5 Ways to Stop Buying Stupid Stuff
Note: The following article is from the August issue of the Motley Fool Green Light service. It has been updated to reflect today’s fashions.
It’s no wonder: Two-fers, upgrades, bulk buys, bonus points, door-buster deals — they’re like magnets for our money. Costco (Nasdaq: COST) has the formula down pat. In a Motley Fool interview, CEO Jim Sinegal copped to purposely merchandising to the impulse-purchase mind-set. Costco highlights an ever-changing array of items at the entrance — from Coach handbags to Fila track suits — that are probably on no one’s shopping list. Yet they end up in a lot of customer shopping carts. Sinegal explained, “The attitude is that if you see it, you have got to buy it because it may not be there next time.”
Exactly. So how do you resist the pull of blue-light specials and expertly orchestrated merchandising? Understanding behavioral economics (the “why” behind our buys) can help you steer your shopping cart — and your finances — in the right direction.
Try these five mental money tricks the next time you reach for your wallet and you’ll walk away from the checkout counter with no regrets and a fatter wallet, guaranteed.
Ignore the source
Every dollar is worth a dollar, no matter if it comes from an ATM, a great aunt, or the laundry hamper. Yet people show more restraint with earned funds than they do with “found money” — things like tax refunds, work bonuses, and inheritances.
A little accounting amnesia can work wonders for those who tend to blow through windfall cash. The authors of one of my favorite books — Why Smart People Make Big Money Mistakes — suggest banking found money for a while before spending a dime. Mingling the dough with money you worked for mentally converts the cash into “savings.” And you’re less likely to treat savings like loot won with a scratch-off ticket. (If you’re at a loss as to how to spend that tax refund, may I suggest a money do-over?)
Sweat the big stuff …
Oddly, we’re more thoughtful with large-sum unexpected windfalls than we are with smaller amounts. However, many people have a blind spot when it comes to spending earned money on big-ticket items.
According to those surveyed for the book Are You Normal About Money?, just 8% of us price out a vacation before we hit the road. Yet the average trip tab — around $2,300 — amounts to about 8% of the average American’s annual income.
Consider the biggest slices of your spending pie and practice cost consciousness where it counts: vacations, transportation, holiday and home expenses, cute shoes. Really planning your vacation — you can use this cheap travel cheat sheet to start — could save you some serious cash.
That said, don’t dismiss outright those seemingly small money decisions. A few percentage points of interest on your credit card or checking account or paying a few bucks more per stock trade may not sound like much, but they add up. I calculated the cost of a few cash leaks and found that over the long term they can do some serious damage — or, if remedied, add some serious cash — to your bottom line.
Comparison-shop with skepticism
On the lookout for the rock-bottom price? Put on your blinders. In an oft-cited experiment by two Berkeley business school professors, shoppers given the choice between two microwaves — a low-end and mid-range option — split nearly equally down the middle, with 43% choosing the more expensive oven. But when a pricier alternative was added to the mix, the majority of shoppers (60%) decided the mid-range microwave was the best deal.
Academics call this “extremeness aversion” — wary of alternatives at both ends of the price spectrum, even the bargain hunters decide to trade up. The resulting budget creep occurs on everything from cars to cameras to coffee.
To avoid this Jedi money mind trick, focus: Weigh the merits of each product independently. Pick your must-have features and a target price range. Compare like with like — and erase from your mind the alternatives that don’t fit your criteria.
Keep separate tabs
“What’s another $[fill in the blank] when I’m already spending $[fill in the blank]?” Contractors, car salesmen, and electronics store clerks bank on this kind of faulty thinking. In the context of a larger purchase, somehow $300 cup holders and $3,000 Corian countertops start to make sense.
Don’t let upgrades and add-ons pad your tab. Instead, consider each option separately and ask yourself if you’d pay $[fill in the blank] were you shopping solely for that item.
Leave home without your credit card
It’s easy — too easy — to pay with plastic. That’s why the price of credit card convenience is higher than that of cash. Yes, even if you pay your credit card bill in full every month.
Studies show that people spend more — and more stupidly — when no actual cash changes hands. We succumb to impulse buys (an estimated 59% of grocery store purchases are not planned) and even tip more at restaurants when we put the tab on plastic.
Smart People/Big Mistakes authors Gary Belsky and Thomas Gilovich say that plastic makes us devalue what we spend because we don’t experience the immediate loss of buying power that we do when we pay with cash. Like Vegas gambling chips, credit cards mask the tangible aspects of spending money. (Quick gut check: Visualize the difference between handing the cashier $40 of the $80 in your pocket versus putting it on your card. Feel the pain?)
Pay in cash only and you’ll likely see a dip in your daily expenditures. Imagine the results after an entire year. Now that’s a rewards program Visa and MasterCard can’t match.
The $480-a-month bottom line
So how much is it worth to test-drive one of these five tips for the next four weeks? Well, I answered that in bold-faced type a half-inch up. Here’s how I came up with it: Try an all-cash diet for one week, and you could shave 60% (the difference between the average debit/cash versus credit card purchase) off your grocery bill alone. That’s $480 a month for the average family of three.
Saving and making money doesn’t have to be complicated. Every month in the Motley Fool Green Light service I co-manage with Shannon Zimmerman (that’s Mr. Champion Funds to those in the know), we focus our laser pointers on investments and money management strategies that help members save or make at least $450 a month. Here’s $79 worth of info on the house: Grab a free (yes, gratis) 30-day trial and skim the detailed issue index (from August ’06 through April ’07) for hands-on advice on everything from ETFs, 401(k) rollovers, ARM refinancing, retail stocks, measuring portfolio risk, savings shortcuts, the best discount brokers, and on and on.
After years of training, Dayana Yochim is ready to enter the Iron Woman competition and triumph in the Target shopping challenge (where every item in contestants’ shopping carts not on their original list results in a score reduction). She is the co-advisor for the Motley Fool Green Light service. She holds none of the companies mentioned in this article in her portfolio. Costco is a Stock Advisor pick, and MasterCard is an Inside Value recommendation. The Fool has a disclosure policy.