Rule # 7: Spend within your means

RULE # 7

This rule came straight out of Dave Chilton’s The Wealthy Barber Returns in his chapter “Under House Arrest.”  Some of us think we have to keep up with the Joneses by purchasing more and purchasing better things. This is also apparent with major purchases- purchasing homes and purchasing furnishings. A lot of students are now thinking about buying their first home if not right after they graduate, but in a couple of years, so it’s important to address this issue.

Buy something you can afford. Perhaps you have been saving for a down payment for a couple of years now and you are thinking about buying your first home. Remember, your first home is often not your dream home, so keep that in mind when you’re in the market. Monthly payments should be affordable and should not prevent you from taking a week or two off of work to spend time with family or to go on a vacation.  Think about the lifestyle you will have when you commit to making large monthly payments.

Beware of handy-man specials. These “deals” can be tricky. The price of handy-man homes is often affordable for new graduates, but long-term – maybe not.  Before you purchase a handy-man special, think about the money it needs for repairs.  Conduct a cost sheet by going to the local hardware store and looking at prices for new floors, kitchen cabinets, bathroom tubs and toilets. Secondly, if you can’t do the work yourself, get a professional quote, maybe have a contractor come with you to tell you the overall price for repairs. Handy-man specials look affordable, but think about the cost once you have implemented repairs and renovations.

RULE #6: Don’t finance anything with depreciating value

RULE # 7

For many of us, financing tends  looks like an attractive option. We think that because the financing option is spread out over a long period of time, we will inevitably be able to afford our purchase.

This may be true; many of us could only buy a new car if we put a down payment on the vehicle, and then make monthly payments towards the principle. Makes sense, right? Wrong. Financing may look more affordable, but we have to look into whether or not these assets are appreciating or depreciating in value.

If you are financing something that is depreciating in value, then you better think wisely as to whether your purchase is worth it.

Think about it this way:

If I were to buy a new car straight from the dealership, the value of the vehicle would depreciate the moment I took it off the lot. If I made low monthly payments for five years, I would finally own the vehicle outright, and I would be finished making payments. But, here’s the crux: what would the vehicle be worth once I actually own it? The answer is that the vehicle would inevitably be worth much less than I had originally purchased it for. (To find out the depreciating value of Canadian vehicles, check out http://www.canadianblackbook.com )

Just some food for thought - think long term when financing assets that are depreciating in value.  

Rule # 5: Debt is the enemy

Debt is the one thing many students have in common; some of my friends have accumulated 20,000; 30,000; and up to 60,000 dollars-worth of debt. It is not uncommon to have racked up absurd amounts of debt to pay for school and living expenses while you are getting your formal education.

One of my former professors, a part-time faculty member at Western University, is a high-achiever in academia; she has a master’s degree from Harvard, and is a PhD candidate. She diligently warned her students against accumulating too much debt. Despite her competitive edge and her Ivy League education, she was and is unable to secure a full-time position as a faculty member. My former professor was a living example of how investing in a superior education doesn’t always have a good return.

But that’s not all. Most post-secondary students are in the same boat. Many of us have been brought-up to think that investing in a formal education will provide us with a great return on our money. We are confident that when we are finished school we will get a job; we believe that one day we will make enough money to pay off our student loans in a couple of years, live a comfortable life and retire. But this wide-spread conception of formal education has proven to be nothing more than a myth.

Post-secondary education is a prerequisite for many jobs: if you don’t have a degree then the job candidate who does is more likely to obtain a position, but the job market is flooded with university graduates and competition is high. It is a truly a no-win situation – there are more graduates than there are available jobs.  What does this mean? It means that investing in education to gain a better position, earn more money and, as a result, more security is a far-fetched ideal that will only be attained by a minority of post-secondary graduates.

The solution? Avoid student debt entirely by pursuing trades, apprenticeships and entrepreneurship. Trades and apprenticeship programs are often paid-positions and are either fully or partially funded by the government. If apprenticeships or trades don’t tickle your fancy, then get creative. Try saving enough money to start your own business and start earning your own revenue.

 Perhaps many of us have already accumulated massive debts, but throughout our search to get a job, it is important to keep these viable options in mind if we are not able to find employment in our fields.  

RULE # 4: Be aware of marketing strategies and common portrayals

 

Just because it’s on sale doesn’t mean you have to have to buy it. Sales are tricky and most of us are sucked in by product marketing. Do demonstrate this, I will provide a brief list of product pricing and marketing strategies that get us every time.

99 cent pricing

Product pricing is not just arbitrarily putting a cost and value on a particular item; instead it is more of a psychologically proven activity. Some strategies simply work for getting us to purchase things, and .99 cent pricing  is a good example. When companies are competing for customer purchases, many businesses earn higher revenue from putting .99 in the right hand digits of pricing figures. The example Mark Stiving uses in his article “Why 99 is the magic number for product pricing,” demonstrates two companies selling bicycle tires at a similar price point.  One company sold its tires at $4.94 per unit, and the other $4.99. The company who charged five cents more sold significantly more tires and earned a higher profit.

Be aware to this type of marketing - it might help you save some money. Buy products based on its performance, durability and longevity rather than its price.

One, Two, Three-for-One, Two, Three

Many companies employ the buy one get one, buy two get one, buy one get two, buy three get one, strategy to trick us into buying more. We’ve all been a victim to this one! We end up spending sometimes three times more than what we initially wanted, or intended to spend because we think we are saving money. 

To prevent being sucked in by these strategies, do a little checklist: do I need this? was I in the market for this product? am I saving? or am I just buying more?

