Everyone loves a good bargain, and it seems that summer is high season for great sales. Starting with Memorial Day all the way through the 4th of July, Back to School, and Labor Day, the deals are everywhere. In fact, if advertisements and promotions are to be believed, we can save so much money at the big box stores that our retirement accounts and college savings plans should be fully funded by early October.
Wait just a minute. We’re not so gullible as to believe that when we shop, however large the discounts, that we are thereby building our net worth. Or are we?
According to a recent article in the Atlantic Monthly, Americans are pretty bad at financial math and make all sorts of mistakes when trying to be smart about their money. For example, when offered a choice of getting a regular cup of coffee at a 33 percent discount, or getting 33 percent more coffee for the price of a regular cup, most consumers thinks the two offers are equivalent, when in fact the discount is the better deal. Apparently, the idea of something being “free” – in this case the extra coffee – completely scrambles our mental arithmetic.
We also prefer package deals, paid for upfront, to paying a la carte, even when we don’t get full value for the package. Think about gym memberships. Wouldn’t paying each time we used the facilities be a better option for most of us, particularly when the rose color fades from our New Year’s glasses and we stop going to the gym frequently enough to make the cost of the gym membership worth it?
As a CERTIFIED FINANCIAL PLANNERTM professional, it’s my job to get the numbers right when it comes to finances, and to know the kinds of biases that clients are prone to when spending, saving, and investing their money. Sometimes I just have to tell them what the best deals are, even when their every instinct is pulling them in another direction. Fortunately, because I am a fiduciary who puts their interests first, they trust my advice, even if their financial math looks different from mine.
So here are my top financial “deals” for consumers, no fuzzy math involved whatsoever:
These are deals because you are buying diversified investments at a discount. The expense ratios for index funds are much lower than the expenses for actively managed funds, and there is no evidence that active management consistently or predictably outperforms indexes. In this case, what you save in expenses really does go to increasing your wealth since more of the purchase price to buy the fund goes into investments and not to pay manager fees.
This seems likes a no-brainer since whatever your employer contributes to your 401(k) to match your contribution is like finding free money. You wouldn’t step over a pile of cash on the sidewalk would you? But there are people who effectively do just that when they do not contribute up to the match, thinking there are better uses for the money. Generally speaking, there are not.
This can be another occasion for found money, though the pile on the sidewalk is not as big as with an employer 401(k) match. In this case, the savings comes in the form of avoiding taxes on any money set aside for certain qualified expenses, such as non-covered medical costs. As long as you are going to use your money for these expenses, cafeteria plan or no plan, you can realize real, net-worth augmenting savings. (But don’t go spend those savings at the shops.)
Withhold the Right Amount from Your Paycheck:
This is an example where people often do the financially illogical thing because it “looks” and “feels” better. In other words, taxpayers don’t adjust their withholding and as a result, set themselves up for a sizeable tax refund. The problem is when that refund comes, too often it is seen as a windfall to splurge on a big TV or an unplanned vacation. Or worse still, it’s needed to pay off credit card balances that were run up because there wasn’t enough in the ongoing paycheck to pay the credit cards in full each month. Simple fix: get your withholding right, take more home, and use that extra to avoid credit card interest or put it in the bank.
Opening and Reading your Bills:
As a kid, did you ever search the sofa or armchairs for loose change that had fallen into the cracks? There is also loose change to be found in the corners of your credit card and utility bills, though in this case, it is usually in the form of stray charges. Check these bills carefully. There is a high probability that you will find an errant charge or two, such as premium cable channels or call forwarding services you never signed up for. Or maybe there are subscription charges that have kicked in on a service that was free for a limited time offer and you forgot to cancel it. A call to the bill issuer will generally result in a credit to your account and/or the avoidance of any additional charges in the future. Here’s a case where you can get paid for just for reading carefully!
Make Lists and Follow Them:
Most financially-savvy of all, especially during this summer season of sizzling sales, is to never leave home without a list. If you see something you want to buy that isn’t on the list, don’t buy it. If it is still burning a hole in your pocket and on your mind a day or a week later, then you can put it on the list and sally forth to the mall. Nine times out of ten, however, you will have forgotten all about it.
Remember: just because you see signs everywhere that announce “Everything Must Go!” this doesn’t mean your financial common sense should go out the door as well.
Eleanor Blayney, CFP®
Consumer Advocate, Certified Financial Planner Board of Standards, Inc.