23 August 2012

4 Questions to Ask Before You Buy Something by Farnoosh Torabi!

Inspired Book

Worth the money?

I recently read a great book by Farnoosh Torabi, Psych Yourself Rich:

I found that there are 4 questions to ask before we decide to purchase a car, buy a house, or pay for graduate degree. As a college student who just graduate, we are going to face so many confusions dealing with these tough decisions. Luckily, Farnoosh provides us with 4 important questions that we have to ask to ourselves before we make any decisions:

1. Do I Have the Money?

This is the most important and obvious question to ask: Do you have enough cash? or do you have a way to finance the purchase, like loan? Affordability is a trick question. For example, if you are considering to buy a car that is financed 3 years by $300 per month and that is only 10% of your income, we can say it is affordable for you. On the other side, if you are considering to buy a house and you need to put the entire cost on a credit card and carry the balance from month to month, then you can not afford it.

2. What's the trade-off?

Now after you know you have money, doesn't mean you have/should to make a purchase. The real cost of something is what you give up to get it, its called "opportunity cost".
You may be confuse with the concept at the first time you hear it.
Consider for example, if you decide to go into graduate school that cost you $15,000 and you find a way to afford it. But the real cost is another thing you can do with those $15,000, suppose you can open your own business with that money. Then we can say that buy going to college you lose your opportunity to build your own business. Another trade-off is your time, 2 years you spend in graduate school means you lose your 2 year opportunity to build a career.

Another example is suppose that putting $300 per month to finance you car means you have to cook more during a week than going out with friends. After now the trade off, how badly you want that new car now?

3. What are the benefits?

Farnoosh call this "measuring utility". The idea is to think how this purchase can actually improve your life. For example, getting a graduate degree may increase your salary in the next few year and may improve your quality of life in some ways. or consider buying a house may gives you the authority of that property.
Few purchases can give you pleasure and happiness, but keep in mind that considering how it can actually improve your life is more important.

4.What are the risks?

Risk is different from opportunity cost. For example, the risk of buying a house is the lack of flexibility that comes with it. The risk of going to graduate school is the possibility if you are not able to graduate later. How well you prepared to manage them?  In this case may be you want to make sure that you have commitment to study hard so you will graduate on time.

That's all from me :) I have to say that the book is actually really great especially for college student who are trying to manage their money.
Hopefully this post help you to make decision in your life! :)


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