Eeyore Could Have Scored a Better Deal

I've heard a lot of talk lately about all the sweet tax credits and other incentives the government is dishing out to the American public in hopes of stimulating the economy. A couple notable examples include the Cash For Clunkers program and the $8,000 First-Time Home Buyer tax credit. While these programs are all well and dandy, let me propose something - Don't ever let the tail wag the dog. What do I mean when I say that? I mean, don't let programs or incentives entice you to act in a way that you wouldn't have acted otherwise.

Let me give an example: Jimmy and Jane have been driving an "old" beat-up Honda, and have decided to "run it into the ground," so to speak. They've paid it off, and are now enjoying the use of transportation without the burden of a loan payment (of course they still have insurance, taxes, maintenance, and fuel, but we'll leave that discussion on the table). In our example, Jim and Jane aren't in a position to purchase a new car, because even the thought of another $400 bill each month is too much to swallow, plus they have a great deal of credit card debt they're trying to pay off. Jim and Jane are smart. Cars are BAD investments.

Along comes the federal government, offering $3,500 to Jim and Jane for their old "clunker" as long as they buy a new fuel efficient car. Immediately they picture themselves being cool, like the Fonz, driving down state street in their hot new ride. They hop in their clunker and head off to Honest Abe's, the local dealer in town. Honest Abe is well aware of Jim, Jane, and all the rest of their counterparts who would be in the market for a new car, thanks to the new program. In anticipation of their arrival, Abe has dutifully taken all the discount, rebate, and sales stickers off his cars - leaving the MSRP (or Stupid Price, as I like to call it - because only an idiot pays MSRP). Because Jim and Jane are getting $3,500 in "free money" their guard is lowered, and they aren't as picky when it comes to pricing or options. They drive away in a brand new, fuel efficient vehicle and take in the new car smell all the way home. What a government we have. Yes, what a government we have.

Let's break this purchase down a little, shall we?

The MSRP on the vehicle was a paltry $30,000. But with the government footing part of the bill, Jim and Jane only had to pay $26,500 - not too shabby. What Jim and Jane didn't realize is that 2 weeks earlier, Abe had been selling that very same vehicle for $25,000 because business was so slow. Eeyore could have scored a better deal than $26,500. Bottom line - when demand goes up (or skyrockets, as was the case in this program) merchants have very little incentive to keep prices low.

Second: Jim and Jane are now stuck with yet another 5, 6, or 7 year loan to pay off. Not cool when you're trying to pay off a bunch of other consumer debt.

I can already hear the naysayers... "but you haven't taken into account all the money they're going to save in fuel from buying a more efficient car." I've done the math, but I'll spare you the details. Basically, if the old car got 21 MPG and the new car gets 28 MPG (a reasonable proposition), and gas is $2.50 a gallon and Jim drives 10,000 miles a year, Jim will save around $300. $300 is better than a swift kick in the pants, but it doesn't even cover one of his loan payments. And surely the savings in gas will be offset by the inevitable increase in insurance costs.

So now we go back to Jim and Jane, one month later, no new car smell, and a loan payment they can't afford. Let's change the story a little bit. Let's assume that Jim and Jane were actually in the market for a newer, more reliable car. What could they have done? Assuming their car was actually worth something, they could have sold it and taken that money to the dealer when demand for cars was low. No, they wouldn't get much for their car when they sold it, but the deal they would have scored on their purchase would have outweighed any foregone money. Then Jim would have taken his sweet wife to the USED car dealership. Cars coming off of a 2 year lease are excellent targets - still in their warranty period, still looking good, low miles - all without the new car sticker shock.

So next time the government (or anyone else) runs an incentive program, think about two things:
How it will the increase in demand affect the price, and
Was I in the market for this product before the promotion?

Asking these two questions will help save you from overpaying, and dealing with the inevitable buyers remorse that comes when buying something you don't need.