Smart SpendingSmart Spending

5 upgrades that waste your money

Extra spending for hybrid cars, store memberships and rewards cards may not be the best choices. Here's why.

By Karen Datko Aug 31, 2010 5:04PM

This post comes from Kimberly Palmer, author of "Generation Earn" and USNews.com's Alpha Consumer blog.

 

Upgrading your wardrobe, car, or wine collection might sound like a rewarding thing to do. After all, you work hard all day, and you deserve to come home to some luxury during your off-hours. But crunching the numbers shows that these five splurges aren't worth their additional cost. Here's why:

 

Fancier wine. Imagine this scenario: You're given two identical bottles of wine, but are told that one cost $5 and the other cost $45. If you were asked to perform a taste test, do you think you'd prefer the pricier bottle?

When researchers at the Stanford Graduate School of Business and the California Institute of Technology performed this test, they found that people said the "more expensive" wine tasted better -- even though it was exactly the same as the "cheaper" bottle.

Baba Shiv, one of the study's authors, previously found that people who paid full price for Red Bull energy drinks were able to solve more brain teasers than those who paid less for the same product. In other words, how much you pay for something can affect how you perceive it.

 

You also might want to consider sticking with screw-top wine, which tends to be cheaper than corked bottles. While corks work well on bottles designed for aging because they let just the right amount of air in, they also increase the risk of wines going bad, or being "corked." Screw caps, on the other hand, don't let that happen, so work well for everyday white wines.

The bottom line: Expensive wine isn't necessarily better.

A hybrid car. There are many reasons to buy a hybrid car: They look cool, they're better for the environment, and they'll save you money on gas. But before paying a premium for a hybrid -- and they do tend to be more expensive -- do a quick calculation to see if the purchase makes sense for you, based on your driving habits.

  • First, check the price difference between your hybrid of choice and its non-hybrid equivalent.
  • Then, figure out how much per year you'd pay for gas with each vehicle by multiplying the current price of gas by the number of miles you drive annually divided by the car's EPA miles per gallon estimate.
  • Take that cost difference and multiple it by the number of years you expect to own the car.

Is the gap big enough to justify the price differential? If you don't drive much, then it's probably not.

Store memberships. It's tempting to purchase a membership account at stores such as Sam's Club or Costco. You can peruse long aisles stacked full of tempting items. But you have to pay a fee of $40 or more for that privilege, and for many shoppers, the membership never pays off.

 

Here's why: According to research from Harvard Business School, shoppers are likely to buy more than they would otherwise (including massive amounts of pasta or toilet paper) when shopping at stores that charge a membership fee because they believe they are saving money. Not only might shoppers end up with more macaroni than they could ever eat, but in some cases, the authors point out, products may be no cheaper than at a local discount store, where you can shop for free.

 

In other words, paying more for membership at a bulk-buy store might not make sense.

 

A rewards credit card. The average non-reward credit card carries an interest rate of just over 15%, according to the comparison website IndexCreditCards.com. The average rate on a reward card is 17.5%. While consumers who pay off their balance each month aren't affected by the interest rates, anyone who carries even a small balance is paying more for their rewards card.

While rewards, which come in the form of airline miles, gift certificates, cash back and other treats, are appealing, they are almost never worth the additional cost that the steeper interest rate imposes. Plus, researchers have found that users speed up their purchases on their credit card when they know they can earn rewards, a trend dubbed "purchase acceleration."

 

The math shows that anyone with a credit card balance is better off sticking with a non-reward credit card and purchasing those so-called "rewards" with their own money.

 

A stylish new wardrobe. Want to spend money so it makes you happy? Then stay away from a luxury-lined closet. Research from the University of Chicago and University of Wisconsin-Madison found that spending money on leisure activities can boost happiness, while spending on material goods such as clothes does not. That's because leisure spending often boosts relationships with friends and family members, and that, in turn, makes us happy.

 

That means the savvy consumer should skip retail therapy, and plan a vacation instead.

 

More from Alpha Consumer and MSN Money:

29Comments
Report
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
Categories
100 character limit
Are you sure you want to delete this comment?

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT SMART SPENDING

Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.

VIDEO ON MSN MONEY

TOOLS

More