Financial Peace University Part 4 – How to be a smart consumer

ConsumerIn part four of the Financial Peace University I’ll cover week 9 titled “Buyer Beware.”

Week 9 Buyer Beware

Dave Ramsey talks about how marketing affects behavior and subsequently debt levels. Some of the information about how companies use marketing to entice consumers is interesting but I somewhat question the usefulness on a practical level. Simply knowing the tactics companies are using doesn’t mean you’ll be immune to their effect.

Beware of marketing tactics

Here are some examples Dave uses:

  • The number of daily marketing impressions the average person is exposed to has increased from 500 in 1971 to over 4,000 today. I believe it. In today’s multimedia culture, particularly with the internet, we are exposed almost constantly.
  • More than half the GDP consists of consumption spending.
  • Dave outlines the ways we’re sold to, including
    1. Personal selling – Sales materials are increasingly customized and personal. By using database technologies, companies often have much information on potential buyers and are able to target individual needs.
    2. Financing – Many businesses provide lines of credit or other forms of financing. In fact, some businesses make more money from financing than they do on actual consumer goods sales. I shouldn’t even need to mention that it’s a mistake to buy consumer goods with borrowed money.
    3. Repetition – This one is self explanatory. This one is self explanatory.
    4. Product positioning – Ever noticed the ice cold drinks displayed prominently in the store on a blistering hot day? Large companies are very savvy and do extensive research to determine the best way to position products in a store.

Again, I found this information useful but not incredibly useful or practical. There are many ways companies market that Dave left out. In fact, I currently run the marketing for a multi-million dollar internet company and am very familiar with many additional sophisticated marketing techniques. For example, a techniques called means-end laddering identifies the high-level personal benefits and values of consumers and emotionally ties the products features to them. Statistical clustering allows marketers to profile certain market segments in great detail and can effectively predict how certain segments will react to products. Conjoint analysis allows marketers to predict how much more a consumer will pay for a product given a tweak in the features of the product (e.g. gel vs. paste consistency in toothpaste).

Although marketers use these techniques, they are not necessarily bad. While they can be used for evil purposes, for the most part they can actually benefit the consumer. Using such tools, companies can create products that more fully meet consumer preferences. As a result, the consumer’s quality of living increases over time.

How to save on big purchases

On the more practical side, Dave gives a few very good tips for spending less, particularly on large purchases.

  1. Wait over night before making a large purchase (being defined as $300 to $1,000 depending on how much money you make). Many of the large, multi-hundred dollar purchases people make are surprisingly impulse purchases. This happens particularly when people receive large lump sums of money such as a bonus. They go on a shopping spree and before they know it have spent the money on things they may not care that much about. The simple act of waiting overnight to make the purchase will deter most frivolous impulse purchases. Once the excitement of the moment has worn off, your brain actually thinks about it and realizes you’d rather spend the money elsewhere or even save it.
  2. Understand the difference between needs and wants. You don’t need the wide screen 60″ LCD TV. You might really, really, really want it, but you don’t need it. Your needs are food, shelter, clothing, and transportation.
  3. Never buy anything you don’t understand. If the sales person can’t explain it in terms you understand, don’t buy it. Buying things you don’t understand inevitably will cause you to buy something that doesn’t really fit your needs.
  4. Consider the opportunity costs (what else could you do with the money). Opportunity cost is an economic term defined as the most valuable foregone alternative. Put in layman’s terms, what else could you do with your money? For example, if you spend $1,000 on the TV, what will you not be able to buy with that $1,000? Maybe there’s something else on your list of wants that you’d rather have even more. I frequently experience regret from buying several smaller items and realizing later that I could have saved that money to buy a bigger item that I want significantly more than the smaller ones.
  5. Seek the counsel of your spouse. As painful as it may be, two minds are better, or at least more reasonable, than one. Unless you are spending personal money, you should consult your spouse on all major purchases anyway. A spouse can offer a different perspective and can often bring to your attention other uses for the funds or other alternatives that may meet your needs at a lower cost.

Posted in Dave Ramsey, Shopping, Spending | 3 Comments »

3 Comments to “Financial Peace University Part 4 – How to be a smart consumer”

  1. chris Says:

    I co-ordinate Financial Peace at my church.

    I agree that to a sophisticated marketer, the program would be amatuerish. But, most of the people who have been in my classes, the elementary information is an eye openner.

    There are many areas that I think Dave is very shallow in his presentation. I’m not saying that as a fault. His information for the masses and any effort at more depth would probably be not time appropriate or mass audience appropriate.

    Yes, I would love to see him get more in depth with a lot of his topics and have sent emails that have requested additional writings from his perspective on a variety of topics.

    Finally, one of the benefits of FPU is there often is someone in attendance who can shine additional light on a topic for other class members.

  2. Silvia Says:

    “Your needs are food, shelter, clothing, and transportation.” I would add: health and education.


  3. sjpeer Says:

    Chris, I agree that Dave’s information on marketing can be an eye opener. It is definitely interesting to know what tactics are used to make us open our wallets. My complaint isn’t that he didn’t get into more advanced techniques but simply that I’m not sure the information is useful in terms of decreasing spending. On the other hand, I suppose that anything that might cause us to pause and think a little before purchasing could have practical implications.

    Silvia, I agree that health and education are vital. Food, shelter, clothing, and transportation are the four needs that Dave advocates. He calls them the “four walls.” His point is that you should budget for those for items first before anything else.


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