You get what you pay for. As consumers, we've heard that phrase so frequently it's easy to forget there are times when spending lavishly won't necessarily give us the best value for our money. In fact, sometimes you get much less than you pay for. Here are five instances.
Why it's easy to overspend: Michael Levin, an assistant professor of marketing at Otterbein University in Westerville, Ohio, believes many people overspend when buying gifts in professional and social settings. Our egos and desire to impress trump being financially savvy, according to Levin.
"For example, your boss invites you to his house for a dinner party. You decide to bring a bottle of wine. If you do not know very much about wine, then you will spend more for a bottle of wine because you are using price as a surrogate for quality," Levin says.
He says many consumers also go overboard when a large group of people will know they're giving a gift, like at a holiday party. "We want people to think we are successful and knowledgeable," Levin says.
Helpful to keep in mind: You may save money by forgoing expensive gifts and instead buying a gift card, but you may not be doing anyone any favors. According to CEB TowerGroup, a consulting company, approximately $2 billion worth of gift cards that could have been used in 2012 were not.
Why it's easy to overspend: You're in love, and you want to prove it. You've also heard the rule of thumb that the cost of an engagement ring is about two months' salary, an invention of the diamond industry, so you pull out the calculator and begin doing the math.
And it's scary math. The average engagement ring in America costs around $5,431, according to the theknot.com (although it's helpful to remember that the lavish diamonds 1-percenters give their intended pull up that average).
Helpful to keep in mind: Not that your significant other isn't worth spending a bundle on, but you could first see if there's an heirloom engagement ring in the family that a parent, grandparent or beloved aunt might want to part with. There's also a trend afoot in which some brides are receiving engagement rings featuring other stones, like sapphires and emeralds. That's still expensive, but generally less so than a diamond.
Why it's easy to overspend: It's the big day, one you'll remember the rest of your life, whether the marriage is successful or not. Many couples and their parents will also remember the cost for some time to come. The average wedding in the U.S. costs $28,427, according to a 2012 survey from theknot.com and WeddingChannel.com.
Helpful to keep in mind: If you aren't careful, you could easily spend to the point that your marriage starts off deeply in debt, or if you're a parent paying for it, you could find yourself risking your retirement and blowing your present-day budget.
While it's easier said than done when you mix personalities and the opinions of your in-laws, you should start talking about what your wedding budget is as early as possible, and how you plan to stay within that budget.
If you don't, and especially if you begin fighting with your partner over wedding costs, "it can create significant fiscal frictions between the newlyweds, which could lead the marriage to end prematurely," says Stacy Francis, who owns a wealth management and financial planning firm, Francis Financial, in New York City.
"I know about this," adds Francis, who is also a certified divorce financial analyst.
Why it's easy to overspend: Maybe you drive a lot. Or you've been brainwashed by all the car commercials on TV, the radio and the Internet, lulled into dreamily thinking about how wonderful it would be to own a new car (instead of considering how not-so-wonderful it would be to make those payments). Or maybe you're in love with our country's car culture. A new car, even a used one, is a beautiful thing.
But many consumers don't understand how to finance a car properly – or they understand, but due to financial pressures, go ahead and get the car anyway, hoping for the best.
Helpful to keep in mind: Interest.com, a financial website, issued a car affordability study earlier this year and concluded that of the nation's 25 largest cities, consumers in only one – Washington, D.C.– could actually afford to spend $30,000, the average cost of a new car or truck. Everyone else, as a group, is buying cars they can't afford.
So how should you pay for a car, new or used? If you don't want to get in over your head and pay excessive interest, Interest.com suggests making a 20 percent down payment, financing the car for no more than four years and making sure the principal, interest and insurance don't exceed 10 percent of your household's gross income.
"You also have to keep the insurance price in mind," Francis says. "Insurance premiums increase with the value of a vehicle. The more expensive the vehicle is, the higher the annual insurance costs."
Why it's easy to overspend: Although there are people who claim to be able to get by on four hours of sleep a night, most people spend roughly a third of their lives asleep in bed. Sleep is important. Comfort is, too. There are a dozen arguments for opening up your wallet and buying the most expensive mattress out there.
Helpful to keep in mind: Not that you should necessarily buy the cheapest mattress out there, but listen to your body and not the hype.
In the May 2013 issue of Consumer Reports, the magazine tested 12 mattresses, and the mattress that earned the highest ranking, the Beautyrest Glover Park Firm Pillowtop, retailed for $780, while the ComforPedic Loft Crestwood Luxury Plush mattress, which cost $1,200, ranked lowest on the list.
"Instead of getting the most expensive mattress, try it out and see how it makes you feel," says Mudit Sharma, a neurosurgeon at Spotsylvania Regional Medical Center in Fredericksburg, Va. "A medium-firm mattress tends to be the most comfortable for the majority of folks."
And if it so happens that the mattress you've been testing and enjoying is one of the cheaper ones, then, no, you're not dreaming – buying it is a good decision.
Corrected on 10/10/2013: A previous version of this story misstated the name of the company CEB TowerGroup.