Handling Finances

What if I told you I actively choose to pay more for exactly the same product.  Would you consider me stupid?  What if I said the extra cost didn’t gain me anything like convenience or service.  Maybe I’m just impulsive?  Or maybe I’m talking about a charity auction or a deal with a good friend?

Nothing so exotic — I’m talking about soda pop and candy bars.

I know I’m addicted to sugar and salt.  Every day, I walk by a vending machine that calls out to me, “it’s soooo sweet…”  Occasionally, I even drop a few quarters into the slot to receive my little 300 calorie package of chocolaty goodness.  Some weeks (like the week after Easter) I find myself visiting the vending machine daily as my taste buds crave their fix after a week-end overdose.

Vending machines are a terrible waste of money — the conveniently placed products cost over twice as much as the same product purchased in a pack of 10, and they have to be outrageously profitable as they only need servicing every month or so.  However, I choose to let myself visit the vending machine for my sugar fixes for one simple reason — if I purchase more sugar, I will eat more sugar.

I have decent self-control.  I can wait months after saving enough for my new camera just to make sure I don’t miss saving for retirement 40 years in the future.  I’m waiting to save even more as a down payment on my mortgage even though I could easily afford to purchase a house now.  Yet when it comes to sugar, my willpower just breaks down.  That’s not to say I can’t resist excess sugar, just that the craving neither increases nor decreases — it just sits there waiting for a weak moment.  Perhaps I even have an excuse — since my wife is diabetic, I do a decent amount of cooking with Splenda, and I recently read that these non-caloric sweeteners short-circuit the signal in your brain that correlates sweetness with making you full.

Anyway, whatever excuses I come up with, the bottom line is that if I have sugar in front of me, it will be consumed.  My solution: don’t buy sugar.

Sure, I’ll visit the vending machines — sometimes much more than I should, but the simple knowledge that I’m paying so much for a bottle of sugar-water is a strong incentive to curb my intake back to once a week or so.  For a while, I tried to save money by purchasing soda in cases, but I found my spending didn’t decrease — my intake increased!  Apparently even trying all the tricks I could think of — bringing only one can to work a day (I started drinking it at home) or drinking extra water to keep my thirst down etc. couldn’t make up for the higher availability of the stuff.

Since I can’t save money by buying in bulk, I choose to continue to overpay for my pop and candy.  With a lower intake for the same cost, and with the need to actually walk across the hall and come up with dollar bills keeping the sugar just out of reach, I actually find my craving decreases over time so I do end up saving money (until Halloween anyway).  More importantly, if spending more saves me from consuming even a hundred empty calories a day (and it does), I come out healthier for the cost.

It’s not a decision I take lightly, and the high prices at vending machines do make me cringe, but the pain is what makes this strategy work in the first place.  Yes, I do make a goal to avoid vending machines some weeks (and often I even succeed) but forcing myself to pay a premium at vending machines is my first line of defense against unlimited consumption of chocolate and soda.  For once, I’m happy that vending machines charge so much, and I’m glad those evil dispensers are there to tempt me just enough to curb my sweet tooth without turning me to great deals on 5-lb bags of skittles.

This week has been rather crazy for me with some new responsibilities at my job and the hardest part is coming home and trying to feel productive (or happy being unproductive). It’s a dangerous feeling because it often leads to spending money — both to relieve boredom in the act of shopping and to try to buy stuff that will entertain me. Knowing why I feel like buying stuff helps me keep myself under control, and my budget is loose enough that I can afford to spend $100 on eating out and playing with photography, but it’s important to remember that spending money won’t help me feel more content.

Anyway, on to the riddles.

Last week, Rob, Patrick and Jennifer invested their money and earned 5.87%, 5.34% and 4.90% respectively. A year after they invested their money, their spouses, Linda, Rachel and Morgan took over investing and again, they each invested $10,000 at the start of the year at a fixed rate compounded monthly. This time, they were less open about their investing and while Morgan revealed that he had earned $600 in interest — as much in the year as Rachel had in 11 months, Rachel only revealed that she had earned as much in the last year as Linda had in only 11 months. How many months would it have taken Morgan to earn at least as much as Linda earned in 12 months?

