This year has been full of firsts. It was the first year we started as a family of 5, first time we moved cross country and into a new home together, first time we lived through a hurricane, and first time we re-modeled our home. With these firsts came forth multiple opportunities to spend large sums of money.
- a mini-van
- a new home
- home re-model
- an 11 unit rental complex
- 2 angel investments
- additional equity in HIT Capital
Each one of these purchases could significantly shorten or lengthen my family’s path to financial independence. The last three may not be your typical purchases, but the mental model in which we go through to buy a computer, car, or home is similar to a stock, hedge fund, startup, or investment property.
It’s not unusual to hear some of my closest friends and family call me frugal, cheapskate, or a penny pincher. Sometimes as a complement and other times as a dig. I’ll be the first to admit that I have mistakenly spent more time researching purchases in the past than the realized savings were worth. While this may have been a detriment at the time, refining the process on less than material purchases is proving to be worthwhile now as the purchases become increasingly more material.
As we look forward to the largest shopping days of the year I hope that you can use and improve upon the mental purchasing model below. Please share your thoughts in the comments and we can continuously refine and improve upon it over the years to come.
The Mental Purchasing Model explained through the purchase of our mini-van.
Step 0 – Need vs. Want
Before we actually start the buying process, we ask ourselves “Do we need the product or do we want the product”. If we want the product, but it will not quicken our path to financial freedom, benefit others, or bring us closer to a personal goal then we never make it to Step 1.
Do we need a new vehicle or do we want a new vehicle? Our situation recently changed as we had twin boys and grew to a family of five. The Hyundai Elantra in the garage is no longer able to support our family needs. Time to upgrade.
Step 1 – Define what it is that you need, get specific
Make an actual or mental list of the items you need. For our new vehicle search we needed: room to fit 3 car seats, a ceiling high enough and a dash far enough back to sit (I’m 6’7″ and my wife is 5’10”), mechanically reliable, and safe.
A few of the items that made our list but became wants not needs were: multiple cup holders, fuel or electric efficiency, autonomous, low road noise, 4-wheel drive, heated seats, lumbar support, bluetooth, and high road clearance.
Step 2 – Research
The second step was to figure out what our options were. To try and be efficient most of this was done while sitting on our patio surfing automobile sites. Once our initial pass was complete online we moved to testing the identified SUV’s at the dealerships/car lots.
Testing becomes time consuming and in most purchases you can replace the in person test with reading reviews or unbiased comparisons of products that meet your previously identified needs. Unfortunately for us, we could neither find the ceiling and dash dimensions nor determine if 3 car seats would fit without testing the vehicles in person.
We began testing sport utility vehicles identified online but found only the very largest could fit 3 car seats across the middle bench and sometimes even those didn’t leave the driver and passenger enough room to sit comfortably. Luckily for us we had a highly motivated salesman talk us into testing out mini-vans. It took my wife telling them no 3 times before we succumbed and tested a mini-van. The minivan met all of our needs and we added them to our potential list of options.
Step 3 – Price and Quality Comparison
We identified our needs and products that meet those needs in the previous two steps, now it is time to read reviews, ratings and insert cost into the equation.
What vehicle gave us the most bang for the buck? The sport utility vehicles (SUV) when compared to the mini-vans ended up being more expensive, less comfortable, less efficient, and less reliable. The only thing holding us back from focusing strictly on the minivan was accepting the soccer mom stigma. To fix that we began calling the minivan a U A V, or urban assault vehicle, and just like that the stigma was resolved.
After eliminating SUV’s we focused in on UAV’s. We began eliminating the models that didn’t fit our needs. The ones with a sunroof and an inability to fit 3 car seats across the middle row were eliminated. With only a few models and brands left we began to compare the reliability, safety, and features available with their associated cost.
We narrowed down the UAV of choice to a Honda Odyssey or Toyota Sienna. We decided the safety, reliability, and fuel efficiency more than covered the additional up-front cost over the competition. The difference between the Sienna and Odyssey were not significant and thus we used vehicle price and condition to make the final decision.
Step 4 – Make the Deal!
What some consider the first step is now one of the last. We know what brand and models satisfy our needs, so now it’s time to find the best value. We aren’t running from dealership to used car lot but rather surfing the lots on the web. With our trusty laptops in hand we searched an assortment of vehicle marketing platforms like: One-Craigs, AutoTempest, Auto-Trader, Ebay Motors, and cars.com. Our search landed us on 3 vehicles listed on Auto-Trader, two Odyssey’s and one Sienna.
Once we identified the three best deals we attempted to negotiate the price down further through email while also specifying an out the door price. In dealership terms this is also known as the price after TT&L, tax title and license. It is unfortunate, but the car business specializes in tacking on extras as you are trying to walk out the door. This is us strictly clarifying the deal so there are no surprises when we arrive at the front door with our credit card in hand.
Step 5 – Pay the Man!
After coming to an agreement, it is time to make the purchase. Verify that the deal did not change and the product is in as advertised condition. If it all looks good, make the purchase. But when you do, do it with one of your cash back tools. In our case with the UAV, we put as much of the purchase on our cash back credit card as possible. When purchasing items online we combine a cash back portal like Mr. Rebates with our cash back credit card. (We never purchase anything that we cannot afford, the credit card is only recommended for savers)
Step 6 – Basque in your glory…….. just kidding, enjoy your purchase!
So enough about the process, does it work?
I did a high-level review of our large purchases made over the past 18 months and the data says the process conservatively netted us more than $150,000.
- $8,000 in mini-van savings
- $12,000 in reduced realtor & bank fees
- $40,000 in re-model costs after Hurricane Harvey
- $50-100,000 in the purchase of an under-priced home
- $40,000 in investment growth
- $1,800 in cash back
If you do not have multiple large purchases in your near future, put to work a slimmed down version in preparation for Black Friday and Cyber Monday.
If you have an idea to improve this mental model, please let us know in the comments!