Online media are full of hacks for saving money, but do they really work? Naturally, some are more effective than others, but the real danger is in those that may actually become bad money habits.
Money saving tips to avoid
Here are some seven things people do to save money, but might actually cost them more in the long run:
1. Succumb to credit-card rewards
Credit cards market their rewards because it emphasizes what they give back to the customer not what they can cost. If you are someone who routinely carries a credit-card balance -- even if only for a few months after holiday shopping -- you should focus more on interest rate than on rewards. After all, rewards are a one-time, low-percentage rebate on what you spend; interest is an ongoing high-percentage expense on everything you owe.
Bottom line: If you are in the habit of carrying a credit-card balance, the best money-saving advice is to focus on getting the lowest interest you can rather than on credit-card rewards. Better yet, build your savings account balance and make important purchases in cash.
2. Spend to maximize credit-card rewards
Some websites love first-person stories with money-saving tips like "how I financed our honeymoon with credit-card rewards." That might sound savvy until you consider the sheer amount of spending required to rack up that amount of reward credit. Chasing rewards can turn into a bad money habit.
Earning rewards for spending you were going to do anyway is worthwhile; but if your spending starts to be driven by the idea of earning rewards, this may be costing rather than saving you money.
3. Minimize tax withholding to access money sooner
This is the kind of clever money-saving advice that sounds good in theory but probably doesn't work for most people in practice. The idea is that getting a tax refund is just a sign that you were paying the government too much to begin with. Imagine instead if you were able to get your hands on that money throughout the year leading up to tax time, earning interest on it in a money market account as it comes in.
For minimizing tax withholding to work in your favor, you need two things most people don't have: a good enough handle on your tax situation to correctly gauge the exact withholding level for your needs, and the discipline to funnel the extra money in your paycheck into savings. For most people, a few extra dollars in each paycheck can quickly get absorbed into their spending habits and not be saved. In that case, it is more effective to get one refund check at the end of the tax year which can be added to savings as a single deposit or invested in a certificate of deposit (CD).
4. Let sales drive buying behavior
"I couldn't resist. It was such a good bargain." How often have you heard someone come home with something purchased on sale saying something like that?
When it comes to things you were going to buy anyway, looking for sales is money-saving behavior. However, if a sale prompts you to buy something you weren't otherwise going to, it is extra spending, not saving.
5. Obsess about Black Friday/Cyber Monday
The above observation about sales applies especially to Black Friday/Cyber Monday. While there may be some good deals to be found on those two peak shopping days, they also apply the age-old sales technique of creating a sense of urgency by setting arbitrary deadlines. That often leads frenzied shoppers to buy more than they otherwise would.
Play it cool. Know in advance what you plan to buy and, if you find a great deal on Black Friday or Cyber Monday, buy it then by all means. However, filter out things you didn't plan on buying, and if you don't find a particularly good deal on what you planned to buy, don't panic. Traditional and online retailers should have plenty of other sales in the weeks ahead.
6. Buy bargain brands to save money
This requires some judgment as to quality and some trial-and-error experience. From everyday disposable items like cleaning supplies to longer-term purchases like clothing and furniture, quality can matter a great deal. Buying cheap is only the illusion of saving if it results in having to replace things much more often than if you had opted for a more-expensive-but-much-longer-lasting alternative.
7. Shop for a high-interest checking account
It is a great idea to look for high-interest savings accounts or CDs; but when it comes to checking accounts, interest should be a secondary consideration to fees.
Why? According to the MoneyRates.com Checking Account Fee Survey, the average monthly checking account fee is now $13.58, which comes to $162.96 a year. Even if you could find an interest rate of 1 percent (which is pretty rare for a checking account these days), it would take an average balance of $16,296 to earn enough interest over the course of a year just to break even with the fees you are paying. The better move is to look for one of the minority of checking accounts that has no monthly fee. Only if you are trying to choose between two or more such free checking accounts should you make the interest rate a consideration.
Money saving advice has its place
There can be merit in popular money-saving tips, but only if you apply them with common sense and focus on the big picture. Don't let money-saving advice control what you spend, just let it inform how you spend it.