Overspending with Credit
If your last name is Trump or Hilton, read no further. If, however, you're like most of us, saving money -- or if you prefer, cutting costs -- is a challenge that occupies a good part of your waking life. And it's a task that has become exponentially tougher in the past year, as price tags on essentials such as food, clothing, and gasoline have skyrocketed. (How bad is it? In the first half of 2004, the cost of gasoline increased by 50 cents a gallon, or 34 percent; and in June, the U.S. Department of Labor announced that prices for food in May had gone up nearly a full percentage point, the largest increase in 14 years.)
Now, with interest rates -- after years of hovering near all-time lows -- starting to rise as well, the importance of getting a handle on your expenses is even more crucial. The problem is that most heads of household feel, not unjustifiably, that they're already running a pretty tight ship.
So how do you cut fat if there isn't any? The truth is that opportunities to save money exist, no matter how frugal you are. They're just easy to overlook. What follows are 10 common money blunders that even financially savvy parents commit -- and how to correct them.
Overspending with Credit
The myriad ways that otherwise responsible Americans fall prey to the perils of plastic are almost dizzying. First and foremost, of course, is the common problem of relying on credit cards to live beyond one's means and then paying dearly for the habit. A shocking 48 percent of credit card holders make only the minimum payment each month, according to Bob Currier, director of education at American Consumer Credit Counseling in Newton, Massachusetts.
This extraordinarily expensive way of borrowing money (for that is exactly what you're doing) is, says Jennifer Openshaw, author of What's Your Net Worth? (Perseus, 2002), "absolutely the biggest mistake you can make with credit cards." Given the sky-high interest rates commonly charged (they can run upwards of 20 percent), paying only the minimum effectively means that the consumer will never get out of debt.
Openshaw offers a sobering example: If you start with a $7,000 balance and pay only the minimum each month, it will take 45 years to pay it all off. Plus, she adds, "you would end up paying about $15,000 in interest on your original $7,000 debt." It is difficult to conceive of a bigger waste of money than this.
Paying off your entire balance each month just makes financial sense. If you can't manage that, either negotiate with your card issuer for a lower interest rate or, if that fails, transfer the balance to a card with a lower interest rate (check out cardweb.com or abcguides.com for possibilities).
What few people realize is that, in addition to its other pitfalls, carrying an unpaid balance negates one of the most attractive features of prudent credit card use -- i.e., the wonderful "float" you get when you charge something on, say, June 8, yet don't have to pay for it until July, with no interest accruing. This grace period disappears when there's an unpaid balance because banks calculate interest on your "average daily balance." That means the moment a charge goes onto your card, it becomes part of that balance and hence starts accruing interest immediately.
Paying for Services You Don't Use
The classic of this genre is the expensive gym membership that one buys -- often at the first of the year, following the usual New Year's resolution to get in shape -- and never uses. "This money waster is based on the financial fallacy that paying for something guarantees that you will make use of it," says Catherine Williams, vice president of financial literacy for Money Management International, a Houston-based consumer credit counseling service.
"In fact, all it does is give you a double dose of guilt -- first, for not working out, and then for throwing money away on top of it." Before you sign a contract committing to a year's worth of workouts, see if you can purchase a trial membership for a month, or pay by the class until you're sure you'll use the facility regularly.
Other unnecessary services may include price clubs or travel clubs that offer no greater discounts than what you'd find yourself by doing some careful comparison shopping. You're often told that such memberships "pay for themselves" after only one or two uses, but before you swallow that line, do the math.
And one more thing about those price clubs: They make it all too easy to "go broke saving money." How many stories have you heard about someone who goes into one of these merchandise-stuffed warehouses looking for discount diapers, only to walk out an hour later with $300 worth of other irresistible "bargains"? Ask yourself if you really need this membership and whether it will actually help you economize. If you can't answer yes to both, save yourself the price of admission.
Paying for Duplicate Services
This error usually results from not reading the fine print. "We live in a very cold place, and at least twice every winter, we have to call to get our car started or towed," says Minneapolis mom Cheryl Rosenthal. "So we always belonged to AAA for the towing service. But we came to find out, our car insurance policy already included it."
Similarly, a remarkable number of consumers (around 25 percent, according to a 2004 online poll conducted by the Progressive Casualty Insurance Company) buy the collision insurance offered -- for an often-steep extra fee -- by car-rental agencies, even though they are most likely covered already by their own policy or even by a special provision on their major credit card.
Many credit cards also offer travel insurance, making it unnecessary to buy one of the policies that tour companies push. And, inexplicably, a surprising number of consumers pay for more than one Internet provider -- an extravagance that has no apparent merit.
Not Being Conservation-Conscious
"When we were growing up, our parents told us to turn off the lights when we left a room," says investment adviser Bill Staton, the coauthor (with his wife, Mary Staton) of Worry-Free Family Finances (McGraw-Hill, 2003). "That advice stands today." According to the U.S. Department of Energy, the average American household spent $1,300 a year on energy in 2001.
