or my personal favorite the McLaren. Knowing that the chances of me ever personally owning one are about equivalent to that of me benching 400 lbs and looking like the Terminator, I love to get up close and personal to those beauties, even if it’s only for a brief moment. I had that opportunity to do just that this past week.
Yes, those are my kids sitting in the cars. What the hell? I’ve never sat in a Ferrari.
As we wondered around the gleaming multi-millions in cars, as much as I love them, I just couldn’t wrap my head around their price tags. I know that even if I was in a position to afford one, I don’t think I could ever actually pull the trigger and purchase it. I could never justify it to myself.
For example, the price tag on a McLaren 650S (the silver one in the pic below) is in the ball park of $350,000. Now, as a financial fanatic who is striving to achieve the goal of financial independence within 10 years, I can think of good ways, and bad ways to spend 350g’s. Buying a McLaren, as much as I’d like to say otherwise, probably doesn’t fit into the 10 year family budget. You notice I said probably, because if a meteor strikes and it busts open like a SpongeBob piñata, and it’s magically fully of million dollar bills, I’m buying my ass a McLaren!
As we wondered around the gleaming multi-millions in cars, as much as I love them, I just couldn’t wrap my head around their price tags. I know that even if I was in a position to afford one, I don’t think I could ever actually pull the trigger and purchase it. I could never justify it to myself.
For example, the price tag on a McLaren 650S (the silver one in the pic below) is in the ball park of $350,000. Now, as a financial fanatic who is striving to achieve the goal of financial independence within 10 years, I can think of good ways, and bad ways to spend 350g’s. Buying a McLaren, as much as I’d like to say otherwise, probably doesn’t fit into the 10 year family budget. You notice I said probably, because if a meteor strikes and it busts open like a SpongeBob piñata, and it’s magically fully of million dollar bills, I’m buying my ass a McLaren!
Now back to the reality of a normal person, on a normal budget. Whenever you have discussions with friends, family, co-workers, the meter reader, the lawn maintenance guy, or a pool boy regarding whether they should make a large purchase, be honest, the conversation almost always evolves to a discussion of monthly payments. Whether it’s a car or a house, the argument always ends up something like,
“Yeah, I could buy a $5,000 car outright but it’d be a hunk of junk. For a couple hundred bucks a month I could be riding in style. I can afford that.”
That may be true. They may be able to afford it just fine, today. But more importantly, can their future afford it? The fact that we degrade to a discussion of monthly payments when we’re looking at purchasing vehicles or homes seems rather ridiculous. The lenders can work “magic” and get you pretty much any payment you request. It doesn’t mean that you’re getting a good deal on the purchase.
Let’s look at a typical example of a person shopping for a vehicle, we’ll call him Bob. First, Bob doesn’t have any money saved, and therefore is looking to finance his new ride. So Bob visits the nearest car lot, Rotten Robs Auto Emporium. Bob has just barely dropped the kickstand on his Huffy, straightened his fanny pack, and is ready to start car shopping, when the more than helpful salesman approaches Bob, asking him how his life is, how his kids are, what kind of car he’s looking for, and most importantly what monthly payment he’d like.
Bob’s feeling pretty good, he just got that promotion. He’s comfortable around $250 per month. Now what are the salesman’s options? He could put Bob in a $7,000 dollar car that would cost around $200 per month, actually under Bob’s budget. He could put Bob in a $14,000 car for $251 per month. Or he could put Bob in a $20,000 car at $273 per month, slightly above his budget, but let’s face it, he knows what Bob needs more than Bob does. What do you think he’ll do? He’s going to sale Bob the $20,000 car that has all the bells and whistles. How did he manage it? Look at the snapshots from my Loan Repayment Calculator.
