Monday, November 9, 2009

That's where they getcha

In a capitalist society, every transaction is about the markup. The providers of goods and services want to charge as much above their cost as they can to make a profit. The consumers want to bargain that down as much as they can.

We accept a certain amount of markup as the cost of doing business, of living our lives. But we may feel taken advantage of when there are extenuating circumstances. When our emotions get in the way, we are vulnerable to not making rational decisions, and a cool, calm businessman is more than happy to step in.

Here are two times when you may want to step back and not let your emotions get the best of you. Or you may feel that the emotional value in the situations is too much, and you don't mind paying the premium.


Funerals are bad business all around, and they are also a fact of life. Grieving, upset families are forced to make decisions they don't want to be making while they try to deal with the loss. It's the ultimate time when emotions can cloud rational judgment.

First, the family probably just plain isn't in the mood to bargain or dicker. Second, there's an intense need to feel like they are doing *something* to make this better, and paying a lot for the funeral can feel like it is that something.

Funeral homes know that, and while they aren't being evil, they are being a business when they charge an arm and a leg. The ordinary markup on a casket is anywhere from 300 to 500 percent of cost. That's supply and demand, but should we really be willing to demand at that cost?

The solution? Plan ahead with your loved ones. Know their wishes and make sure they know yours, so that you can each have peace of mind when the time comes that you are doing right by your loved one. Even better, pay for it in advance. That's usually better than waiting until the last minute.

If you feel that you want an expensive funeral, that's fine. But if you don't, make sure your family knows now.


I have personal experience with this right now, having a 9.5 week old son sitting next to me as I type this. I simply cannot believe what people will pay for infant products.

Actually, I can believe it. The day after the ultrasound told us we were having a boy, and thus the little baby in there had a name to go with the idea, I was walking through the baby section at Wal-Mart. I was practically overwhelmed with the desire to have everything I saw. For him! How could I let a little money stand in the way of my son having anything? Every toy might be the difference between a properly stimulated brain and a lifetime of dullery! Every safety device might save his life! Cost meant nothing!

I snapped out of it.

Babies need security and attention from human beings more than anything else, and those are free. Not to mention that they grow out of needing most basic equipment so quickly that the secondary market is absolutely flooded.

Don't let cold, calculating businesses prey on your emotions. When you feel the least urge to consider the cost, that's probably when you should be doing it the most.

Sunday, November 1, 2009

There is no good debt, or is there?

One of the interesting facets of sports is the issue of belief. When an athlete goes steps onto the field, it is absolutely vital for them to believe they can do what needs to be done. That they can win, that they can beat the other guy. It's this belief that allows them to do their best, even when their best may well not be good enough.

Humans are funny that way. What's best for us to believe isn't always the truth.

So should we believe in good debt?

Debt is the ultimate complication, the antithesis of minimalism. It trades instant gratification for long-term commitments, commitments we may decide later we don't want to meet, but are forced to.

For a long time, the common understanding has been that there is such a thing as "good debt." The most commonly cited are mortgages and student loans.

Mortgages are theoretically good debt because they allow you to begin building equity in a home rather than paying rent that you never get back.

Student loans are theoretically good debt because they allow you to significantly increase your earnings potential

The problem is that the circumstances in which those are beneficial are narrow, but the concepts open the door to bigger problems.

A mortgage for a small home that can be easily afforded might be a good debt. But it opens up the door to rationalization. Given the chance, people will bend their thought process toward the result they want to reach. If they want to buy a house and a mortgage is the only way to do it, they'll convince themselves that they need it and can afford it.

The idea of a mortgage as good debt is what allows people to convince themselves that it is okay to buy a much bigger house than they actually need, which can be a crippling financial mistake and lead to a lifetime of extra work and stress to pay for that extra space. "Can afford it" continues to be a tricky concept, because we tend to be optimistic by nature. It's not enough to be able to afford the mortgage payment in good times. What if you lose your job? What if you are forced to change careers? What if you are forced to take a lower-paying job in the same field? Could you afford your mortgage then, at least for as long as it might take to sell the house in a tough buyers' real-estate market (several years)? Buying only the true minimum amount of house that you actually need can free you from those concerns.

Student loans are even more nefarious. It's an oft-cited statistic that college graduates make, on average, more than $1 million more in their lifetimes than those who stop at high school.

That is a bad statistic.

It's comparing apples with a bag of mixed fruit, at best. All high-school degrees are more or less interchangeable. Having a "college degree" could mean anything from an associate's degree in English to a Ph.D. in engineering. If you take out advanced postgraduate degrees in medical, legal and engineering professions, there isn't a lot of difference in the earnings of high-school and college graduates.

College is getting more expensive each year. The cost of a four-year degree can range well into the six figures, and few students are going to get away with less than a $30,000 investment. On a 30-year student loan at 3 percent interest, the true cost is going to be 2.12 times as much as the money borrowed.

A non-productive college degree is a six-figure luxury. It's easy for a college student to insist that they just can't be happy in life if they don't major in music theory at the expensive school all their friends are going to. Ask them again in 20 years if they would have rather had a paid-off house, a few nice vacations and a retirement date a decade closer instead, and their answer might be different.

College is the most important and most complex financial decision anyone will be asked to make, and 18-year-olds are rarely equipped to make that decision.

Car loans are by far the worst. Yes, they seem to be a necessity in modern society, especially for some people's jobs. But the total cost of the loan is usually twice the original price of the car, and the car depreciates considerably and consistently. And few people ever buy the minimum amount of car they need. For a few thousand dollars, tops, anyone can find a reliable and serviceable used car. With patience and a willingness to hunt for deals, even $1,000 should be easily enough. If you can't save that up to buy a car without debt, then you can't really afford the car.

In the end, most of us are better off telling ourselves there is no good personal debt

Take a look at that chart above, courtsey NPR. For five decades Americans took on more and more household debt. We, in short, have a problem.

Yes, some drugs have medicinal purposes. Would you tell an addict we there's good morphine and bad morphine? No, you tell him to go cold turkey.

Most of us should be doing the same with debt.