Seeing isn’t Always Believing

Businesses pay big bucks for their products to show up in magazines, newspapers, TV, radio and online. Products that are commonly advertised on mainstream media outlets generally depict just one opinion, which usually shines the product in a positive light. If we were shown all of the negative opinions of the product in question, we would probably be less likely to want to buy them. That is- instead of a company selecting only positive testimonials, they would demonstrate positive and negative reviews of a product; then customers would probably be less likely to buy them.

So next time you see an ad, be aware that the reviews have been carefully selected to reflect only one, usually positive, opinion.

RULE # 3: Don’t buy something you don’t need

When a new product comes out, we often think that our lives are incomplete without. We become entranced with new products, and then we start to think “how could I function without this smartphone?” “how could I travel without my GPS?” or “I just wouldn’t have felt myself if I wore that dingy old thing one more time. I’m glad I bought this new one.”

Annie Leonard, author of The Story of Stuff, suggests that we are all (by "all," I mean North Americans) victims of a phenomenon called “perceived obsolescence.” Perceived obsolescence is when we think we need something to be in sync with the crowd, but it is really just falling for the latest trend. Perceived obsolescence is the addition of that new, shiny, chrome button on your blouse when last season’s in-style metal for buttons was gold, and we “gotta have it”. It is the difference in shoe length for men - yes, the longer and pointier shoe - because we all know that makes their feet look bigger, and men just want their feet to look bigger!  But are their feet really bigger?  I think we all know the answer to that.

Many of us believe we will be better humans for succumbing to the pressures of magazine ads and human-mannequins that flaunt the latest fashions. It is subconsciously drilled into our brains that those who do succumb to this pressure become “more than human” because their newest technology allows them to do things no other human could. As a culture, it is pretty common to shudder with disgust at the prospect of “old” in preference for “new.” But this mentality does not benefit us as consumers, it drains our pockets! Perceived obsolescence is really a mentality that renders us all slaves to the market, instead of becoming free agents of our own lives.

Really, I know it seems simple, but again, I reiterate: don’t buy something you just don’t need. I mean, do you really need it? or do you just think you do?

RULE # 2: Think about hours earned vs. hours spent

We all have different schedules; many of us earn different amounts of money, but we all have to think about the same thing: when we want to purchase something, we have to think about how many hours it took us to pay for the product we want to buy. 

Thinking about your purchase in terms of how many hours it took you to earn your money is a good way to prevent impulsive purchases. I’m not a mathematician by any means, but when I go to the store and I want a new purse or pair of shoes, I do a simple calculation. The shoes are $80.00 plus 13% HST (in Ontario, Canada), so the total cost will come to about $90.00. But how long did I have to work to pay for those? 

Hypothetically, if I was making minimum wage ($10.25 per hour in Ontario), which is a typical wage for students, it would take me over a day to pay for those shoes.

Here’s a detailed breakdown: 

Hours worked: 9.75 @ $ 10.25	$    99.93
Income tax (9.9%)	- $      9.89
CPP (4.95%)	-$      4.94
EI (1.88%)	-$      1.87
Total:	$    83.23

Based on annual incomes ranging from $20,000 - $40,000. Deduction rates have been acquired from the government of Canada website, http://www.cra-arc.gc.ca. This chart is illustrative and is not intended to replace professional advice.

As a student, each and every day counts. We are busy people and often have many expenses including tuition, rent and a long list of other bills. So think long and hard, and ask yourself some important questions: is this purchase worth it? will it set me behind on my payment schedule? or have I already saved enough for this expense? 

If you have been a diligent saver, then go ahead – treat yourself and don’t delay any longer. But if you have been struggling to keep up with your obligations and you’ve been living paycheque to paycheque - just save a little more, wait for the product to go on sale and then make your purchase then. Patience, as they say, is a virtue.

RULE # 1: Don’t spend money you don’t have

I thought I would start off with the most basic, yet one of the most fundamental principles: don’t spend money you don’t have. This advice was given to me when I was young and has served me well throughout the years. Even though this principle is so basic, not everyone abides by it.

If you don’t have cash for something- don’t buy it. It’s that simple.  In other words, even though you have a $500; $1,000; $4,000 or $10,000 dollar limit on your credit card, this does not mean that you actually have that money.

Abandon the mentality that leads you astray; the one where you convince yourself that you will pay yourself back later – this is not a good way to get yourself ahead. If you’re burning to have that new item, whether it is the latest technology, or the newest accessory - then you better start saving.

This rule is not intended to deprive you of your goodies; it is meant to empower your pocketbook! Skip the interest payments and pay cash; your purchase will be more affordable in the long run. Recite this to yourself 10 times: I will not spend money I don't have.

Why this blog?

In the weeks to come, I will be posting 10 “rules” on how to be more financially responsible. My blog is intended to help us become smarter about how we spend our money.

I didn’t come up with all of this advice by myself, but I have listened to some wise people – namely, my father, Stephen Pope, who is a certified stock broker and successful entrepreneur, and Dave Chilton, author of The Wealthy Barber and The Wealthy Barber Returns. I have used these strategies myself, and to my surprise – they actually work.

 You never know when you’ll encounter a rainy day, so it is best to start saving and plan to succeed financially no matter what curve balls life throws at you. Knowing you have some cash will definitely reduce stress and give you some incentive to save for things that really matter to you.

This discussion is informative, and may not be appropriate for all situations. If you have different advice that has worked for you, please share. Remember, the goal here is to equip ourselves with the knowledge  we need to be in control of our own hard-earned money!