That means, as Staton points out, that cutting your consumption by just 10 percent (a reasonable goal) will put $130 a year back in your pocket. Just paying attention is half the battle. A TV or stereo should never be on if there's no one in the room watching or listening. A faucet should not be running if no one is actively using the water (a quick quiz: what's the water doing as you brush your teeth?).
Set your home thermostat at the highest temperature your family can stand in the summer and the lowest in winter, and make sure your doors and windows are all caulked and sealed properly. Unplug appliances you use only sporadically and buy the most energy-efficient models you can find of big items such as refrigerators and air conditioners.
Also, watch your paper consumption. This is a very pricey area for most families today, who are constantly printing documents ranging from kids' artwork to vacation photos. Use both sides of the page when it's appropriate, and to conserve both paper and computer ink (which, at $66 an ounce, is more expensive than Russian caviar or French champagne, notes Jerry Chamales, the founder of Rhinotek, a producer of remanufactured ink), avoid printing in color and change the setting on your printer to "draft" quality whenever possible. The payoff for all this conservation is not merely financial; you're also sparing the environment.
Not Minding Your Media
Many parents of small children are old enough to remember those halcyon days when television was (gasp!) free. Today, we pay and pay handsomely for the dubious privilege of being able to gaze at the tube 24-7. Still, if you carefully review your monthly cable statement, you will probably find that you are paying for programming that you don't use -- or can live without.
"I rarely even glance at our satellite TV bill," admits Mary Chapman, an Alexandria, Virginia, mother with two school-age sons. "But a couple of months ago, I decided to see exactly what we were paying for. I discovered we were subscribing year-round to a 'sports pass' that my husband wanted only during basketball season. It was $30 a month, and I hadn't even bothered to check!"
Similarly, take a few moments to peruse your next telephone bill. All the bells and whistles you signed on for -- such as caller ID and call waiting -- cost you every month, so decide which ones you need and which you can do without. "I was paying a monthly fee to have three-way calling before I realized there weren't three people in the world I wanted to talk to at the same time," recalls credit counselor Williams.
Indeed, it's a good idea to examine all your media and ask yourself if they're worth the cost. A DSL or other cable line for your computer can easily run $50 a month. While such high-speed connections are a convenience, you may want to consider reverting to dial-up. "I have high-speed Internet access at work, so I use our home computer mainly to check e-mail," says Brooklyn, New York, mom Molly Meyers. "Dial-up is perfectly adequate."
Spurning Uncle Sam's Gifts
"Most families are leaving money on the table because they are not paying attention to taxes," says Openshaw. By reducing your annual taxable income, she points out, you reduce your taxes, and that equals money in the bank. That's why it's a major mistake not to take advantage of various tax shelters offered by your employer, chief among them 401(k) or other individual retirement plans. Yet a surprising number of people do just that, arguing that they can't afford to participate. In fact, they can't afford not to.
First of all, such plans force you to save -- a worthy goal in itself. Furthermore, because your contributions are exempted from current income taxes, you pay no taxes on that money until you withdraw it (as early as age 59 1/2). And you're not taxed on the interest you earn until then, either. More bluntly, if you fail to participate in your plan, you are doing nothing less than throwing money away, because your employer is then not required to put in its match, which in most cases is at least 50 cents for every $1 you earn, up to 6 percent of your total income.
Most employers also offer tax-sheltered flexible spending accounts for the cost of childcare, unreimbursed healthcare, and commuting; everyone who has such expenses should avail themselves of these plans. Paying for these items in after-tax dollars increases your cost by as much as 28 percent (if that's your bracket). And don't be embarrassed to ask for a tax receipt for a donation to, say, the Salvation Army, your favorite charity, or the local fire department.
Williams also urges parents to get their money's worth from their tax dollars by taking advantage of public facilities such as parks, pools, and libraries. "We used to rent or buy videos for the kids," says Janice Brathwaite, a mother of three from Delray Beach, Florida. "Now we take them out of the library, keep them for a week, and pay nothing at all."
Setting Deductibles on Insurance Policies Too Low
This is a common mistake made by people who get nervous at the prospect of paying a lot of money out-of-pocket in the event of a claim. But raising your deductible (the amount you are responsible for before your insurance kicks in) will save you plenty in premiums. Openshaw, like many other experts, goes so far as to advise, "Take the highest deductible possible to save on your premium."
Even changing your deductible from $500 to $1,000 will save you around $80 a year on a typical homeowner's policy on a residence valued at around $100,000. And even though $80 may not seem like a lot, keep in mind the realpolitik of insurance: Claims under $1,000 are seldom worth bothering with anyway, experts agree, because filing them puts you at risk of being dropped by your policy holder and/or having your premiums raised.
