Top 5 Ways People Waste Money
The most serious wastes of money are the least obvious and the most culturally normalized.
It’s not just shopaholics who waste money. Sure, we all know a person or two who spends money without reserve. You know, the person who makes weekly trips to Target or whose got 40 pairs of shoes or who drives Starbucks stock out of this world with his daily dose of lattes.
Nope. Shopaholicism is probably the most innocuous way to waste money in affluent countries. Why, you ask? First of all, because it’s obvious and you know when you’re doing it. But second, because we literally have the money to spend. That’s why we work, after all, isn’t it? Hardly any of us works for food anymore. People in affluent countries aren’t motivated to work for the necessities, because one could really live off society and get the necessities. Rather, they are motivated to work for consumer goods: for the plasma tv or the new Ford Mustang.
It turns out that the biggest money mistakes in today’s world come in the form of paying for things that you neither need nor get any real benefit from. Without further commentary, here’s our top 5 list of ways people waste money.
1. Buying Insurance That You Really Don’t Need
In general, don’t buy insurance unless it will really protect you financially. For example, we never buy insurance on our socks because we can go down and buy a new pair of socks for cheap if the current ones go bad.
Don’t buy full insurance coverage on a car over 5 years old. The price you pay for the insurance would be better served for saving for a new car when the current one has to be put away.
Insurance is only meant to cover situations with major financial consequences. If you’ve already got plenty of money to take care of the ones you love, you don’t need life insurance. Never buy life insurance as an investment vehicle unless you are keen on dampening the return on your investment.
2. Buying Warranties That Cost As Much as the Product
You may not know this, but the major electronic stores like BestBuy and Circuit City make a lot of money by selling extended warranties that cost up to 50% of the value of the product purchased. It’s great business for them and it plays on the fears that people have of product failure. In general, if you realize that the average life of an electronic product is 3-5 years, then you should just hedge your bets and skip the extended warranty. 9 times out of 10 you won’t need the warranty, and the one time that you would have needed it isn’t worth the price you pay for the other 9 warranties.
3. Paying Fees That You Could Have Avoided
Whenever you make a major 5-7 digit purchase ($10,000+) you can get deceived into paying uneccessary fees. It’s a psychological trick that all the best financial businesses use. $900 seems like a drop in the pond of a $300,000 house. And since the mortgage companies know this, they get you to pay all sorts of extra fees that you could have avoided by shopping around.
Another trick used by car dealers is to wear you down and tire you out and then hit you up for extra fees on your final bill that you don’t know notice until you get home the next day and look the bill over with fresh eyes. If you are ever asked to sign a document or make a decision in such a situation, it is usually best to err on the side of rejection rather than acceptance. Reject fees that look suspicious.
4. Buying After Solicitation
Marketing Methods 101: Make the consumer think he needs something he had never thought he needed before you made your pitch.
Seriously, salesmen can be good. My wife and I almost paid $5,000 for a whole house water filtration system once. The funny thing is that we had never been dissatisfied with our water system in the past. One day, a guy showed up to our house, gave a 2 hour sales pitch that was damn impressive, and we were hooked. We then thought we needed the filtration system. The fact is that we had been solicited for a product that we really didn’t need and we were being asked to pay way too much.
Solcitation often takes place for products and services that have a high-potential return for the business that is selling them. It is not unlikely that you will be solicited for financial productrs like mortgages, refinancing, credit cards and debt management loans. In all cases, be very suspicious. Chances are that the solicitor isn’t offering you a great deal.
A rule of thumb: always initiate your own purchases and never let anyone else start the process for you.
5. Not Maximizing the Power of Your Money
Most people don’t realize it, but there is a very basic strategy for allocating your money in order to maximize its potential. The key principle for maximizing the power of your money is to be diligent about letting it flow into high-interest accounts. Pay off high interest loans and credit cards, but only if you can’t make as much via stock investing. There is no reason to pay off a 2.9% loan if you can make 8.7% in a mutual fund. Similarly, there is no reason to leave your money in a 4.5% savings account if you have credit card debt accruing interest at 10%. Move your money into accounts with the highest interest levels first. If you have a credit card accruing 14% interest, stop everything and move money into the account to pay it off. If your mutual funds are making 10%, then move most of your 4.5% savings into your mutual funds.
This simple principle will keep you from wasting tens or hundreds of thousands of dollars over a lifetime.