The retail industry has everyone fooled. While millions of people spend their time scouring for deals, clipping coupons from the newspaper if they’re old-fashioned, plugging into the latest mobile deal applications if they are somewhat more technologically inclined, sharing their finds on Facebook to recruit friends for group deals, the companies on the other side of the transaction are generating higher profits.
Can anyone really complain? Consumers are saving more money than ever and yet retailers are raking in more revenue. Even as we’re still trying to recover from the employment effects of the recession and economists say the middle class doesn’t have enough to spend to stimulate the economy on their own, the industry is thriving. It’s a couple weeks early, but I bet the National Retail Federation, when the organization releases its holiday predictions, will expect double-digit growth over last year. The NRF tends to be very optimistic heading into the holiday season, but they haven’t misplaced their trust in the capacity of consumers to spend.
It seems like this should be impossible: how can consumers be saving more while retailers bring in more revenue? Well, there are two important assumptions to overcome.
1. Saving more is not the same thing as spending less. Retailers will continue offering sales, deals, and coupons because they simply encourage consumers to spend more. A perceived deal can help convince a spender to open his wallet or swipe her credit card when they might not have otherwise. This isn’t the result only on the large scale, it’s proven behavioral finance that holds true on an individual basis.
A recent study found that digital coupon users spend 23 percent more per shopping trip than those without coupons. If you use coupons, you spend more, not less. You are not saving money. It’s true you’re getting more for the money you are spending — but research clearly shows that you wouldn’t be spending that money in the first place without the coupons.
The only way to save money is to spend less, and the use of coupons is not the path towards spending less.
2. It’s a zero-sum game. Economists talk about the growth of wealth not being zero-sum; this is, a group of individuals who experience wealth growth — say “the 1 percent” — doesn’t require an offset group of individuals whose wealth decreases — say “the 99 percent.” The economy can grow and, in theory, lift everyone who plays a part in it.
Another way of illustrating the lack of the zero-sum game in the economy is by talking about wealth re-distribution upwards. Consumerism is how money from the middle class and lower goes through a process that benefits the corporate class — the executives in large corporations, private equity firms, and preferred shareholders. If the transaction is reduced to its basic components, it looks like money is simply moving from consumers to producers, building more wealth for one group of society while keeping a larger group financially dependent.
Economists agree the process is more complex than this, and as producers show their relevance to society, they create enough economic substance, adding to the full “pie” to match or exceed the wealth that flows in their direction.
But on an individual level, the macroeconomic reality isn’t relevant. When you spend money, you have less. What you spend as a consumer doesn’t come back to you in the form of greater potential for building wealth. Every purchase eats into your wealth. The more you spend on movies and concerts, the less you’ll have available for food and rent.
With the understanding of the above, you’re better poised to make decisions that help you actually spend less rather than just “saving money.”
1. Shop less often. I could buy some new items every time I go shopping for clothing. A few weeks ago, I found myself at an outlet center near the New Jersey shore, and it’s hard to resist some of the nice clothes I can find on sale. (I like Van Heusen’s styles — looks great, fits well, and not as expensive as the premium brands.) I’m tempted to buy something every time I’m shopping, which is completely unnecessary. If I just don’t go, I wouldn’t buy anything.
Even necessities like food — change your shopping schedule and you’ll find your purchases are more efficient.
2. Conserve what you have. A corollary to the above is that you can make what you already own last longer. In terms of clothing, I still had a lot of my clothing from college — and even some tee-shirts from high school. I was probably thirty-five years old when I finally went through and eliminated some of the stuff I didn’t want to or could no longer wear. But because for many years I had no extra money to spend, I simply made do with what I had. It wasn’t until I had some extra income that I decided it was time to upgrade my wardrobe — although it helped that I wasn’t going into an office every day.
3. Buy in bulk. From a behavioral finance perspective, there is one trick that does work to spend less money over the long term, and that’s buying in bulk. There’s a trade-off. You need to store what you buy, and having more stuff takes up extra space, requiring a larger living space than you might otherwise need. And there’s an up-front cost. You’re spending more money today than you normally would, and it’s reducing your cost in the future. A lot of people living paycheck-to-paycheck can’t necessarily handle larger up-front expenses.
4. Reconsider your needs and wants. Many times we’re spending more than we need to spend because we haven’t given a lot of thought to whether a purchase is necessary. There are certainly instances when it’s acceptable to spend money to satisfy a desire rather than a necessity, but it shouldn’t be an automatic behavior. Take some time. Add a delay into the process. Wait twenty-four hours if you find yourself with the urge to make an impulsive decision. This provides an opportunity to consider your other options or how that money could be otherwise utilized.
5. Don’t join rewards or loyalty programs. Van Heusen, the clothing brand I mentioned above, offers rewards. In fact, I just received a $20 discount on my next purchase via email. But I have to make that purchase before a certain date or that money disappears. I can get a decent shirt for $20. It’s worth it. But if I shop, I’ll probably spend more than $20. In fact, just going to the store increases the chances of spending more money that’s not necessary.
I also use the rewards program at Staples. I’ve spent quite a lot of money at that store over the years, and I don’t think I’ve ever received any cash back rewards. I could save money on each purchase by shopping for supplies elsewhere. Loyalty programs incentive shoppers for changing the way they make purchasing decisions, and taking some important factors, like price, out of the equation, it can have an erosive effect on long-term wealth building.
It’s tempting for any particular person to believe that they are better than the average: Overall, people who use coupons end up spending more money, but I’m the exception. Well, that’s always a possibility, just as it’s possible that you’re an above-average driver, but it’s not likely, just as studies show that more than half of the population believes they’re better drivers than average. This is the illusory superiority cognitive bias.
Ditch the coupons and stop wasting your time on efforts that don’t actually save money. Consider your choices and make decisions about your shopping behavior while keeping in mind the tools and techniques that do improve your financial situation over the long term.