Step Down to Save Money

Recent stock market volatility and recession jitters have me thinking of a similar environment five years ago at the start of COVID-19. What I wrote then is as important today: “While we can’t control prices, we can control (somewhat) what we spend.” Not everyone is able, or will feel emotionally inclined, to “buy the dips” in stock prices, but everyone can review and tweak their spending habits.

In this tough economy with rising prices for many household expenses and stock market carnage, many people are looking for “deals.” People at all income levels are seeking ways to lower expenses so they can claw back against inflation, save money, and/or repay debt. Consider these strategies:

Consider Stepping Down- Like smoking cessation patches where nicotine is reduced gradually, “stepping down” reduces household spending in gradual stages instead of eliminating an expense completely. To visualize stepping down, imagine a staircase. On the top step is the most expensive way to buy an item and on the floor below the bottom step is the least expensive purchasing method. 

Put It Into Practice- Here’s an example of buying pancakes for breakfast. The most expensive method (top step of the staircase) would be going to a “sit-down” restaurant. The next step down would be to buy pancakes at a fast food outlet. Go down two steps  and you can buy frozen pancakes at a supermarket and, three steps down, pancakes prepared with a mix. At the “floor” of the staircase would be the cheapest method still: pancakes prepared “from scratch” (i.e., dry ingredients).

Keep On Going- “Stepping down” can also refer to the frequency or amount of a purchase as well as where it is made. For example, you may decide to eat out two or three times a month instead of five or six. You’re not completely eliminating what is obviously a pleasurable activity. You’re simply taking steps to reduce the cost. Or you might “step down” by eliminating an appetizer, drink and/or dessert when you eat out. Again, you’re still enjoying a restaurant meal, but doing so for less money.

Step Down Shopping Venues- “Stepping down” works best with “discretionary” expenses that are not locked in. Examples include clothing, shoes, gifts, home furnishings, toys, housewares, and travel. Steps of spending, from top to bottom, might include shopping high-end retailers, mid-level price department stores, discount stores, factory outlets, consignment stores, and thrift shops, flea markets, and garage sales. Again, the more steps someone goes down, the greater the likely savings. 

Be a Thrifty Shopper- Many thrift stores are operated by non-profit organization fund-raisers and are a win-win-win-win: donors get rid of items they no longer need, shoppers get great bargains, a non-profit agency gets needed cash, and less stuff ends up in landfills. Some thrift shops have “dollar racks” and end-of-season bag sales. I volunteer at a thrift shop and am constantly amazed at the wonderful items (all donated) that are available for sale at a fraction of their original price. I also went on a thrift shop trail recently with friends and bought home a haul of nine items that cost $22.

Now is a tough time to be a consumer with the impacts of tariffs and inflation. The next time you want to buy something, consider “stepping down” and visiting a local thrift or consignment store. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Spending Money: Insights and Recommendations

 

Recent data from government agencies and retailer organizations indicate that U.S. consumers have continued to spend money robustly in 2024 even with inflation increasing the cost of many goods and services (a.k.a., cost-of-living creep). Not surprisingly, delinquency rates on credit cards have increased, with 8.9% of balances transitioning into delinquency during the past year according to data from the Federal Reserve Bank of New York.

I recently attended a seminar called The Psychology of Spending that delved into emotions and other factors that prompt people to spend money. Below are seven insights and recommendations:

 

Emotional Appeals- Advertising campaigns frequently appeal to people’s fears and desires. Some common examples include: a desire for good health and well-being, a desire to be loved, a desire to project a positive self-image, and a fear of physical decline and financial insecurity.

 

FOMO is Real- Whether it’s called “fear of missing out” (FOMO) or “keeping up with the Joneses,” it is human nature to compare ourselves with others. As a result, people buy things to “fit in” or appear successful. It is important to remember that “you are not what you buy.”

 

Timing is Everything- Studies have found the longer people are in a store, the more likely they are to make unplanned (impulse) purchases. Therefore, solid shopping advice is: create a shopping list, follow the list, and don’t linger in a store or mall. Also, shop alone as much as possible and avoid browsing, free samples, trying on expensive clothes, and talking to salespeople.

