There are many purchases where the seemingly cheapest way to purchase an item turns out to cost more out-of-pocket in the end. This was highlighted recently when I took a young family friend out to lunch. A few financial topics came up and in each instance she was either surprised or disappointed to learn that she was spending more than she needed to, while thinking that she was saving money.
Let’s review some of her discoveries:
- She goes out to restaurants, paying full price while I had saved 20% on our meal with a discount card I bought at Costco. If I hadn’t had that discount, I would have used a coupon that I had received from a loyalty program. I also buy coupons on eBay if they are cheap enough.
- Another strategy is to use ‘focused purchases.’ Airlines, hotels, pharmacies, grocery stores, and restaurants reward frequent customers if you sign up for their loyalty program. So whichever brand you select as meeting your needs best, try to use their loyalty program exclusively to build up the most discounts, reward points, miles, coupons, or other financial benefits.
- While she had just returned from attending yet another concert in a neighboring state, she didn’t have enough money to pay her annual car insurance bill in full, so she pays more to break it down into monthly payments.
- Since she does not take good care of her car, she spends more in repairs than she needs to. To avoid these extra repairs, she is considering leasing a car because “she heard that it is cheapest.” So I explained that leasing a car cost 40% more than paying cash for a new car; it is the most expensive way to buy use of a car. She had also heard, incorrectly, that she didn’t have to put any money down and could still get a low lease payment.
- One eye opener for her was the concept of value, meaning price per use over time. For example, a cheap t-shirt that falls apart quickly and needs to be replaced is more expensive over time than a higher-priced t-shirt that lasts much longer. Cost per usage or cost for time can be applied to many semi-durable and durable purchases. By choosing a more expensive item that offers more value, it ends up being less expensive overall.
- She also never built a credit rating, and ‘no credit rating’ is equivalent to a ‘bad credit rating’ to potential lenders. So she was put into the expensive high-risk insurance pool and was unable to rent an apartment that she wanted.
I am not picking on her, at only 22 years old, she simply hasn’t been exposed to financial concepts or thinking about money except that it is something you can spend immediately.
I meet people far older than her that still haven’t been exposed to financial rules that lead to financial stability. For example, I had some repair work done on my house and I overheard a few conversations between the two workmen. At one point one tells the other, “Anytime I’m ahead of rent by $100 I buy another tattoo. To keep my girlfriend from getting angry about spending money that way, I buy one for her, too.” From a few other comments he made, it appears that this 34-year-old man’s financial life is in imminent crisis. He prompted his friend, “We should get tattoos this weekend!” The other man replied, “I’ve got higher financial priorities than tattoos.” But he wouldn’t relent so easy, “You don’t buy it all at once! Just pay for parts of the tattoo over time; that is how you make it affordable.” While this is true, he is still spending all of the money, whether in parts or all together; money that he cannot put toward savings or investing to turn around his perilous financial condition.
Although this man’s primary financial weakness happens to be tattoos, I have seen all kinds of unaffordable financial weaknesses: fishing equipment, shoes, concerts, jewelry, racing-car parts, wine, buying rounds of drinks at the bar, foreign travel, and even self-help seminars. If you repeatedly make purchases on a credit card that you cannot pay off in-full when the bill is due, then you may have a financial weakness to address.
Several of the wealthiest people that I know find all kinds of ways to save money on routine and expensive purchases. Paying for value instead of looking only at price is one way that they do it. Another way is to spend time learning how to save money on large expenses. For example, a relative drove a brand new Jaguar sedan for 3 years and ended up making a $7,000 profit when he sold it, based on expert use of tax law. Another relative performed a lot of research and his latest new-car purchase had so many discounts that he only paid 76% of the retail price. He saved so much money that he could have immediately sold the car for a profit.
How are you going to address your routine and expensive purchases in the future: Will you be spending more than you have to or will you free-up extra money that you can direct elsewhere for spending or savings?