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What Are Some Lifestyle Changes That Save Money?

Read up on behavioral economics and think about the ways that your own spending decisions are biased. A dollar is a dollar, not a percentage of what you're buying.
10/30/2014 03:29pm ET | Updated December 6, 2017
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Answer by Jaap Weel, MA in Econ (GMU) 2011

Read up on behavioral economics and think about the ways that your own spending decisions are biased.

A dollar is a dollar, not a percentage of what you're buying

Remember that saving 5% on a $10,000 item is not at all like saving 5% on a $10 item. But in order to process decision problems at different scales, the brain tends to normalize things so the two cases appear similar. Ever since I studied behavioral economics, I started spending less time worrying about saving 20 cents on spaghetti, but I spent a lot of time thinking about what car to buy and making sure I got a good deal on it. You can buy a lot of spaghetti for a $4k discount on a car, and yet I see people who spend lots of time on grocery coupon clipping but never stop to consider whether they could move to a cheaper apartment, drive a cheaper car, etc.

Be very careful with periodic payments

But at the same time... Convert monthly payments into longer periods when you are thinking about them. A "mere" $100 cell phone contract actually costs you $2400 over the duration of the 2-year contract, and getting an $80 contract instead saves you $480. For the same reason, renegotiating or changing your cable contract (claim you're planning to switch to fiber), insurance, mortgage is likely to have a much better money-savings-the-time-spent ratio than coupon clipping. It may take several dozen hours to research how to refinance your mortgage, but it may save you money each month for the next 20 years, and that adds up! Apartment rent is another such tricky thing. The difference between a $1400 or $1600 apartment does not seems as large as it is, and that is of course why the rent is quoted per month, and not for the whole period of the lease. (I hear that in London, the practice is to quote rent per week!) (For an even more extreme example, my local NPR station recently asked people to pledge $1 a day.)

Risk aversion, insurance, and warranty

Think about risk aversion and see if you're being inconsistent, especially when it comes to insurance (often a scam) and extended warranties (nearly always a scam). An old saying passing its way through my family is that you should insure yourself for things that would bankrupt you. Would it bankrupt you if you totaled that 2000 Corolla? If you didn't get an extended warranty on your fridge and it were to break, just how destitute would you be after paying $700 for a new one? (And yes, $700 really does buy you a decent fridge in the US, much larger than the family of 5 I grew up in ever had when I was a kid.) I have heard of people getting insurance for their windows (in case somebody breaks them). If you have so little savings and so little credit limit that you cannot pay for a broken window... that is precisely when you should reconsider such frivolous expenses as window insurance. (I don't know if window insurance exists in the US, but I saw it marketed pretty aggressively in Holland.) Also, your credit card may already offer extended warranties on anything you buy with it; American Express is especially nice about it, but other firms do it too.

Don't be a cheapskate

And last, again not from economics but from personal experience: I have found that being too stingy has often led me to buy inferior things that later have to be replaced, and for many values of X, two cheap Xs cost more than one expensive X. But combine that with the IKEA rule: any product category at IKEA will have a cheapest item, which is inferior in quality, a second cheapest item, which is better, and a bunch of others which merely look different in some way. (My canonical examples are woks and bookcases, both of which come in considerable variety, of which only the very cheapest is actually really inferior.) Or, to put it a bit more generally: there are diminishing marginal quality returns to paying more. I have a $70 coat rack that, unlike the $25 coat rack I considered briefly, does not fall over when you hang a heavy coat on it. I consider that worth paying three times as much for. But you can easily blow $700 on a coat rack. Is that 10 times as good as mine?

Data, data, data

The first thing they teach you (or should teach you, anyway) about optimizing a computer program is measure first, optimize later. Same with personal finance. If you optimize the bits that happen to strike you as being interesting or easy to optimize, you're like the guy who looked for his keys under the lamppost "because that's where the light is." Get something like mint.com to gather all your financial data and look over it. Where are the biggest advantages to be had? It may be not in the payments you deal with everyday and that come easily to mind (groceries, gas, that sort of thing).

Cost of living

The nuclear option to reducing cost of living is to go and live in a cheap place. If my $1500/month apartment in Redwood City were in Topeka, Kansas I'd be paying about $500 for it. Now as it happens, there are good reasons I don't live in Topeka: Redwood City has some perks, like Climate Best By Government Test, proximity to my job, proximity to my friends, proximity to lots of potential jobs and potential friends, etc. But if you really need to start spending less right now, moving to a cheaper place is something you need to keep in mind.