 

Spaving Does Not Work- A new financial term, “spaving” (i.e., the practice of spending money to save money to get a perceived deal), made headlines in 2024. Unfortunately, it is simply a trap to entice consumers to spend more (e.g., “Buy 2 - Get 1 Free”). Smart shoppers look for sales on items that they need or were already planning to buy. Otherwise, bargain hunting can be costly. The best “bargain” is actually not to buy something if you do not need it.

 

Impulse Buying is Costly- Average Americans spend $315 monthly (over $3,700 per year) on impulse purchases, which feel exciting, especially when combined with spaving (i.e., the thrill of a deal). An example is “retail therapy,” where people get a temporary “rush” by shopping to cheer themselves up. Experts recommend free mood-boosting activities (e.g., walking outdoors) instead.

 

Spending Habits Can Change- It is not easy, but it can be done. For example, research shows that people spend more when they use credit so leaving credit cards home may help. Also, waiting 24 hours for purchases over, say, $50 or $100. Another habit that I wrote about in my book, Flipping a Switch, is that deeply ingrained values of frugality are also difficult to change.

 

Hard Questions- Self-evaluation can help people analyze spending habits and emotional triggers. Good questions to ask yourself are: what do I enjoy spending money on and why?, what are my best spending habits?, and what spending habits do I want to change and how can I do it?

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

The Cost of Convenience

A key factor that determines what people spend money on every day is convenience. Convenience generally saves time but can add to the cost of products and services because somebody did some work for you (e.g., marinating meat or fish or making kabobs). 

An estimated $751 billion is spent annually by Americans on convenience items according to a study by Finder, an online data aggregator.

 

Consider the following ten examples:

¨    Buying sliced fruit at a supermarket vs. whole fruit (e.g., melons and strawberries) and cutting it up yourself; ditto for packaged salads vs. cutting up lettuce, tomatoes, etc. yourself

¨    Using food shopping delivery services vs. shopping yourself at a supermarket

¨    Ordering home food delivery (e.g., DoorDash, Grubhub) from restaurants instead of eating out

¨    Taking a cab or ride share (e.g., Uber, Lyft) vs. using public transportation or even walking

¨    Eating out, take-out, or meal delivery services vs. cooking food at home and brown bagging

¨    Visiting a drive-through vendor for coffee and/or breakfast vs. preparing these items at home

¨    Shopping online, being tempted to overspend, and having to pay shipping and handling fees

¨    Buying home-delivered books online that could be checked out for free from a public library

¨    Using vending machines to buy snacks or beverages instead of bringing them from home

¨    Hiring a home cleaning service or lawn mowing service vs. performing these tasks yourself

 

Another example of high-cost convenience spending is using plastic (debit or credit cards) or mobile (digital) wallets (e.g., Google Pay, Venmo, Apple Pay) to make purchases. Studies have found that people spend more when no physical money is changing hands...about 30% more when they don't spend with cash.

According to a Pew Research study, in 2022, about 41% of Americans said none of their purchases in a typical week were made with cash, up from 29% in 2018. Digital wallets are even more convenient than credit cards because people don’t need to carry a credit card and can pay with their phone. The easier it is to spend money, the more money people typically spend.

Bottom Line: convenience spending methods are here to stay and people often use them to help manage their busy lives. Convenience is not necessarily a bad thing but people need to understand the price tag and evaluate how convenience deccisions affect their finances. 

When money is tight, it may be wise to ditch convenience in favor of inconvenient, but lower cost, spending options. Personal decision rules are also useful (e.g., a spending limit for spontaneous purchases). 

For additional information about the cost of convenience, view this OneOp webinar.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

How to Negotiate Lower Prices

 

Whether you shop in person at “brick and mortar” stores or prefer to shop online, price discrimination is a fact of life. In simple terms, price discrimination is the practice of charging different customers a different price for the same product or service. Think airline seats, hotel rooms, cars, auto insurance, credit card interest rates, cell phone plans, and items sold at garage sales. 

