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How not to buy a flat-screen TV

He rushed out to buy a 42-inch plasma TV at the height of its retail price, and financed the purchase at 9% over 25 months.

By MSN Money Partner Aug 2, 2012 10:55AM

This post comes from Kentin Waits at partner blog Wise Bread.


Wise Bread on MSN MoneyMost of us know that we should try to spend less and save more. But much of the advice we hear and lessons we try to learn are abstract. We seldom hear a real story of an actual person making a truly unfortunate financial decision.


Image: Watching television (© Onoky/SuperStock)I'd like to help change that. Here's a little tale about a dear friend of mine, whom I'll call Dan. Dan was already walking a financial tightrope when he decided it was time to enthusiastically embrace the digital TV revolution. So in 2006, he threw caution (and a lot of money) to the wind and bought a new plasma TV. (See also: "Massive list of things to do while watching TV.") 


Now, back in 2006, flat screens of any kind were a relatively new phenomenon and were priced accordingly. Dan's 42-inch TV retailed for $1,995. Since he was already strapped for cash and had a bumpy credit history, he purchased from a local store whose owners were willing to work with him on financing (at a 9% interest rate). This is where it gets interesting and where the details of his purchase really start to matter.


To understand why this purchase was such a bad idea, we need to do some financial forensics on the real cost of the TV. (Post continues below.)

Early adoption = higher price

This one is obvious, right? Today, a TV similar to Dan's six-year-old model retails for about $599. Through the miracle of market forces, competition, lower production costs, and the eagerness of early adopters, the price of flat screens has fallen dramatically. If Dan had waited, he could have paid $1,396 less for essentially the same thing.


More sales tax paid

Dan lived in Iowa and in 2006, the sales tax in that state was 5%. The total tax on his purchase was $99.75. Though Iowa's sales tax is now 6%, the lower price of the TV would still have Dan paying only $35.94 in tax in 2012. The tax savings alone would have been $63.81.


Lots of interest

Dan was paying the local electronics store 9% interest on his new TV, which he managed to pay off in 25 months. If Dan had saved an amount equal to the check he sent to the electronics store every month (about $95), he could have saved the entire 2012 purchase amount (tax included) in cash in about 6 1/2 months.


Loss of earnings potential

So far, Dan's choice to purchase the TV early resulted in a higher price and that, of course, meant more sales tax. Also, since Dan purchased the TV at the height of its retail price, he was less likely to have the cash on hand to pay, so he financed the steeper purchase price over the course of two years at 9%.


But there's another hidden cost we haven't explored yet. Remember the $95 that Dan paid to his financier (17 months longer than he would have needed if he'd waited and bought with cash later)? Well, let's consider the lost potential of that money. At a 4% interest rate, the $1,615 ($95 X 17 months) would have earned a laughably small amount in interest. But what other debt, savings vehicles, or bills could that money have been directed toward?


If a family makes five or 10 large purchases at similar or even worse terms, what's the multiplying effect on their lives, their opportunities, and their fortunes?


In the end, Dan paid at least $1,460 more for his higher-priced flat-screen TV in 2006 than he would have paid for the same model in 2012. Even though he had a fairly reasonable interest rate and paid more than the minimum due each month, Dan still didn't fare too well in this transaction (and that's without factoring in depreciation/resale value on such an early model TV vs. later models).

Granted, I'm going purely by the numbers here. Some may argue that Dan's viewing delight is harder to quantify, but no less important. Dan's net loss for those six years might be mollified a bit by 42 inches of "Cupcake Wars" glowing on his wall. I hope so.


What financial decisions did you live to regret? Do you have friends or family who are still making whoppers of fiscal mistakes like Dan?


More on Wise Bread and MSN Money:

Aug 2, 2012 2:42PM

I would only add one thing.  If at the end of making his payments, he kept making the payments to an interest bearing account of some type, he would have the money (or at least a sizable down payment) set aside for the next big thing.  After all, he's already budgeted for the payment.  This option only makes sense if he has no other outstanding loans that have a higher interest rate than his expected return on the interest bearing account.


Then again, it's never a perfect world.

Aug 2, 2012 12:09PM

One of the many examples of people wanting it now, no matter the cost. 

Delayed gratification seems to be dwindling nowadays.

He could have also ordered the TV online, most likely paid less, and not have to pay sales tax.

But that would mean he'd have to wait UP TO A WEEK to get his precious TV.

Who can expect anyone to wait that long?!?! (note the hint of sarcasm)

Aug 2, 2012 1:10PM
And this is why I laugh at the morons waiting in front of Apple stores for the newest i-am-a-loser thing...
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