The other day a friend of mine approached me excitedly, saying, “I found the house of my dreams. It's in foreclosure and the bank will sell it to me for a great price.”
“How good is the price?” I asked.
“Just before the real estate market crashed, the seller was asking $780,000 for the property. Today, I can buy it from the bank for $215,000. What do you think?” she asked.
“How would I know?” I replied. “All you've given me is the price.”
“Yes!” she squealed. “Now my husband and I can afford it.”
“Only cheap people buy on price,” I replied. “Just because something is cheap doesn't mean it's worth the cost.”
I then explained to her one of my most basic money principles: I buy value. I will pay more for value. If I don't like the price, I simply pass. If the seller wants to sell, he will come back with a better price. I let him tell me what he will accept. I know some people love to haggle; personally, I don't. If a person wants to sell, they will sell. If I feel what I am buying is of value, I'll pay the price. Value rather than price has made me rich.
Against my advice, my friend sought financing for her “dream” home.
Fortunately, the bank turned her down. The house was on a busy street in a deteriorating neighborhood. The high school four blocks away was one of the most dangerous schools in the city. Her son and daughter would either have to go to private school or take karate lessons. She is now looking for a cheaper house to buy and has asked her father, who is retired, for help with the down payment. If her past is a crystal ball to her future, she will likely always be cheap and poor, even though she is a good, kind, educated, hard-working person.
My Point of View
What follows are some thoughts on why my friend will probably never get ahead financially — especially in this market.
- She and her husband have college degrees but zero financial education. Even worse, neither plans to attend any investment classes. Choosing to remain financially uneducated has caused them to miss out on the greatest bull and bear markets in history. As my rich dad often said, “What you don't know keeps you poor.”
- She is too emotional. In the world of money and investing, you must learn to control your emotions. When you think about it, three of our biggest financial decisions in life are made at times of peak emotional excitement: deciding to get married, buying a home, and having kids.My dad often said, “High emotions, low intelligence.” To be rich, you need to see the good and the bad, the short- and long-term consequences of your decisions. Obviously, this is easier said than done, but it's key to building wealth.
- She doesn't know the difference between advice from rich people and advice from sales people. Most people get their financial advice from the latter — people who profit even if you lose. One reason why financial education is so important is because it helps you know the difference between good and bad advice.
As the current crisis demonstrates, our schools teach very little about money management. Millions of people are living in fear because they followed conventional wisdom: Go to school, get a job, work hard, save money, buy a house, get out of debt, and invest for the long term in a well-diversified portfolio of mutual funds. Many people who followed this financial prescription are not sleeping at night. They need a new plan. Had they sought out a little financial education, they might not be entangled in this mess.