It is common for consumers to pay different prices for these items (e.g., coach seats on the same flight or prices for the same room at the same hotel just like the Trivago television ad). 

In this time of sustained high inflation for many items, price discrimination is particularly concerning. One way to fight back against price discimination is to become a better "haggler." In other words, learn to negotiate the price (downward) on more items that you buy.

Below are some experts tips for haggling:

Ask Better Questions- Questions that require a “yes-no” response (e.g., “Will you lower my interest rate?”) should be avoided because salespeople will likely say “no.” Instead, use phrases that require a conversation. Examples: “What discounts are available?” and “This is more than I want to pay. Tell me what I can do to get a lower price.” You can also negotiate by suggesting a lower amount than the posted price. Example: “I can go $2,500. That’s my limit.”

 

Develop a Script- Negotiation experts recommend preparing a script or list of bullet points to refer to when haggling. Ideally, practice negotiating with a friend or family member to get the timing down right. A negotiation request should be positive and show respect to company staff. The more data available to support the request (e.g., competitor pricing), the better.

 

Cast a Wide Net- Not every item for sale has negotiable prices but many more items do than most people think. As an example, research by Consumer Reports (CR) found that 63% of CR members who haggled for a better price on a mattress succeeded and they saved a median of $258. However, only 22% of the sample of more than $6,000 members tried negotiating for a mattress. Take-away: If you don’t try to request a lower price, you will never get one.

 

Question Questionable Items- If items on a hotel, rental car, or parking lot bill are not fully disclosed or services are not provided, this is a “hook” to question fees and request to have them removed. A common example is hotel resort fees. If they are supposed to cover a pool or fitness center and these facilities are closed, there is a legitimate case to be made to lower your bill.

 

Drop Names- Price discrimination is rampant when affiliation-related discounts are involved. If you have connections that will save you money, speak up. For example, military veterans and service members often receive discounts when shopping and from some cell phone carriers and members of AAA and AARP receive a variety of travel-related and other discounts.

 

In summary, the best antidote for price discrimination is smart negotiation. To learn more about how to haggle effectively, review this article from The Wall Street Journal.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

New Ways to Shop

U.S. Shopping History

Back in the day, people shopped in a single general store in rural towns across America. Think Oleson’s Mercantile store in Little House on the Prairie. Mark-ups were generally high and product selection was limited. This started to change in the late 1800s with the introduction of mail order catalogs (e.g., Sears) where shoppers could select from a wide range of merchandise.

Then came the heyday of large shopping malls in the mid-20^th century. Malls were where baby boomers (me included) went to shop and “hang out.” These malls generally had 4-5 large “anchor” department stores, as well as dozens of small specialty shops. Many were two stories with escalators. It is projected, however, that up to 25% of U.S. malls could close in the next five years. COVID-19 accelerated a decline in shopping malls that was already underway.

The Rise of E-Commerce

E-commerce has emerged as the leading way that Americans shop and Amazon’s share of the U.S. ecommerce market is almost 60%. Almost 1 in 3 Americans (especially Millennials) has an Amazon Prime membership and prime members spend over $1,000 a year. 

Even people who don’t shop that much online often use Amazon and other online retailers to do price checks and/or negotiate with “brick and mortar” retailers. Amazon Prime Day is now the most profitable retail shopping day…more than Black Friday and Cyber Monday combined.

Social Media and Shopping

Beyond Amazon, technology has impacted shopping in other ways. Social media is a big driver of consumer purchases. One example, according to a webinar by Next Gen Personal Finance (NGPF), is so-called “haul videos.” These are videos where social media influencers highlight fast fashion brands to millions of followers. 

Haul videos and the resulting FOMO (fear of missing out) and YOLO (you only live once) mindset that occurs can cause people to blow their budget, over-consume, increase credit card debt, and waste money on low-quality clothing.