Let’s look at a typical example of a person shopping for a vehicle, we’ll call him Bob. First, Bob doesn’t have any money saved, and therefore is looking to finance his new ride. So Bob visits the nearest car lot, Rotten Robs Auto Emporium. Bob has just barely dropped the kickstand on his Huffy, straightened his fanny pack, and is ready to start car shopping, when the more than helpful salesman approaches Bob, asking him how his life is, how his kids are, what kind of car he’s looking for, and most importantly what monthly payment he’d like.
Bob’s feeling pretty good, he just got that promotion. He’s comfortable around $250 per month. Now what are the salesman’s options? He could put Bob in a $7,000 dollar car that would cost around $200 per month, actually under Bob’s budget. He could put Bob in a $14,000 car for $251 per month. Or he could put Bob in a $20,000 car at $273 per month, slightly above his budget, but let’s face it, he knows what Bob needs more than Bob does. What do you think he’ll do? He’s going to sale Bob the $20,000 car that has all the bells and whistles. How did he manage it? Look at the snapshots from my Loan Repayment Calculator.
The math is pretty simple. If you're trying to negotiate based on any single variable that isn't the total purchase price, you're basically removing your purchasing leverage.
In working strictly with the monthly payment, the salesmen is free to massage all the other inputs until the magic number pops out. In this case, he bumped up the length of the loan from the 3 year to 7 years, and still increased the interest rate, which is pretty common for longer loans. Had Bob been looking to trade in his current ride, the salesman would have even more power to cut the monthly payment by giving Bob pennies on the dollar for his car, and still put him in a 7 year loan.
So do we hate the salesman? No! He has a job to do, and cars to sale. We blame Bob, because he went in with no goal, no starting point, and no clue what he actually wanted.
If Bob had just included one extra restriction in his purchasing requirements, it would have significantly constrained his options. For example, if he would have given the $250 monthly limit and no longer than a 3 year loan, that would have significantly reduced his options on the car lot, but would have put the control back in his hands. At 4% interest, he would be limited to around $8,500 for the loan.
So do we hate the salesman? No! He has a job to do, and cars to sale. We blame Bob, because he went in with no goal, no starting point, and no clue what he actually wanted.
If Bob had just included one extra restriction in his purchasing requirements, it would have significantly constrained his options. For example, if he would have given the $250 monthly limit and no longer than a 3 year loan, that would have significantly reduced his options on the car lot, but would have put the control back in his hands. At 4% interest, he would be limited to around $8,500 for the loan.
In any purchase negotiation, keep the control where it belongs, with you.
This means doing your homework. Knowing what you can afford before you enter the deal. Working everything in terms of total purchase price, the monthly payment will fall out of that. If you can’t afford the resulting payment, you can’t afford the product. Look for something cheaper. Learn from the mistakes you’ve made in the past.
Don’t allow your financial future to be sabotaged by today’s purchase because of price creep.
Even if you go in knowing exactly what price you want to pay, it’s very easy to get sidetracked by that next car that’s just a little shinier. I’ve been bitten by this more times than I’d like to admit. I go in thinking my limit is say $10,000, only to end up spending $12,000 for that little nicer version. If you’re going to make these types of mistakes, like I have, make them when the consequences aren’t so critical, and learn from them.
Don’t allow your financial future to be sabotaged by today’s purchase because of price creep.
Even if you go in knowing exactly what price you want to pay, it’s very easy to get sidetracked by that next car that’s just a little shinier. I’ve been bitten by this more times than I’d like to admit. I go in thinking my limit is say $10,000, only to end up spending $12,000 for that little nicer version. If you’re going to make these types of mistakes, like I have, make them when the consequences aren’t so critical, and learn from them.
Moving up a level of complexity, a mortgage lenders office definitely isn’t the place to be learning about price negotiation and how a $200 per month higher mortgage (price creep) will affect you in the long run. By then, the pressure is on, the numbers are coming from everywhere, and you’ll inevitably make a mistake you’ll regret for what could be the next 30 years.
