While everyone likes to save money, there are some things that many of us do that actually cost us more money in the long run than they save. Moreover, many of these money mistakes and misperceptions are commited thousands of times per day across the globe. Here are some of these common money misperceptions and how to avoid wasting your money on them.
Adjustable Rate Mortgages
Perhaps the most abused way to save money is the adjustable rate mortgage. Most adjustable rate mortgages have variable interest rates that adjust each quarter based on economic interest rates. While a rate may be slightly lower on an adjustable mortgage rate, many people make the mistake of thinking that they are saving money by getting an adjustable rate mortgage, simply because the monthly payments are less. While it’s true that you could save money over the life of the loan if interest rates remain the same, it’s not likely. And when interest rates reset, it could raise your monthly payment to a level that you have trouble paying. An even bigger mistake that people make when they get adjustable rate mortgages is that they set them up with balloon payments. That means that they pay less principal in the early part of the loan and then increase principal payments near the end of the loan. This is detrimental because although your initial payments will be lower, your payments will not be paying down principal until later in the loan. This means lots of extra interest expense over the life of the loan. It also means that your loan principal will not decline very fast. In other words, you will build equity much slower in a loan of this type.
Each year consumers spend about $20 billion on extended warranties! In our opinion, extended warranties are perhaps the biggest way to waste your money. People like to feel protected and businesses love to fuel this desire by offering extended warranties. In fact, the extended warranties sold by Best Buy account for nearly 50% of Best Buy’s profit! And according to a study by the University of Maryland’s School of Business, nearly 35% of consumers buy some type of extended warranty each year. Furthermore, these individuals paid about 18% of the products’ value for their warranty. However, the shocking fact is that less than 8% of the people that bought warranties used them. And of those that did use them, many of the repairs were under warranty or were for less money than the extended warranty cost. Do the math, people paid 18% of the product cost and used the warranty only 8% of the time. Who makes money here? And isn’t it true that if something is a great deal for one side of the transaction, that it’s not worth it for the other side? Many arguments can be made about extended warranties, but unless you really want that extra piece of mind, don’t waste your money on them.
Increasing Your Insurance Deductible
Many people try to save money by increasing their insurance deductible. Some people even bring their deductibles into the thousands to try to save a few bucks per year. While it makes sense to raise your insurance deductible to a reasonable level, it usually doesn’t pay to raise it too much. That’s because the money you save will be forfeited when you do have to make a claim. It may be a numbers game, but most people that have insurance have to make a claim at some point on their insured property. An example of how raising your insurance can cost you would be to look at a homeowners policy that has a $100 deductible. By raising the deductible to $1,000 you can save $40 per year. Now, let’s see how long it will take you to save the extra $900 in deductible, should you need to file a claim. Divide the $900 savings by the $40 per year in lower insurance rate and it will pay for itself in 22 years. However, according to insurance industry experts, the average household files a claim every 12 years.
Buying Daily Deals
With so many daily deal and coupon sites, it’s hard not to get excited about saving money and buy some of these deals. If you buy the deal and use it, then great, you may or may not have saved money. If you were going to use the service or product anyway, then you did save money. However, buying deals that you would not otherwise spend the money on is the same as wasting money. However, this is not even the biggest waste of money with these coupon deals. The biggest waste of money for these deals is the number of people that don’t actually use their coupons before they expire. It is estimated that between 25 and 40 percent of daily deal coupons go unused! While that is the average, locally, we found one company that said about 80% of their coupons were never used! Our advice: Don’t use these daily deals. Especially if you feel like you are saving money by using them. While you could save money on them every now and then, they are likely detrimental to your long term budget.
Leasing a Car
Leasing a car is a good deal for some people. If you buy a new car every three years, or if you have a business that you can write off the lease expense, then leasing a car may be a good value and actually save you money. However, most people that lease cars would be better off buying the car outright. There are many reasons for this, but one of them is that leasing a car means you will always have a monthly payment. Owning a car that is paid off will save you much more each month. Furthermore, leasing a car means you will be driving a new car all the time. New cars depreciate at a much faster rate than older cars, so you are also losing more money each month that you drive a new car. If you really want to save money, look into buying a car that is about 2 years old. A 2 year old car has lost around 30-40% of its value and can be purchased for the same monthly payment as a new car of the same type can be leased. This way you’ll save money and can sell the car when you’re done with it to gain back some of your basis.
Buying in Bulk
While the warehouse clubs can also be a good place to save money, many people end up wasting a lot of money by shopping at these stores. There are a few reasons why people waste money at these stores. First, many people buy in bulk and then let a lot of the product go to waste. Second, many items in these warehouses are not a better unit price than at a regular store. And finally, these stores encourage you to buy things you wouldn’t otherwise buy. With all of the free samples and displays, many people end up with more in their shopping cart than they planned. Also, the “warehouse” mentality is to assume that everything is a good buy and therefore many people associate less guilt with making purchases at these stores. This also translates into many impulse purchases that are not necessary.