Tuesday, May 20, 2014

How 'saving money' really works

Along the same lines as my post on the Millionaire Mindset, I want to make the notion of saving quite clear. What a lot of people do to save money is actually doing the opposite! Despite what retailers will tell you, buying a product at a discount does not mean you are saving money!

There are a couple questions to ask yourself before buying a product or service:
1) Do I need this? Can I do without it?
Example: The Drift Light is a self-dimming lightbulb with three different modes, and can be used with a traditional on/off wall switch. Neat, right? Is it neat enough to pay $29 per bulb? 
Assuming you've gotten through life just fine without it and you don't suffer from insomnia, is it worth the money once the novelty wears off in a few days?

2) Can I accomplish the same purpose in a way that is cheaper?
Example: If I plug in a lamp with an attached rheostat (dimmer dial), will that accomplish the purpose I need? ambfurniture.com sells a floor lamp with dimmer  for $31.99, or $3 more than a single Drift Light lightbulb! 

3) Will I regret this purchase tomorrow? Next week? Next month when the credit card bill comes?
Do I really need to give you an example for this?

4) Do I really have the money to pay for this now? If not, is it something I'm willing to save up for?
How often have you swiped your credit card, only to get the bill a month later and ask yourself why you'd ever pay that much? If you do this once, it's understandable. Do it again, and you'll feel pretty stupid!

...and the real kicker is this one:
5) Would I have considered buying this if it weren't on sale?
Example: Just about any advertised sale, ever! Stores do this because they count on getting people to buy more than they intended, or even getting people into the store in the first place!

Stores have policies and routines that are specifically designed to make them more money! One of the most tried-and-true tactics is to advertise a sale. This prompts people to go into the store in the first place--and once customers are in there, they will be more likely to browse around, buy stuff they didn't intend to buy in the first place, and feel good about the great deals so that they'll return!

In fact, some stores have the same items on sale for weeks on end! Department stores are notorious for this: my takeaway is that the store never expected to get the list price in the first place! I've seen this on men's shirts, for example--brand-name dress shirts for $52, on sale for "only" $28.99 (which is still a lot for a freakin' shirt!). The list price is artificially inflated, just to make people think they're getting a great deal on a premium, high-quality product. And if that item (like the dress shirt) remains on sale for 26 weeks out of the year, yet somebody buys it when it's not on sale--well, more profit for them!

The point is this: never buy something just because it's on sale. Buy it because you need it, you were going to buy it anyway, and it fills some need. Otherwise, you're just being tricked into handing your money over to a wealthy retailer.

For more reading on similar ideas, try these articles: