Opportunities to overspend are everywhere. Unless you're armed with a healthy helping of self-control and a fair amount of common sense, it's easy to overpay for most things we need in our everyday lives.
Given the way capitalism works, we're all bound to overpay sometimes. The key is to avoid making it a habit.
With our deadline from Uncle Sam right around the corner, we're all wishing we could spend less here. Avoiding these two common tax blunders is a great way to start.
First, if you're getting a big refund, you're letting the U.S. government borrow from you interest-free. Would they make you that kind of sweetheart deal? If you expect your tax situation to remain largely unchanged from 2011 to 2012, adjust your withholding so you can keep more money in your paycheck. You can do it any time.
Second, if you owe money to the government, have you done everything you can to reduce your tax liability? Contributing to a 401(k) plan or individual retirement account is a fantastic way to reduce your taxable income. And with IRAs, you can play catch-up by contributing for 2011 through April 17.
Also, with two types of IRAs to choose from -- Traditional and Roth -- you have the option of deciding whether you'd like to take your income deduction now (traditional), or if you'd rather have your money grow tax-free (Roth).
No one wants to be told they've made a poor real estate investment, but, in reality, the majority of people would be better off renting than buying a home.
There are two main reasons for this. First, the glut of foreclosures and today's tight lending practices are constraining home prices, so if you buy a house now you're, not unlikely to get much more than you paid for it if you have to sell anytime soon. The nation's largest homebuilders have found it nearly impossible to increase prices. KB Home (KBH) tried to raise its prices in its recently ended quarter, and failed miserably.
The other reason is that your home is not primarily an investment -- it's a place to live. So if you buy with the idea that your "investment" will beat your returns elsewhere, good luck. Yale professor Robert Shiller, who has done extensive research into housing prices dating all the way back to 1890, discovered that home prices outperformed inflation by a ridiculously small margin historically -- just 0.21% per year from 1890 through 1990. If the market returns to this type of marginal performance, you won't ever see the kind of gains you might once have expected.
You're probably aware a new car depreciates sharply the second you drive it off the lot -- but have you ever really stopped to think about that? The cars that were made even 10 years ago are of much better quality than the cars your parents drove. Whereas reaching the 200,000 mile mark was once considered remarkable for a car, 10-year-old vehicles are now passing it with ease.
Paul Taylor, the chief economist at the National Automobile Dealers Association, predicts new-car sales will rise to 13.9 million in 2012. His reasoning for the boost in new auto sales involves America's aging fleet, more affordable credit options, and aggressive dealer incentives.
But think about this: Used-car sales have been outpacing new-car sales by a margin of about 3-to-1 for more than a decade. That's not an anomaly -- that's a trend. The reason is that used cars are actually more affordable, easier to finance, and depreciate far less in value than new cars. A new car simply isn't as fiscally prudent or cost-efficient.
One reason you're overpaying for consumer electronics is mirrors why you overpay for new cars -- they depreciate fast.
But it's more than that. Such products face the double whammy of wider availability (as competitors jump on every bandwagon) and innovation, which will perpetually move prices lower. The longer a product is on the market and the more available it becomes, the lower its price should go.
In terms of innovation, the drawback of nearly all electronics is that whatever you buy, whenever you buy it, a newer, more high-tech product will be on the market within weeks or months. Take 3-D televisions: In July 2010, the average 47-inch to 50-inch 3-D TV sold for north of $900; a year later, the same TV sold for about $400. This is why Sony (SNE) has lost money on its television division for eight straight years. Buying used -- or perhaps buying the previous year's closeout model -- is the smarter way to go.
It's a noble idea to make strides to leave the Earth in a better condition for future generations. But at what cost?
The latest green crazes involve electric and natural-gas-powered vehicles. These represent noble carbon footprint-reducing actions, but very few seem reasonably cost-efficient for consumers.
Although the federal government offers up to $7,500 in tax credit for purchasing an electric vehicle, and the cost of operating the vehicle would save the average American more than $800 per year (electricity costs versus gasoline costs at $3 a gallon), the upfront sticker shock of EVs means it could take longer than a decade recoup the higher upfront cost.
To boost the driving range of a Tesla Motors' (TSLA) Model S Roadster from 160 to 230 miles will set buyers back an extra $10,000; to boost the range to 300 miles, $10,000 more. Is it worth an extra $20,000 when you could just as easily buy a number of new or used vehicles for that price (or cheaper) that get around 40 mpg? Probably not.
