Chess vs. Checkers
A friend recently saved up about $35,000 to purchase a vehicle. He knew what he wanted, educated himself, and walked into the dealership armed with the information to buy a slightly used vehicle. The plan was made, and now it was time to execute!
I called him a few days later. "How did it go?!?! Did you get what you wanted?"
"I ended up with an even better deal!"
Oh man, I was dying to hear more. I was proud of him for nailing this one. After all, he had worked so hard to save that cash. Then, he shared the story......
He walked in with a plan to pay $35,000 in cash for a 3-year-old model he had his eyes on, but walked out with a brand-new model with a $52,000 price tag. What?!?! Wait, where's the better deal? "They offered me 1.95% for a 72-month loan.....that's practically free money! I make much more than that on my high-yield savings, so I'm actually making money on the deal."
Here's how he framed it:
If he had paid cash, it would have cost him $52,000.
With a $765 loan payment for 72 months, it would cost him only $55,000 over 6 years. Just $3,000 more for the privilege of stringing it out for 6 years.
Now, he can keep his $35,000 in his high-yield savings account. At 3.5% interest, he'll make $1,200 per year, or $8,600 over the next 6 years.
$8,600 of interest earned minus $3,000 of interest paid = He's coming out +$5,600 on the deal. Boom!
He couldn't have been more excited. He felt like he just won the game. However, I don't think he's looking at this through the proper lens. He didn't come out $5,600 better on the deal. He walked in hoping to spend $35,000 on a vehicle and walked out committed to spending $55,000. That feels more like spending $20,000 MORE than planned.
Further, he now has to tell his wife that he just signed up for a $765/month vehicle payment just one year after promising each other they wouldn't go back to playing the debt game (after grinding their way out of the last one). As he put it, adding $765/month to the monthly budget won't be simple, "but the deal was too good to pass up."
He thought he won, but he was playing checkers while the dealership was playing chess. The salesperson knew which buttons to push, and thoroughly pushed them.
Here's the thing. My buddy is a smart dude. In fact, I'd dare call him brilliant in many ways. He has a truly gifted mind, and he's tremendously successful at his craft. However, he's also human. He's not immune to the psychological games being played on us on a daily basis.
It's so easy to get played. We think we're winning, but we're playing checkers while the person on the other end is busy playing chess. We need to be mindful. And in the world of personal finance, debt is often used as a creative tool for the chess player.
Stay vigilant, my friends! These are winnable battles, for sure, but we must keep our wits about us as we navigate this world of finance. One day, one decision at a time. You got this!
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