Upgrading your wardrobe, car, or wine collection might sound like a rewarding thing to do. After all, you work hard all day, and you deserve to come home to some luxury during your off-hours. But crunching the numbers shows that these five splurges aren’t worth their additional cost. Here’s why:
[In Pictures: 8 Painless Ways to Save Money.]
Fancier wine
Imagine this scenario: You’re given two identical bottles of wine, but are told that one cost $5 and the other cost $45. If you were asked to perform a taste test, do you think you’d prefer the pricier bottle? When researchers at the Stanford Graduate School of Business and the California Institute of Technology performed this test, they found that people said the more expensive wine tasted better – even though it was exactly the same as the cheaper bottle.
Baba Shiv, one of the study's authors and associate professor of marketing at the Stanford Graduate School of Business, previously found that people who paid full price for Red Bull energy drinks were able to solve more brain teasers than those who paid less for the same product. In other words, how much you pay for something can affect how you perceive it.
You also might want to consider sticking with screw-top wine, which tends to be cheaper than corked bottles. While corks work well on bottles designed for aging because they let just the right amount of air in, they also increase the risk of wines going bad, or being “corked.” Screw caps, on the other hand, don’t let that happen, so work well for everyday white wines.
The bottom line: Expensive wine isn’t necessarily better.
A hybrid car
There are many reasons to buy a hybrid car: They look cool, they’re better for the environment, and they’ll save you money on gas. But before paying a premium for a hybrid – and they do tend to be more expensive – do a quick calculation to see if the purchases makes sense for you, based on your driving habits. First, check the price difference between your hybrid of choice and its non-hybrid equivalent.
Then, figure out how much per year you’d pay for gas with each vehicle, by multiplying the current price of gas by the number of miles you drive annually divided by the car’s EPA miles per gallon estimate. Take that cost difference and multiple it by the number of years you expect to own the car. Is the gap big enough to justify the price differential? If you don’t drive much, then it’s probably not.
[Visit the U.S. News Personal Finance site for more insight and money management tips.]
Store memberships
It’s tempting to purchase a membership account at stores such as Sam’s Club or Costco. You can peruse long aisles stacked full of tempting items. But you have to pay a fee of $40 or more for that privilege, and for many shoppers, the membership never pays off.
Here’s why: According to research from Harvard Business School, shoppers are likely to buy more than they would otherwise (including massive amounts of pasta or toilet paper) when shopping at stores that charge a membership fee because they believe they are saving money. Not only might shoppers end up with more macaroni than they could ever eat, but in some cases, the authors point out, products may be no cheaper than at a local discount store, where you can shop for free.
In other words, paying more for membership into a bulk buy store might not make sense.
A rewards credit card
The average non-reward credit card carries an interest rate of just over 15 percent, according to the comparison website IndexCreditCards.com. The average rate on a reward card is 17.5 percent – a difference of almost 2.5 percent. While consumers who pay off their balance each month aren’t affected by the interest rates, anyone who carries even a small balance is paying more for their rewards card.
While rewards, which come in the form of airline miles, gift certificates, cash back, and other treats, are appealing, they are almost never worth the additional cost that the steeper interest rate imposes. Plus, researchers have found that users speed up their purchases on their credit card when they know they can earn rewards, a trend dubbed “purchase acceleration.”
The math shows that anyone with a credit card balance is better off sticking with a non-reward credit card and purchasing those so-called “rewards” with their own money.
[See How Twenty-Somethings Became Debt Scapegoats.]
A stylish new wardrobe
Want to spend money so it makes you happy? Then stay away from a luxury-lined closet. Research from the University of Chicago and University of Wisconsin-Madison found that spending money on leisure activities can boost happiness, while spending on material goods such as clothes does not. That’s because leisure spending often boosts relationships with friends and family members, and that, in turn, makes us happy.
That means the savvy consumer should skip retail therapy, and plan a vacation instead.
Kimberly Palmer is the author of Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back, which will be published in October by Ten Speed Press.
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Soakee of SC 8:38AM March 25, 2011
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