Shop around periodically for periodic payments

My grandma once signed up for a cell phone plan back in the day when cell phones came with pull-out antennas to improve reception. The plan was outrageously expensive by today's standards and had not been offered to new customers for many years, but the telco had never bothered to inform her that she could get the same service for a fraction of the money. In other words: just because you were responsible and found a good deal on your cell phone plan, car insurance, annual chimney sweep, or whatever, does not mean that it's still a good deal.

Debt and savings and investments

Unsecured consumer debt can be very expensive. Making payments on a 20% APR credit card or store credit is a much better investment than any mutual fund can give you. Unless you are about to declare bankruptcy anyway, you should probably consider any option to get rid of high-interest debt, including digging into savings you promised yourself you wouldn't dig into.

Coupons, special offers, and the like

In general, I think chasing coupons and special offers and the like is often more trouble than it's worth and exposes you to the temptation to buy things you wouldn't otherwise have bought just because they are, or seem to be, cheaper than they normally are.

But... if you understand the economics behind these things, it becomes easier to spot the cases where you can really actually save some money. Whether a particular discount scheme actually saves you significant money is pretty closely correlated with whether there is an obvious underlying economic reason for offering the discounts. (That is, a reason above and beyond the fact that shouting "we have discounts" has a slight psychological effect regardless of whether your prices are any good.)

One such case is discounts given to adjust for fluctuating demand. This is especially relevant for restaurants. They need to charge more at peak times, and to do that without being accused of price gouging they give discounts at non-peak times. They all do so in different clumsy ways, and you can eat very cheaply if you figure out all the Wednesday Lunch Specials and suchlike.

Another case of fluctuating demand is seasonality. Consumer electronics, toys, etc really are cheaper after Christmas. That's because a large fraction of consumer electronics get sold just before Christmas. Afterward, retailers have inventory that will either go out of style or at least be expensive to keep on the books until next Christmas (opportunity cost, storage cost, etc.) Same with out-of-season clothes.

Taxes

In the US, taxes unfortunately tend to depend a lot on details of how you spend and invest your money. Learning about these is boring to many people, but it really pays off, especially for higher incomes. Here's an example of how screwy the tax system can be.

Imagine identical tract homes A, B, and C. Joe buys home A for $250k and sells it after 30 years for $750k. Jane buys home B, sells it after 15 years for $500k, buys home C for $500k, and sells it after 15 more years for $750k. Joe pays a $37.5k of capital gains tax. Jane pays none. WTF? Well, current law exempts $250k of capital gains from real estate for each transaction (with lots of conditions and provisos, consult a CPA, etc.). If you spread out your capital gains over two transactions, you get twice the exemption (provided you meet all the conditions and provisos etc.)

The technique Jane used is known as "tax gain harvesting." For some investments, though, you want to do the opposite: "tax loss harvesting." It's all horribly arcane and requires shuffling pieces of paper (or entries in electronic ledgers) around in just the right way. But it can save you a lot of money.

Buy used

Buying used often makes sense, depending on why people are selling the used item. Things people get rid of for purely aesthetic reasons are especially likely to have a lot of remaining use in them.

Probably the best example of where buying used is a great deal is appliances. People throw out washers and dryers because they got bigger ones, they switched from gas to electric or vice versa, and other reasons that have nothing to do with whether the appliance is functional. Things that go in kitchens (fridge, stove, etc.) may get tossed for purely aesthetic reasons. Every US metro area has a few used appliance dealers that'll sell you these things. Typically they'll even deliver and install, so you get all the same convenience you'd get from buying at Sears or Home Depot.

Things like eBay and Craigslist have vastly improved the liquidity and efficiency of used goods markets, but be careful to check you're really getting a good deal. I've seen cheap harbor freight tools on craigslist for more than their original price. Reclaimed lumber prices are currently going crazy at least here in the Bay Area and you're much cheaper off buying new in many cases.

When in doubt about quality it can help to simply ask the seller why they are selling. Many people who are willing to advertise defective goods to the public at large aren't very good at lying to someone standing right in front of them.

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