Six Misperceptions That Waste Your Money

by on February 20, 2012

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 Misperceptions that waste your moneymeans 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.

Extended Warranties

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.

{ 19 comments… read them below or add one }

Bob Webster March 3, 2012 at 1:40 am

I think adjustable rate mortgages have their place. If you intend to only stay in your house for a short period, say five years or less, you might be able to get a 7:1 or a 10:1 – these 30-year mortgages are fixed for a period of time that exceeds the period of time that you intend to stay in your house.

Of course, situations change and you could find yourself needing to stay in the house longer. Then, the interest rates will adjust and could possibly put you in a precarious financial situation.

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Amy Turner March 9, 2012 at 4:31 am

Buy a second hand car that is still in good running condition, make sure it does not take up too much gas or your saving objective will be defeated. Good maintenance and upkeep will prevent breakdown and huge repair bills which will amount to big savings in the long run. This is, assuming you have the cash to finance the purchase, since getting it as a loan will be more expensive.
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Jessie April 8, 2012 at 7:08 am

Regarding the extended warranties – I remember a few years back when I was buying a PS3 in the UK [worked there for a few years] and they offered me the extended warranty. It worked out to be over 30% of the PS3. I can’t recall the figure exactly. Not only that, there was a huge contract with loopholes that they could have squirmed out of and not everything was covered. If you wanted full coverage, err that will be extra

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Jeff April 29, 2012 at 8:47 pm

If you have the room for buying in bulk there are some great deals to be had. I just don’t have that much room for a thousand rolls of toilet paper!

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Rachell May 25, 2012 at 6:12 am

I don’t know if there’s another but I really really love the pics you used on your post. Throwing money on toilets.. LOL
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Sonoma County Home Loans June 10, 2012 at 5:12 pm

Agreed, adjust the rate mortgages especially are not really what they used to be anymore and fortunately. These programs are decent, but I fixed rate mortgage is usually ..375 2.5% higher than in just great mortgage anyway and for the uncertainty of the economic conditions, wouldn’t it make more sense to go with a long-term fixed rate mortgage and have a monthly principal and interest payment over the full life of the loan? For example in our neck of the woods for Sonoma County refinancing, we always let people know that adjust for it mortgage is a short-term Band-Aid but the best long-term solution is really a fixed rate mortgage with terms between 30, 25, 20 and 15 year and even 10 year terms
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Lee August 5, 2012 at 5:10 am

Hi
Enjoyable read, gets you thinking about the main things people spend there money on and how much they could save by getting the best deal.
Getting the right mortgage being the big one as a house is the most expensive item people re likely to by.
Fixed against variable rate mortgage is always a hard one but as interest rates are so low at the moment if you have a variable rate mortgage the only way your payments are likely to go in the long term are up. So I agree especially at the moment if you can get a fixed rate mortgage at a decent rate for a good time scale that is probably the best way to go.

Thanks lee
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Buy car insurance September 25, 2012 at 5:08 am

Very well described. There are so many things in which we waste our money and this is only because we do not try to understand the things properly. In the insurance case if you do not understand your car insurance policy then you may waste money on unnecessary coverage. So it is very much required to understand the things properly. Money comes from hard work so think wisely and save some money.

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VickieMFuller November 10, 2012 at 2:08 am

Well stated! but there are many way in this world in how to waste money. It also depend on how person handle and budget there money.

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Short term car insurance November 15, 2012 at 2:28 am

its great. That’s very true. A lot of people forget about business insurance when they have a small side business.
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Plumbers in Tucson January 8, 2013 at 11:56 am

A good way to save money is to turn down the heat level on your water heater. Most people have it set too high, so it runs too much costing either electricity or your natural gas bill to go through the roof.
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David January 24, 2013 at 11:44 pm

My New Year’s resolution was to save money this year and there were about three things on your list that I was going to do, until I read your article. Although things make sense upfront, when you really consider them from all angles, as you have, they no longer make sense. I will take your advice to heart and hopefully make smarter choices this year than I did last. Although only a couple weeks into the New Year, I am anxious to see some big changes.

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Edward Moore February 3, 2013 at 6:48 pm

You can save your money by investing it to small businesses and have also an insurance for your family in the future. Prioritize first you needs than wants.

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John June 29, 2013 at 8:00 am

Very well described. There are so many things in which we waste our money and this is only because we do not try to understand the things properly. In the insurance case if you do not understand your car insurance policy then you may waste money on unnecessary coverage. So it is very much required to understand the things properly. Money comes from hard work so think wisely and save some money.

Reply

Solomon July 5, 2013 at 4:33 am

Hello !
Well that’s astonishing information. Generally we didn’t think deeply. Its really sad we wasted lots of money. But on the other hand we purchase satisfaction in the case of extended warranties. So, it depends on us whether we need money or satisfaction.
Thanks

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Richard Thompson August 2, 2013 at 4:07 pm

The best advice in here is the one about not raising your deductible. You will save much more money in the long run by having a reasonable deductible, rather than a high one and low premiums. Most people don’t look long term, and prefer the amount of money saved each month, but that money will most likely be used on something short term. When you need to file a claim, and your deductible is high, you will most likely be pretty strapped for cash. Finding the right deductible total is key to saving money.
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Mr Financial Debauchery September 4, 2013 at 7:37 pm

The daily deal is always a big bust for me. I sometimes feel as though when something is on sale I have to buy it or I will miss out. When you’re frugal you can’t pass up a good deal.
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Donald Quixote from home insurance Fort October 2, 2013 at 11:11 am

I enjoyed the article and I appreciated the point of being aware of your deductible. When it comes to finances emotions need to be removed from the situation since they are what companies play on in their promotions. List everything out and let the number decide for you.

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Maximillian Heth July 19, 2014 at 3:57 pm

Yes, warranties are a waste of money and time, but it’s a tool that businesses have always used to maximize profit because they work so well and people are so gullible.

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