Life Tips From My Finance Professor: Part 1 – Purchases

18 03 2008

I took an investments class the during the Fall semester of my Senior year in college, and when I say “took” I mean that I dutifully attended every class, sat in the front row, and tried with all my heart to understand what the hell he was talking about.  It wasn’t that I didn’t understand the material, I just didn’t understand how our professor could brush over things so fast.  Most of the rest of the students never attended because the professor was one of the few that “recycled” his tests every year and didn’t change anything except for the numbers (ie: you did not need to attend class, you just needed to know someone who took him last semester).  

Dr. Chucky (as he preferred to be called) is one of the most peculiar people I have ever met.  And this is what you need to know about him… He probably smoked 2 packs a day, he sweated like a pig, and he spoke 6 languages.  He was a professor because it allowed him to play with his portfolio all day and use his summers to travel.  He is an incredibly smart person, but the type of smart person who didn’t relate very well to less smart people.  He has been on over 10 game shows and won a great deal of money from them.

I have previously written about things that should be mandatory for every college senior to learn (My Mandatory Class Proposal) and this series is about what Dr. Chucky rushed through on the last day of class when he handed out a sheet with many jumbled and incomplete sentences.  The thoughts were broken into 5 different categories.  We then talked about a 6th.  I will try and decode his thoughts in this series. 

Purchases:

1.  “1 hour search/study for each $1000 purchase”       

 What I believe he is saying here is don’t sweat the small stuff.  I write a great deal about frugality, and how I’m a bargain hunter, but usually what happens to me is that I over-research items and I don’t value my time enough.  If you spend 8 hours trying to figure out how to save 10% on a $1000 purchase is it really worth the time?   On the other hand, if you spend 20 hours researching a car and how to buy one it is probably a better use of time.  Or if you are looking to buy a house, spend as much time as you can, I don’t know if it’s possible to over-research a $200+ thousand purchase.

2.  “Think of all purchases in annual terms”       

 We live in a society that looks at things as “how much per month” without looking at the entire picture.  Sometimes it’s easier to finance things (not recommended) but we need to look at a bigger picture than just monthly, so look at how much you’ll be paying every year.  That should open your eyes, especially if you start to think about how much of that is interest and how much is principal.  Then look at how much you’ll be paying over the life of the loan…is it worth it?

 3. “Autos: go to fleet manager or internet managers”       

 Car salesmen are the pawns of the dealerships, the more they get you to pay, the more money they get.  Fleet/Internet Managers run the show.  They don’t get paid based on how much you pay, they get paid based on inventory turnover.  They don’t like to deal with haggling, they just want to get you in a car and out the door.  Mary and I did this when we bought our Volvo, it was a great experience, we got it for a great price, and we didn’t even need to haggle.  The internet manager agreed on our price, though the sales manager was royally pissed off (we heard him yelling at the internet manager).

 4. “Insurance, higher deductibles will lower premium rates”       

This pretty much speaks for itself.  Some people may say “but then I have to pay more if something happens,” true, but if you took the difference between the more expensive monthly payment, and the less expensive monthly payment you could be adding that difference to your emergency fund and earning interest on it in the meantime.  Pretty soon you’ll have saved enough to pay a higher deductible if something were to happen, and the rest is just more money saved.

 5. “Live below your means, save on : yard, car wash, cable TV, tipping”       

In other words, live below your means and don’t mindlessly spend.  There are plenty of luxuries that most people consider staples, Cable TV being at the forefront.  If you look for places to make cuts, you will find them.  You can wash your own car, you can take care of your own yard, and you don’t have to be known as a “big tipper.”

 6. “House purchase: Multiple Listing Service add-ons”      

  While I normally probably wouldn’t be able to decode this, I did jot down what he was talking about.  Multiple Listing Service (MLS) is the service that real estate agents use to search for houses.  What he meant by add-ons is to go to your real estate agents office early in the morning and map out which of the houses added to the list that morning you will go look at.  He was a big advocate of buy the cheapest/worst house on the best block, and he recommended that this was the only way to get it before someone trying to turn a profit by flipping it would.  Mary and I discovered that this really is the best way to do it.  When we were looking at houses we went by one that we really liked, on the day it was listed.  It was listed for what our agent believed was below market value, and the next day a contract was in on it for full asking price.  Two months later, it had been flipped and was back on the market for $100k more.

7.  “$1,000/month rent, buys a ~ $360,000 home after tax @ 5%”      

 This is one that I really can’t fully decode.  I believe he is essentially saying don’t throw away money on rent when you could be buying a house, but his math seems to be off.  By my math $1000/month buys a $225,000 house at 5% interest, if you put 20% down.  If you paid $1500 a month on mortgage you could do a $360,000 home after 20% down.  As someone in the process of buying/building a house, I’m still torn on the whole rent vs. buy thing.  There are tons of pros and cons to each, but I’m happy with our decision.  

As you can see, in Dr. Chucky’s list of incomplete sentences and thoughts on personal finances there is some great wealth of advice just waiting to be decoded and understood.  Stay tuned for more!

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3 responses

21 03 2008
Bank charges

Hi,
Its really fantastic to read this kind of the post .This is really a good creation . This is really awesome .I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale. .
.. Thanks.

22 03 2008
Ron

These are some GREAT tips. I’m including your article in my Roundup for the week!

22 03 2008
Roundup and Link Love - Spring 2008 Edition | The Wisdom Journal

[…] and Frugal has life tips my finance professor taught me. These are great. Here’s a peek–do one hour of research for every $1,000 spent on an […]

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