Given this catch-22, you're better off with a higher deductible. To make sense of all this, it may help to remind yourself that the true purpose of insurance is to protect you from catastrophe, not routine bad luck. A loss that costs you $1,000 is regrettable but rarely catastrophic. As long as you're covered beyond an amount you can reasonably absorb, your insurance is serving its purpose. Paying for anything more is bad money management.
Not Getting the Most Mileage from Your Car
This is a mistake you should correct in the most literal way: Purchase a vehicle with the best gas mileage you can find. Doing the math makes the case. Say you upgrade from a car that gets 20 miles per gallon to one that gets 26; if gas costs $2 a gallon, you'll be saving $2 every 20 miles, or nearly $450 annually, assuming your car is driven 15,000 miles a year (the average in the United States, according to Edmunds.com, an Internet site devoted to car maintenance). And there's no need to pay 20 cents a gallon more for premium gasoline, unless your owner's manual calls for it (a requirement of only a few high-end models); indeed, most cars today are designed to run on regular.
What will make a big difference in your car's fuel efficiency is routine maintenance. Brakes that rub gobble up extra fuel, and so does driving on tires that are not properly inflated. Above all, be vigilant about changing the oil. "The most important fluid in your car is that dark, syrupy liquid that lubricates your engine," says Don Earnest, editor of Penny Pincher's Almanac (Reader's Digest, 2003), who advocates a firm, inflexible rule of an oil change every 3,000 miles. Treating your car well is not cheap, of course, but in the long run it saves you money because it extends the life of your car.
And, incidentally, if you're financing a car, whether new or used, shop around for the best deal. Many car buyers still get their loans from the dealership. But in fact, according to a report issued in January 2004 by the Consumer Federation of America (CFA), dealers' finance departments routinely mark up their rates and fail to disclose this fact to the consumer.
"These hidden finance kickbacks typically add at least $1,000 to the cost of an auto loan," warns Stephen Brobeck, executive director of CFA, who estimates that the practice affects about 1 in 4 buyers who finance through dealers. You're better off approaching lenders directly for the best rate -- preferably before you walk onto the lot. This will put you in the best position to negotiate.
Shopping on Impulse
How many times have you ended up paying too much for a basic commodity -- dashing out for a single can of formula at the convenience store, for example, or plunking down top dollar for a child's birthday present rather than finding something on sale at Toys 'R' Us -- because you needed it right this minute?
But one of the bedrock truths of modern consumerism is that almost anything can be had for a lower price -- if you plan ahead and are willing to do the research. In the latter regard, today's consumers have an immense advantage over those of the past, because the Internet has made it possible to comparison shop for everything from clothes to travel to insurance to phone service. And sometimes, all it takes is saying no -- and not necessarily to the kids, but to yourself. After all, it's a rare toddler who objects to wearing a hand-me-down.
Yet legion are the mothers who splurge on the latest toys or newest clothes. "It's hard to resist some of the adorable kids' stuff that's out there these days," acknowledges Jane Cressi, a Milford, Pennsylvania, mother of 15-year-old twin daughters. "But my advice to parents is this: Save your money now, when your kids don't care what they wear or play with, because it will change when they're teenagers. That's when you'll wish you had all the money you wasted when they were babies!"
Not Sweating the Small Stuff
This category includes a whole grab bag of nickel-and-dime spending that, individually, doesn't amount to much, but which can add up over the long haul. Indeed, many credit counselors instruct their clients to write down every cent they spend for a week -- from Popsicles to newspapers. "They're stunned when they see how much money gets frittered away," says Williams.
Take that daily cappuccino habit. You don't have to give it up; after all, the point of saving money is to enhance the quality of your life, and being forced to abandon every small pleasure will have an opposite effect. But (there's always a "but") if you're going to maintain the habit, you should at least be conscious of what it is actually costing you so that you can make an informed decision. That way, you can determine whether that java is genuinely worth $15 a week, or close to $800 a year, or whether you'd rather put the money elsewhere.
Similarly, a $2 fee to get access to your own money at an ATM may not seem unreasonable -- $2 is not a huge sum -- but it's still $2 less in your pocket, and two bucks here and two bucks there add up to big bucks before long. Do the extra legwork to find a branch of your own bank from which to withdraw the cash. And if you're paying to have a bank account, you're a chump. Banking has become supercompetitive, so if your bank won't waive those fees, switch to one that will.
Likewise, paying attention to due dates and deadlines will save you the fines that snowball when you fail to pay a bill on time or you return a video past its due date. Just ask the governor of California. Since taking office last November, Arnold Schwarzenegger has saved taxpayers thousands of dollars on toilet paper alone by switching from two-ply to single-ply at the Capitol. "It's not anymore the two-ply," he told the New York Times. "Because you know what? We're trimming. We're living within our means." Hey, if the Terminator is willing to sacrifice comfort to save money, it behooves the rest of us to follow suit.
Lorraine Glennon is a freelance writer in Brooklyn, New York.
Originally published in American Baby magazine, September 2004.