More Than You Bargained For
Nobody would voluntarily throw a $100 bill in the trash. But we all waste money every day — in ways you may not even realize.
Vera Gibbons, correspondent for Kiplinger's Personal Finance magazine, visited The Early Show and explained where the wasted money is going and what to do about it.
Gibbons says you many not be surprised to discover that you're on the losing end of "deals" such as year-long gym memberships and video rental clubs.
After a few months, she says, you've practically forgotten how much money you spent to join a membership or club in the first place. And you may be paying for a service you're not using. Gibbons says it is easy to ignore the lost money on bills you have paid so long ago.
"Behavioral economists" have found spending money is not always based on reason, according to Gibbons, but instead it's more often based on emotion.
Behavioral economics combines economics and psychology in order to better understand how people save and spend their money. Gibbons says findings from this field are becoming mainstream.
The biggest problem, according to these economists, who come from top schools like Stanford and Harvard, is that most of us suffer from overconfidence. We believe we are going to go to the gym four times a week for a year; we believe we are going to rent three videos a week; and we believe we will only talk on our cell phones a certain amount of time.
Unfortunately, says Gibbons, our predications often don't come true, and all of the miscalculations are costing us big bucks. There is no official number for how much money the average person wastes each year, but, she says, it's safe to say we are unnecessarily losing hundreds of dollars.
Gibbons points out that gym memberships are the biggest money waster. A Boston study observed 8,000 gym members who had monthly membership contracts. The study found that 80 percent of members went to the gym less than five times a month — paying $17 a visit. The gym offered a $10 "pay per use" option. However, when signing up for the monthly deal, members clearly believed they would go enough that each visit would wind up cost less than $10. This overconfidence, the study found, wound up costing each member about $700 over the life of the contract.
Other big money wasters include video rental clubs, credit card interest fees and gift cards. Sales of gift cards, the plastic version of a gift certificate, are estimated to be about $40 billion this year. Two billion dollars worth of those will never be spent. Consumers will leave them in their wallets, leave some money on the cards, or lose them in the family junk drawer.
Gibbons says we waste more money when we buy with credit cards versus cash, because we overextending ourselves when paying by credit cards.
To make matters worse, we tend to place too much value on the money we save, and not enough value on the money we borrow, such as credit card debt. The average household has $8,000 in debt -- and 59 percent of Americans carry a balance on their cards.
Gibbons says if you're paying the average 15 percent interest on your debt, every $1,000 of debt is costing you $150 a month. However, every $1,000 in short-term savings is probably only earning you about $20 a year. Yet, people hesitate to dip into savings to pay off debt, which Gibbons says is a financially poor decision.
Gibbons says you can control your spending by changing your behavior.
If you're ready to make a few changes, here are Gibbons's tips:
Base Decisions on the Past: If you haven't been to the gym in five years, why assume you're going to become an addict now? Decisions to spend money should be based on past behavior, not how you "intend" to act or change. In short, know thyself!
Get a Second Opinion: Ask someone who really knows you it they think you will use a certain product or service.
Pay With Cash: Gibbons says you'll feel more pressure to consume products if you pay with cash. An example: some behavioral economists studied a theater company and found that the no-show rate for credit card customers was 10 times higher than that of cash customers.
Avoid "Buy Now, Pay Later": When you pay for an item long after you use it, the cost often doesn't hit you as much as when paying with money. This decreases the likelihood it will be used. Research shows that timing really does affect consumption. Gibbons says the more immediate the payment, the more likely it is you'll consume the product or use the service.
Reconsider Season Tickets: When you buy a season pass or season tickets it's difficult to allocate costs to one specific performance or game. Another study proves this point. Economists researching a Shakespearean festival found that the no-show rate for those who bought tickets to a single play was 0.6 percent. However, of those who had season tickets to four plays, 21 percent failed to show up.