Dave Ramsey, popular speaker, radio host and writer on getting out of debt, encourages his audience to use a debt snowball.  The idea is that as each debt is paid off, the monthly payments that used to be directed toward that debt can be directed toward the next debt in an ever-increasing “snowball” of monthly payments focused on one debt at a time.  In their admirable fight to be free of debt, some snowballers have even turned to “snowflaking” — the frugal search for every possible dollar and each elusive penny to accelerate the repayment of their debt and reduce the monthly interest payments.  For example, Paidtwice recently wrote about how snowflaking isn’t only for attacking debt.  Rocketc at Rocket Finance mentioned snowflaking in a discussion of how he earns interest on monthly credit card balances.  Glblguy at Gather Little by Little brought up snowflaking in an article about gazelle intensity vacations (gazelle intensity is a term used by Dave Ramsey to describe the alert focus it takes to get out of debt).

These bloggers are absolutely right.  Snowflaking can easily increase wealth (not just decrease debt) and it’s a great way to focus on what’s important rather than blowing money at vending machines.  However, snowflaking is highly inefficient — it requires constant focus on priorities, a considerable amount of time thinking about small purchases and requires a strict budget to be really effective.  The vast majority of Americans should not focus on snowflaking, but on throwing huge blocks of ice at their debt or savings.  The vast majority of Americans are not being nickel-and-dimed to death, but are vastly overpaying for houses, cars and televisions.

Ice blocking — some examples.

Okay, so I won’t start using “ice blocking” as a verb, but attacking spending by focusing on the largest expenses first is just good common sense. Because we see gas prices at every other corner in our daily commute, many of us obsess over the price of gas.  We are depressed when gas prices rise and feel victorious when they drop just before we buy.  We’re willing to drive miles out of our way to save $2.00 on a tank of gas at the “cheap” station.  How many of us regularly check to make sure we’re saving 10-15% on fuel by keeping our tires properly inflated?  Even more importantly — how many Americans are buying cars new and taking a huge hit in depreciation while griping about gas prices?  It’s so easy to focus on gas prices when they’re on every road in huge letters in the sky, but saving $2 on gas won’t help your finances if you refuse to save $10,000 by buying your car used!

Similarly, it’s easy to get caught up in sales and spending hours browsing through clearance racks for rock-bottom prices, but it won’t help a bit if you spend $800 on a “reasonably priced” new HD-TV when you could buy a decent used TV for under $100!

We humans are simply hardwired to look at the world in relative terms — when we discuss gas, we compare the price to the last few prices we noticed.  When we buy a new car, we tend to compare the price to all the other new cars rather than taking the time to looking at all the options, calculating the yearly cost of gas and looking at the options in relation to our other financial goals.  There’s nothing we can do about this rational thinking — in fact, one study had people estimate the price of everyday items like keyboards, chocolate and wine after writing down the last two digits of their social security numbers.  It found that those who wrote large numbers (like 80) estimated the prices as 216 to 346 percent higher than those who wrote small numbers (like 22).  Advertisers use this relative thinking against us in sales and cash back bonuses and very successfully manipulate us into paying more while feeling like we saved less.

Some larger expenses that should be researched carefully to avoid washing out coupon-cutting and bargain buying:

• Purchasing a car,
• Shopping for the latest *anything* rather than paying half the price for the last generation,
• Routine medical treatment like flu shots, dental work or physicals.
• Music/movie/book collections where radio and the local library offer the same for free.
• Gym memberships.
• Planning vacations.

That’s not to say that going to Disneyland instead of the Grand Canyon or keeping a DVD collection can’t fit into your budget!  And it certainly doesn’t mean that cutting out vending machines and packing bag lunches is stupid if you do have a gym membership and have the latest, fastest computer!  I just think it’s important to point out that while many frugal bloggers have cut the major fat and moved on to pinching out dollars and cents in their zeal to get out of debt, the average American trying to get out of debt or start saving money needs to start at the top and make the large decisions that come with large savings.  Yes, every little expense adds up over time and small daily cuts can make a huge difference in the long run.  Still, to someone just starting on the road to financial security, making a small number of highly rewarding decisions will be much more effective than fighting to cut back back on daily coffee consumption while spending $200 a month on cable.