The Cost of Cheap Financial Decisions

🔍 Deep Dive: The Cost of “Cheaper” Financial Decisions

I’m all for a deal, but always pursuing the lowest upfront cost can lead to higher total costs over time.

A crucial skill for wealth-building is understanding when to spend more initially knowing it’ll save you more in the long-run.

1️⃣ Spending More on Fake Discounts

Retailers use a tactic called price anchoring to make you think you’re getting a deal. This tactic involves displaying a higher “original price” alongside a discounted “sale” price.

This creates a psychological “anchor” that makes you perceive the sale price as a steal. Yet if you look at the price history, you might find the “sale” price was the “original” price a few weeks ago.

Why This Isn’t Cheaper: These tactics can cause you to spend more, afraid if you don’t hit “checkout” you’ll miss a rare deal.

Browser extensions like Honey are great for viewing price history and evaluating whether the “sale” price is a good deal.

2️⃣ ”Free” Financial Advice

When it comes to working with a financial advisor, cheaper isn’t always better.

While some are “free” on the surface, they may earn a commission:

A) Selling you products

B) Managing your investment portfolio

If you’re not monitoring these fees, they can add up. You might not need the products they’re pushing, and sacrificing 1% of your investment portfolio for their commission is significant.

A better alternative: Work with a flat-fee fiduciary financial advisor. They charge a set fee, rather than taking a percentage of your assets or a commission on products.

It might be more upfront to pay an hourly rate, but it could save you in the long-run.

3️⃣ Redoing Your DIYs

I’m all for learning how to do something yourself to save cash. But it can lead to greater costs down the line if you’re not careful.

This comes up often with home renovations. What starts as an “I’ll just rip up the flooring myself” can quickly turn into “Oops I made a mistake now I need to hire someone to fix it and do the original task.”

Think about the opportunity cost, too.

Example: I can do my own bookkeeping and taxes for 40 hours or hire an accountant for $1,500. I’ll take the latter. Less stress, more time.

4️⃣ Missing Out by Being Too Conservative

Conservative investments might feel safer and help you sleep at night. But they often fail to keep pace with inflation, meaning your purchasing power decreases over time even if your account balance grows.

I see this a lot with people stockpiling cash in a checking account rather than investing. And the impact is huge.

5️⃣ Pendulum Swing of Frugality

Periods of extreme frugality are often followed by spending frenzies.

Why? Because you end up feeling deprived and resentful. As you watch everyone else grab drinks and go to that concert, you’re cracking open a Pepsi at home and live-streaming from your couch.

It’ll save you a few bucks, but it gets old… fast.

To compensate for the “lost fun” by being frugal, people tend to “snap back” and spending excessively. Sometimes this shopping spree costs more than the small things you deprived yourself of.

A better approach: Mindful spending.

Ramit Sethi, author of I Will Teach You to Be Rich, says we should identify what brings us joy, then “spend extravagantly” them and cut costs mercilessly on everything else.

Put It Into Practice

Where are you pursuing the “cheaper” option, and is it actually saving you money? How can you invest in what matters and cut where it doesn’t?

💵 Budget Breakdown: What to Do With an Inheritance

This week’s budget breakdown comes from a recent Yahoo article.

The situation: A reader inherited $10,000. They want to use it to pay off their $9k credit card debt. However, talk of a potential recession makes them question if they should just save it for their emergency fund.

You’re not alone if you’re also concerned about a recession. A recent survey found that 62% of CEOs predict a recession or slowdown is coming. It’s a very real possibility.

Even if you haven’t inherited a chunk of cash, this applies for other windfalls like bonuses, legal settlements, or the sale of an asset.

Here are my thoughts:

• Emergency fund should always be priority #1. This can prevent you from having to take on more credit card debt in an emergency.

• If you have high-interest debt, like credit cards, start by saving 3 months of expenses. Pay off the credit card debt. Then build your emergency fund up more.

• If you don’t have high-interest debt, aim for 6 months of expenses saved for your emergency fund. Invest the rest.

🔗 Quick Links

🥖 How to get restaurant food at a discount.

💰 How much to put toward retirement vs. savings.

🛍️ The trend leading to massive savings.