For example, do you know what the true cost is if you go into a mortgage thinking you’ll pay $1,000 per month, but instead find that slightly newer nicer house that’s only $200 a month more than your goal? After all, it’s only an extra $200 a month right, no biggie. If you can afford $1,000, what’s $1,200 in the long run?
An extra $200 per month mortgage is the difference between a $210,000 house and a $250,000 house at 4% for 30 years. More importantly, if you succumb to the temptation of the $1,200 mortgage, you’ll end up paying an extra $68,750 in total payments, of which $28,746 is extra interest you could have avoided.
Mortgage price creep will destroy your financial future. When you’re amortizing a loan out as far as 30 years, even an extra $50 per month will add $18,000 in total payments and over $7,500 in additional interest (on roughly a $200,000 loan at 4%).
For example, do you know what the true cost is if you go into a mortgage thinking you’ll pay $1,000 per month, but instead find that slightly newer nicer house that’s only $200 a month more than your goal? After all, it’s only an extra $200 a month right, no biggie. If you can afford $1,000, what’s $1,200 in the long run?
An extra $200 per month mortgage is the difference between a $210,000 house and a $250,000 house at 4% for 30 years. More importantly, if you succumb to the temptation of the $1,200 mortgage, you’ll end up paying an extra $68,750 in total payments, of which $28,746 is extra interest you could have avoided.
Mortgage price creep will destroy your financial future. When you’re amortizing a loan out as far as 30 years, even an extra $50 per month will add $18,000 in total payments and over $7,500 in additional interest (on roughly a $200,000 loan at 4%).
Another way to look at it, if you’re truly comfortable with a $1,200 mortgage, then you could buy the $210,000 house at a roughly 20 year loan term. That would end up saving you over $55,000 dollars from the 30 year loan.
The numbers can be worked in all sorts of ways. Knowing what you truly can afford, and what you’re really getting yourself into when it comes to a purchase as important as home can be the difference between being happy or being a slave to the mortgage. There are numerous online calculators (including mine) that you can use to get an indication of the total cost of a loan, including how much interest you’ll end up paying. I urge anyone considering a large purchase to get intimately familiar with loan repayment calculators, you’ll be amazed at just how much interest you could end up paying over the life of the loan.
And if you decide that you're not willing to pay that kind of interest for 30 years, that's okay too. There is nothing wrong with renting. Times have changed. The idea that achieving the American Dream meant owning a home doesn’t hold up anymore. Maybe it’s a sign of the times (I’m looking at you Millennials), maybe people are just getting smarter and refusing to shackle themselves into 30 years of debt. Home ownership isn’t for everybody, and that’s fine. We all must do what’s best for our individual families based on the circumstances we’re presented with.
What’s important is that we approach the future with our eyes open. We know exactly how any purchase is effecting us both in today’s dollars, and our future financial stability. We know and accept that the purchase today means less for investment in our future, and could add years to our working life. If we choose to accept that, then at least it was our decision. We won’t wake up at 60 years old, still working 8-5, and wonder how we got there.
Oh, and about those muscles (from the title), here you go. Don’t be jealous of his gazillion abs.
And if you decide that you're not willing to pay that kind of interest for 30 years, that's okay too. There is nothing wrong with renting. Times have changed. The idea that achieving the American Dream meant owning a home doesn’t hold up anymore. Maybe it’s a sign of the times (I’m looking at you Millennials), maybe people are just getting smarter and refusing to shackle themselves into 30 years of debt. Home ownership isn’t for everybody, and that’s fine. We all must do what’s best for our individual families based on the circumstances we’re presented with.
What’s important is that we approach the future with our eyes open. We know exactly how any purchase is effecting us both in today’s dollars, and our future financial stability. We know and accept that the purchase today means less for investment in our future, and could add years to our working life. If we choose to accept that, then at least it was our decision. We won’t wake up at 60 years old, still working 8-5, and wonder how we got there.
Oh, and about those muscles (from the title), here you go. Don’t be jealous of his gazillion abs.
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