Buy Now, Pay Later

Another pandemic-accelerated, technology-enabled trend is Buy Now, Pay Later (BNPL). This is where shoppers divide their purchase into multiple (e.g., 4-6) equal payments and make the first payment at the time of checkout, typically online. Most (75%) BNPL users are Gen Z or millennials. Names of BNPL providers include AfterPay, Affirm, Klarna, and ZipPay. 

Unlike traditional layaway plans, which were very popular in the heyday of shopping malls, BNPL enables shoppers to get a product up front with the first payment instead of waiting, sometimes for months, until the final payment is made. However, if consumers miss a payment, there can be late fees and other penalties added to what they owe. 

Therefore, shoppers using BNPL should avoid buying things that they do not readily have money for. One study, however, found that nearly a third of BNPL users have struggled to keep up with payments.

Timeless Shopping Strategies

Clearly, Americans’ shopping experience has evolved over the past 100+ years. However, some timeless money-saving shopping practices remain. Look for deals (e.g., coupons in stores and discount codes online), compare at least three competing vendors for big purchases, and use credit cards wisely.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Are Extended Warranties Worth the Cost? It Depends

 

Shopping season is in high gear and it happens almost every time that someone buys large appliances, a computer, a cell phone, a big screen television, a new or used car, and exercise equipment, such as a treadmill. 

While ringing up the purchase or checking out online, you are asked “Would you like to buy an extended warranty?”

An extended warranty (a.k.a., service contract or protection plan) is purchased separately from the purchased item that it is for. Like term life insurance, it is a form of insurance for “big ticket" purchases. 

Extended warranties cover specific risks associated with an item for a limited period of time in exchange for a fee that customers pay.

Are extended warranties a good idea? Many consumer advocates say no because they are a great profit center for retailers. Some have even used descriptions like “steer clear” and “money down the drain.” 

However, the best answer to this question is probably “it depends.”

Consider the following factors and decide for yourself for each item that you buy when the “Would you like to buy an extended warranty?” question is asked:

¨     Frequency of Use- Around 10% of extended warranties ever get used. Appliances and electronic items generally don’t need repairs during the covered time period (usually 2 to 5 years after purchase). Take the time to research the odds that specific items might need repairs during the extended warranty period.

¨     Cost- Extended warranties can be expensive and can increase the purchase price of items up to 20%. Many shopping experts recommend purchasing high quality brands with positive consumer reviews to lessen the risk of having to have items repaired.

¨     Value- To put things in context, research the median cost of repairs for various items (e.g., a refrigerator) using a resource like Consumer Reports. In many cases, the cost of an extended warranty may be similar to a typical repair bill, which may not ever be needed.

¨     Self-Insurance- To hedge your bets about needing future repairs without an extended warranty, consider setting aside several hundred dollars for each “big ticket” item that you buy in an earmarked savings account. Use this money to repair or replace items as needed.

¨     Exclusions- Extended warranties often contain exclusions such as normal “wear and tear” and accidental damage (e.g., spilling coffee on a laptop). Review the “fine print” before signing any documents and also inquire about the process for submitting claims and locating service providers, especially for online purchases.

¨     Other Coverage- Free extended warranty coverage may already be provided by the product manufacturer or a credit card rewards program. Check out what coverage is already available and for how long.

¨     Possible Exceptions to the Rule- A few products might be good candidates for extended warranties due to their service repair history and cost. Examples include smart phones, treadmills, laptop computers, and large screen televisions. Again, research the service history of specific items and the median cost of repairs.

An extended warranty fee may seem “cheap” compared to the cost of a big-ticket item with sales tax, but it is not a purchase requirement. If you are going out to shop for a “big ticket” item, do some background research about various makes and models and their service history before you are put on the spot with an impulse decision.

Remember, too, that complex purchases with multiple moving parts and speed can often lead to poor purchasing decisions. Many “big ticket” purchases (e.g., cars and cell phones) come with a fair amount of “paperwork” and some people agree to extended warranties to simply “speed things up.”

For additional information about extended warranties, review the Consumer Reports article, “Why You Should Steer Clear of Extended Warranties.”