Dave Ramsey Financial Peace University Review: Week 6

This week’s lesson was about the power of marketing on our buying decisions. This was my favorite lesson so far. Being a finance/consumer nerd, this kind of stuff really interests me. Dave starts out by telling us that we live in the most marketed and advertised culture in the history of the world. It’s no secret that companies want your money and that many resort to deception and trickery to get it. Even when they aren’t resorting to sneaky tactics, they are bombarding you with ads to get you to buy their products. Some statistics that Dave threw out:

• The average person is exposed to 3,000 – 4,000 ads per day through radio, TV, billboards, flyers, etc. (This is up from 560 in 1971.)
• A child born today will see more than one million ads before they die.
• A Harvard study showed that people spend an extra $200 per year per hour of TV they watch. Now, I’ve read this study and I don’t know if Dave just interpreted it wrong or left the stat hanging like that for the scare factor, but think about this. If you watched four hours of TV a night (which is the average) every night for a year, you would spend an extra $800 per day, $5,600 per week, or $291,200 per year if this were true. I’m pretty sure that even the most dedicated spenders would have trouble making that mark, unless your last name is Trump.

The study comes from Juliet Schor’s book, “The Overspent American.” What she’s actually referring to is the number of hours you spend watching TV beyond the average. So if the average is four hours a night and you are watching five, it’s not the four hours that costs you $200, it’s that extra one. So an extra seven hours of TV for one week (or a total of five hours per night) costs you $1,400 per year. If you only watch an extra hour once per week for the fifty-two weeks in a year, you would tack on $10,400 to your spending over the year. It sounds like a lot, but if you really think about it, probably not. If you watch HGTV and decide to make over your kitchen, that $10,000 is gone in a heartbeat. If you watch the Travel Channel and head to Greece, you can probably kiss $5,000 goodbye. If you watch a lot of celebrity shows or shows set in expensive locales with expensive wardrobes, you may try to keep up. Anyway, the point is that there is a direct correlation between television and your spending. Since the average household now has more TV’s than people, it’s something to think about.

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If you think advertising does not affect you, Dave read off some corporate jingles, some going back as far as the fifties, and asked the audience what products they were for. People knew every single one. We’ve been exposed to and assimilated the messages whether we made a conscious decision to pay attention or not.

Beyond TV, we are marketed to through personal selling, financing as a marketing tool, radio, Internet, and product positioning. Most of these are self explanatory, but I thought the discussion of financing as a marketing tool was interesting, given that in this class we’re supposed to be getting away from financing. Those same as cash, zero interest, and rent to own sales pitches are how financing becomes a marketing pitch. The problem is, Dave notes that 88% of those same as cash contracts convert to payments. The costs for no-interest financing are worked into the goods, meaning the price of your furniture goes up, even if you opt to pay cash. These companies aren’t giving away money. They’re getting it somewhere and if it’s not from interest, it’s by raising the prices of the stuff they sell. This is why, if you pay cash for a big ticket item, it’s in your interest to try to hagglethe price down. You don’t want to have to pay the premium for someone else’s same-as-cash offer.

Dave also talked a little about how companies study and target consumers. They watch us shop. They manipulate the way we travel through stores, they attract us with swanky packages or sex, they hit our eyes with the colors that we notice, they pay to have their goods put in the best locations, and on and on. Stores put things in the flyers that are not on sale, knowing that people will buy it just because it’s in the flyer. We, as consumers, are guinea pigs for the marketers. Whole industries have sprung up around monitoring and interpreting consumer behavior. It’s fascinating stuff and the more you know about what goes on behind the scenes, the better you become at ignoring it and even doing the opposite of what the marketers hope for.

Dave then moves on to talk about what happens to you when you make a significant purchase. He says that for most people this is anything over $300. In my house it’s more like $50. Your body actually undergoes physiological changes when confronted with a big purchase. Your pulse rate increases, your eyes dilate, you sweat a little, and your endorphins start racing. It’s like being on drugs. Buyer’s remorse is the state you find yourself in the next day, after the rush has faded. You wake up wondering what you just did. It’s actually a physiological process, not just a state of mind.

Dave talks about how, when he was selling real estate, he was taught to prepare people for buyer’s remorse. People were backing out of contracts in the days following a sale because the high faded and they realized they’d made a bad decision. So the head of the agency Dave worked for decided that all sales agents would talk to the buyers before the sale even closed about buyer’s remorse. They would paint it as normal and something to expect. Because the buyers then thought it was normal and they’d been prepared for it, they didn’t back out of the contracts. They just shrugged and said, “Yeah, they warned us this would happen.” Sneaky, but effective.

So what are we to do if every company is out to get our money? Dave offers five suggestions.

1. Wait overnight before making a purchase. Let the high fade before you decide.

2. Consider your motives for the purchase. Is it a need, or a want? Are you trying to buy someone’s love or fill some other void in your life?

3. Don’t buy anything you don’t understand.

4. Consider the opportunity cost of this purchase. In other words, if you buy this TV, you’ll have to give up future earnings on that money.

5. Seek the counsel of your spouse or, if you’re single, of someone you trust to tell you the truth and talk you down.

These are good ideas and I would add one more: Try to reduce the amount of ads you’re exposed to. Watch less TV. Listen to less radio. Don’t even look at the ads in a magazine. It’s hard, but the less marketing you’re exposed to, the less you’ll spend.