We've all been there. You're just about to complete your transaction when the salesperson warns you of the countless perils that await your purchase if you don't protect it with the store's extended warranty. These warranties are, in almost all cases, bona fide moneymakers for sellers and risky, money-losing bets for buyers.
Consumer Reports senior editor Tod Marks hit the nail on the head back in 2006 when his magazine looked into the feasibility of extended warranties and found many simply weren't worth the paper they were printed on. In Marks' own words:
You're betting [the product is] going to break at exactly the time period between when the manufacturer's warranty expires. ... You're also betting that the cost of the repair will be more than the cost of the warranty. You're also betting that you'll want to get it fixed. Technology advances so quickly that new features, dropping prices, better products may mean it's preferable to buy a new item rather than fix the old one.
It doesn't make sense to buy a warranty on something that could easily be replaced out-of-pocket.
Our nation's banks continually find innovative new ways to boost revenue. Recently, many have turned to checking account fees of various flavors to bring in new streams of income, and if you aren't careful, you could be unwittingly contributing more than you should to your bank's bottom line.
Financial research company Bankrate looked at 238 institutions with non-interest-bearing checking accounts: Only 45% of them were fee-free in 2011. That's down from 65% in 2010 and 76% in 2009. The study also found out that 92% of all checking accounts have waivers built in that drop the fees as long as certain conditions are met (such as a once-a-month direct deposit and a minimum balance). Still, this means if you aren't careful, you could be getting charged by your bank for access to your own money.
However, checking account fees don't just end there. Taking money out of a non-partner ATM cost consumers an average of $2.40 last year, up from $2.33 in the prior year. Overdraft fees also crept higher, rising to $30.83 in 2011 from $30.47 in 2010. Familiarize yourself with your bank's policies lest you wind up nickel-and-dimed.
It's no surprise that many investors these days are risk-averse, and it's not just retirees who are fearful of dipping their toes into the waters of the stock market; increasing numbers of younger people won't either. Yes, protecting your assets is important -- but at what cost?
The usual financial safety nets -- bank CDs and U.S. government bonds -- are not necessarily your smartest investments and could actually wind up costing you dearly. Inflation is outpacing almost every one of these safe havens, meaning real-money losses for investors in them.
In February 2012, the inflation rate was of 2.87%, its lowest year-over-year reading in 11 months. Yet your options for government-backed safety nets in almost all cases yielded far less than this. A 10-year Treasury bond is currently yielding just north of 2%, while most bank CDs are offering around 1%. An investment doesn't protect your assets if it's guaranteed to lose real value.
Credit cards are filled with pitfalls designed to lure you into spending money you don't have. The average American household carries close to $16,000 in credit card debt. Each of the nearly 610 million credit cards now in circulation is a weapon of wealth destruction, just waiting to explode if you mishandle it.
Credit card pitfalls come in two forms: rewards and annual fees. According to a survey conducted by the Federal Reserve Bank of Boston in 2010, 60% of consumers have a credit card with built-in rewards. There's nothing wrong with a rewards card in and of itself, but there certainly is if you can't or don't pay off the card every month. Based on a 2004 study by the Federal Reserve, 25% of Americans have no credit cards and an additional 30% pay their balances off every month. That leaves 45% of Americans throwing their cash away on average interest rates of 12.8%.
Of equal danger are credit cards that charge you an annual fee. The prevalence of fee-based cards is growing, they made up more than one-quarter of all cards in 2009. But in most instances, unless you're a very big spender, you could easily find one that offers you similar terms without a fee.
Not all brand-name products can be replaced -- drugs under patent, for example -- but in most cases you can find cheaper alternatives.
We know that store-brand foods cost less than similar brand-name products, but do they taste the same? In October 2010, Consumer Reports conducted a survey to find out. They determined that store brands are just as tasty as brand-name products despite the hefty discounts. Even better, most stores will offer you a money-back guarantee if you're not completely satisfied with the store brand, which adds an extra incentive to at least try the cheaper items.
In medicine, the gaping difference between generic and brand names is even more pronounced. Teva Pharmaceutical (TEVA), one of the world's largest generic-drug makers, often prices its generics at just a fraction of the price of a branded drug. That's because generic drug producers don't have exorbitant clinical trial costs built into their expensing, which means extra savings that can be passed on to you, the consumer. There's little sense in being tied to a brand-name product if you can get the same product for less.