Tuesday, September 29, 2009

Americans don't spend wisely


On Mondays (or sometimes on Tuesdays!) we post a question from a reader and an answer from Dan Danford. If you have a question for Dan, please post it in the comments section.

QUESTION: What would you say is the most common financial mistake among most Americans?

ANSWER FROM DAN DANFORD: This is really easy for me. Americans make bad decisions about spending. There's an old saying about people "knowing the cost of everything and the value of nothing." We buy stuff with little enduring value and wonder why we're always out of money. We could take examples at every salary level and find really bad ways that people spend money. They buy bad houses, cars, clothes, and electronics. And they lament that they "just can't get ahead."

A simple test could fix this. If every purchase decision was preceded by resale analysis, most bad decisions would be avoided. Before you buy something new, go to eBay and review what that same product is selling for used. Look up recently completed sales and you'll see the instant loss on that new item you covet. If it's a car, you'll see how much it depreciates. The same for televisions, telephones, and telescopes! You may choose to make that same purchase anyway, but at least you'll know what the decision is costing you. And what the true "value" of that product is ...

This isn't rocket science. If you have a fixed amount of money - all of us do - and you have to buy things with it, why not buy the best things? This really accomplishes two goals. First, you'll own things that retain value, and second, you can invest the money you save. Another thing, too, actually. You'll be light years ahead of your friends and neighbors who keep right on making bad decisions.

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