Our small group was back to full strength tonight and it was a good discussion. Everyone in the group is as fascinated as I am about this sneaky marketing stuff. We have a couple of people who work in retail who attested to what Dave said and talked about their companies’ sneaky practices. One talked about how companies advertise items that they know they have very few of and how employees are trained to sell pricier alternatives when people come in looking for the advertised items. Another talked about how items are advertised in the Sunday flyer, but they aren’t on sale. They’re just advertised at the regular price but people assume the flyer means a sale price.

Almost everyone in the room admitted that they would have a lot less debt if they had waited overnight on many purchases. Whether it was a boat, a motorcycle, or a TV, if they had waited they probably wouldn’t have bought it. Many people in the room had some form of buyer’s remorse and it wasn’t just because of the debt. Many people don’t use their purchases or even know what to do with them. It’s just waste. That led to a discussion of how we can ensure we enjoy what we buy. One idea was to save up for it so you appreciate it more. Another was to rent or borrow a similar item to see if you like it before buying your own. And another was to just buy fewer of everything so that what you do buy assumes more significance. All good thoughts.

Everyone in the group checked their credit reports last week. Most were shocked at the number and type of inaccuracies. One person was in the wrong job. Another was living at the wrong address. Another had what appeared to be the beginnings of identity theft. Another had a credit report over forty pages long with accounts for stores that weren’t even in business any longer. There’s a lot to be cleaned up in our class but most have already made a start.

We spent some time talking about other things like couponing, Angel Food Ministries, and price matching, which gave people some good ideas to help them get on track. These are the types of discussions I love: People trading ideas back and forth, people talking about their personal experiences, and everyone having a good time. It’s nights like these that make the class fun. Even if there were no Dave, just talking about finances from a personal perspective is fun for me.

Homework Roundup: This week we have to read a little bit and update our “Financial Snapshot.” This is a form that’s filled out at weeks 3, 6, 9, and 12 to track your progress along the baby steps and to give you an idea of how you’re doing in the class. Looking at my entries from week 3 and comparing them to week 6, I can see not much has changed. Since I started with no debt, those numbers remain the same. However, I am happy to see that under the “How much have you saved during the class,” I’ve increased my total by about $400 since week 3. This includes some miscellaneous income, some reduced insurance premiums, and other things like coupon savings, etc. I’m up to about $1,500 total for six weeks, although $800 of that was the tax refund. So I’m doing pretty good on the savings front. With or without the class I probably would have saved most of that money, but it’s nice to see it in black and white. (I don’t count the money I “saved” by doing the budget just yet because I’m still not certain that it’s really there.)

At week three I was not living on the envelope system. For week six, I did get to check off that I am living on the system. I documented my troubles with the system and how it works in the piece I wrote for Week 3. I’ve grudgingly adopted this system into my life because it’s homework, but after three weeks of using it, I’m no closer to loving it. It makes me nervous to carry a lot of cash around. On a day where I have to go to the gas station, the grocery store, and run other errands, I’m easily running around with $200-300 dollars in my purse. I feel like a mugging waiting to happen. I’m also resenting the loss of my credit card cash back. When I’m forking over cash at the grocery store, I’m thinking of the fact that my card doubles the cash rewards at the grocery store, so I’m losing money with each transaction. It kind of burns me.

That said, it was easy to figure out how much to put in each envelope; the budget showed me that number so it wasn’t a hard system to set up. (Even though I received the special Dave envelope system with my membership, I’m just using old junk mail envelopes. Since this system isn’t for me, I’m keeping the Dave envelopes pristine so I can give them to someone who really needs them. In other words, if you want to do the envelope system, don’t bother shelling out for Dave’s, just make your own.) The other thing about it that is easier is the record keeping. When I return home I don’t have to enter debit receipts into the checkbook, or credit card purchases into Quicken. I just toss everything back into the drawer and forget it.

There are some benefits to living on the envelope system and I can see how it makes someone more accountable and helps them stick to their budget. I can see how it can wean someone with a credit card problem off of the plastic. If you can be careful with the cash and really stick to the system, you should never go over your budget. However, I can report, having tried it, that it’s just not for me. I prefer not carrying wads of cash around all the time and I prefer to earn credit card rewards. I can go cash-only, I prefer not to.

We did get into a discussion about the envelopes in small group and another potential problem with the system was revealed. What happens if one spouse is using the system and the other spouse just refuses to do it? We have a couple that has this problem and they are having difficulty sticking to the system. The wife keeps taking cash out of the envelopes to cover purchases that her husband makes “outside the system.” Then they go over budget each month because he keeps driving the spending beyond what is in the envelopes. He says he’s trying to get better, but the exasperated look on the wife’s face tells me he’s not getting better fast enough. This isn’t a problem with the envelope system per se, but it is a problem if both spouses aren’t working the system. The system only works if everyone stays accountable to it. That’s true of any budgeting method.

This wasn’t a Dave assignment, but it’s one I want to try for giggles. I want to try to reduce the number of ads that I’m exposed to. That 3-4k statistic freaks me out. I’m going to try an experiment to try to reduce my advertising exposure. I watch very little TV, but I get magazines and newspapers. I do watch some TV and even things I rent on Netflix have ads built in through product placement and previews. I doubt any place is ad free, but I want to try to view fewer ads.

Finally, if you don’t have the time to attend the course yourself, consider buying the Dave Ramsey Financial Peace University DVD Home Study Kit (9 Week Course) 2012 Release. It sells for between $185.00 and under $200.00 on Amazon.com.

Next: Dave Ramsey Financial Peace University Review: Week Seven

This is a series of posts about what you will find in Dave Ramsey’s Financial Peace University course. You can find the previous posts here: week one — week two — week three — week four — week five