Tuesday, May 26, 2015

Financial Mistakes Are Forever...

When you make a financial mistake, there is usually no "do over" or way to fix it.   The best you can hope for is to learn from the mistake and move on.   Expensive lessons!

One popular trope on situation comedy television is to have an episode where a main character goes out and buys a fancy car.   They then realize it was a mistake and "take the car back" and get their money back.  GLEE! for example, used this in one episode, where the Mr. Shuester buys a new Corvette to impress his girlfriend, and then realizes it was an expensive mistake and "takes it back" and they even give him his old car back in the deal.

Nice fantasy.  In reality, well, things are different.  Financial mistakes often cannot be unwound and set right.   You take a hit and you are hit for life.   And that is one reason why buyer's remorse is so strong.   People buy big-ticket items and then realize they have squandered a large amount of the finite amount of money they will ever earn in their lifetimes and they get upset.  Very upset.

With cars of course, there is no "taking back" a brand-new car to a dealer.   Once you buy it, it is a used car, worth 10-20% less than what you paid for it.   If you decide you don't like it, your only option is to sell it, or try to trade it back in.  Either way, you are out thousands and thousands of dollars.

For some smaller items, it may be possible to "take it back" if a store offers a return policy for unused or undamaged items.

But other items in your life, like home appliances, or expensive vacations, often cannot be returned.   If you buy an expensive washing machine or refrigerator, you generally can't return them, unless they are defective.

For example, a friend remodels a house.   After reading a copy of Fancy Home Magazine they decide to buy a "built-in" refrigerator that has drawers that look like cabinet drawers.   It is really cool looking to be sure, but it costs $10,000.   Is that a lot of money?  Well, if you are a millionaire, it is 1% of your net worth.   Doesn't sound like a lot, but bear in mind you only get 100 of those 1%'s.   And to me, 100 is not a large number.  I can count that high. That's how many times I shake a Martini shaker before serving (I lie, actually 200).   It is a big chunk of change even for someone with a net worth of over a million bucks.

So the friend blows the bucks on the fridge.   It is a done deal, and now they complain they are "broke".   Well, guess what?  You can't rip out that fridge and sell it and get your money back.  You cannot unwind that financial deal.   All you can do is live with the fancy fridge and hope it provides you with $10,000 worth of intimidating your neighbors.

Oh, and you have to pay for all the service calls and maintenance that such esoteric high-end appliances usually require.  My neighbor had a Sub-Zero built-in, and she kidded me that the repair guy was now living in their basement.

On the other hand, the basic refrigerator can be had for under $1,000 and usually never needs service, other than cleaning.  After 15 years you throw it away and start over.   And no, a $10,000 refrigerator does not last ten times as long (150 years, no).

We all make financial mistakes of one sort or another.  There are cars we wish we didn't buy, and maybe clothing that didn't last long or fit well or look good.   There are bad meals we paid too much for in restaurants.   It happens to all of us.   And rarely can you unwind these deals and start over again.   You make a financial mistake, you usually have to live with it for life.

I talk a lot here about the 4th dimension of money - time.   Money over time is a powerful concept and yet it eludes most people.   The lady with the $10,000 refrigerator thinks, "Well, I've already paid for it, so that's that!"  And to some extent this is true.  But it is also true that the entire transaction cost of the refrigerator is easily ten times what it should have been.

You see, appliances, cars, houses, and everything else we own is destined to fail, break, wear out, or go hopelessly out of style (or with electronics, be obsolete or incompatible with new formats) in 15 years max (for electronics, maybe five, particularly Apple products).   When you buy a car or a house or anything, it is tempting (when you are younger) to think, "Well, I have this thing now, and I am now set for life!"

But as you get older, you realize that "things" in your life are very ephemeral.  They pass through your hands in short order, and you end up acquiring new things to replace them.   Cars, clothes, appliances, houses, whatever.   Nothing lasts forever.   And please don't say otherwise, because the cost of rebuilding things eventually exceeds the cost of replacement.

So, to an older person, the purchase of an appliance appears somewhat different than to a younger person.   You look at it as a 15-year relationship, and that over your lifetime, you will be forced to buy a number of these appliances, wear them out, and then buy new ones.   When you needlessly multiply this cost by a factor of 2, 5, or 10, well, you are not necessarily getting 2x, 5x, or 10x life service in return, or even a 2x, 5x, or 10x better "experience".

For example, while I enjoyed owning BMWs over the years, I realize that the cost of these vehicles is very high, and the cost of maintenance and even basic service is often 2x, 5x, or even 10x that of a lesser car.   The problem is, they don't last even twice as long.   In fact, in terms of longevity, some Japanese car is going to yield a longer service life with less maintenance at a far lower cost.

But what about the experience?  Isn't it worth it to have "the ultimate driving machine?"   Maybe in the past, when most "normal" cars handled horribly and rode like buckboards.   Today, well, yes a BMW handles better, but not 2x, 5x, or 10x better than some econobox.   And let's face it, on legal city streets, you aren't going to drive like a LeMans driver - or at least you shouldn't be.

So you can spend twice as much and not get twice as much in terms of service life or user experience.   And once you pull the trigger on a big-ticket purchase like that, well, you can't extract your money back out, unwind the transaction, or otherwise undo the deal.   You've spent X dollars on an item, and that leaves you with Y-X dollars, where Y is your lifetime income, which indeed is a finite number.  No, you can't just go out and "earn more money" even if you wanted to.

So, if you buy a pair of brand-new jet skis and then use them once and let them rot, that's a huge financial mistake.   And you laugh, it happens more often than you think.   I recounted the tail of the dental hygienist who bought a boat at a boat show, used it once, decided they didn't like boating, and then let it sit in the driveway, un-winterized, for several years - unable to sell it because they owed more on the loan that it was worth, compounded by a cracked engine block and a hull full of water and algae.

You really have to think through big-ticket items like this, if you are a middle-class person.   Yes, it is nice and fun to have nice things and all, but then again, if you spend money willy-nilly, you may run out.  And that could be a disaster when you get older.

So you went and bought a motorhome on a 20 year loan and decide you hate RVing.  Or you spend way too much money on a leased Acura, and now regret not buying outright, a secondhand Honda for the same amount.   What can you do about it?

Well, nothing.   Except for one thing.   And that one thing is to confront yourself over the matter, realize you made a mistake (instead of externalizing by blaming the dealer or manufacturer or the loan company) and then learn from the experience.   If you can do this, then the tens of thousands of dollars you spent at least provides you with an education - and painful learning experience that will stick in your brain for life.

And painful lessons are the ones we most remember.