The Biggest Ways People Waste Money

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The Biggest Ways People Waste Money

They run the gamut, from the smallest things (coffee, anyone?) to the largest (do you really need that big house?)

For David Bach, few purchases are a bigger waste than a new car.

 

The average American will have to work about two or three months a year just to make the payments on a new car

with insurance, says Mr. Bach, co-founder of AE Wealth Management and author of several books on personal

finance. It’s a huge, unnecessary expense, he says, at a time when many Americans have little if any savings and

aren’t putting anything away for retirement.

But he is particularly scornful of a much smaller purchase: coffee.

 

“I do not start my day without coffee,” Mr. Bach says, “but I make it at home every morning for 20 cents instead of

spending $5” at a cafe.

 

Everyone has a different take on the biggest ways Americans waste money. We asked a group of experts about

where they see the biggest financial waste—and what can be done about it.

 

Below are edited excerpts of conversations The Wall Street Journal had with Mr. Bach; Robert Shiller, a Nobel

Prize-winning economist and Yale University professor; Danika Waddell, a certified financial planner at Goddard

Financial Planning in Seattle; Soo Kim, an assistant professor of marketing at Cornell University’s Samuel Curtis

Johnson Graduate School of Management; Ellen Weber, a certified financial planner in Seattle, and Jonathan

Bricker, a psychologist at the Fred Hutchinson Cancer Research Center in Seattle.

 

WSJ: What are some of the biggest things people waste money on?

DR. SHILLER: Big houses are a waste. People are still in a mode of thinking about houses that is kind of 19th

century. As we modernize, we don’t need all this space. For example, we don’t need elaborate kitchens, because

we have all kinds of delivery services for food. And maybe you don’t need a workshop in your basement, either. You

used to have a filing cabinet for your tax information, but now it’s all electronic, so you don’t need that, either. And

bookshelves, for people who read a lot. We have electronic books now, so we don’t need bookshelves anymore.

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Subscriptions to health clubs are notorious, and capitalize on people’s failure to anticipate their future laziness.

MR. BACH: Small-dollar purchases like coffee and bottled water. When you ask people why they don’t save, why

they don’t invest, why they don’t use their 401(k) plans, the No. 1 reason is “I don’t make enough money.” Five

dollars a day makes a huge difference. If you’re sipping a latte right now and you’re not saving, well, that’s dumb.

MS. WADDELL: The primary thing I see people waste money on is “convenience” items and unplanned grocery-

store trips. Lack of planning leads to people stopping to pick up one or two things and then spending $100 or more.
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DR. BRICKER: It’s often in quickly consumable items—mostly things you can put in your mouth, so convenience

foods, sweet foods, and things you can drink. You can consume them immediately, so there’s an immediate reward

that you get from it. And you are not seeing the longer-term perspective on how that consumption is not only

harmful to your wallet but also harmful to your long-term values—what we want to be doing with our life.

 

There also is wasted spending on the things you deep down don’t really care about or you’re not ready to commit to

doing something about. You buy the Peloton bike for $2,000 because you care about your health, but you are not

ready to do the hard physical work, so it sits in your basement.

 

MS. WEBER: When children become adults, I often see parents who are reluctant or forgetful about moving their

adult children on to paying their own car insurance and cellphone bills, things that have a family plan, even though

the kids may be 27 years old.

Some parents tend to overschedule their younger children. It would benefit both parents and children to take a look

at how much they’re actually getting out of some of those extra activities and whether it would be better to focus on

just a few and not try to have their kid have a finger in every single pot or club or sport.

I also think people waste money buying more house than they need. This whole notion that every single person in

the house needs their own bathroom is somewhat ludicrous. And yet most homes now are built with that kind of

space, even though families are shrinking. More and more of our stuff is stored electronically; we should need less

storage for it. There’s also a tendency to buy houses with big yards that most people do not use but end up

spending lots of money paying someone else to mow and maintain.

DR. KIM: Compensatory purchases. Essentially anything that people use to signal to other people that they are

successful in some domain because they don’t feel so successful in reality can be a compensatory product. So,

conspicuous things like luxury goods and accessories that have big showy logos, to signal that they have money

and social status.

But even a relatively small-ticket purchase could be a compensatory purchase. I think this logic could be applied to

many of the “fancy/hip” brands today, even with those handling smaller-ticket items like coffee.

 

WSJ: Why are people spending money on such purchases?

 

DR. SHILLER: Having a big house is a symbol of success, and people want to look successful. People have to

know about your achievements. How do you know, really? Who knows what people are doing in their day job? But

you do see their house.

MR: BACH: We spend money unconsciously. It’s a habit. You don’t stop and think about it.

 

MS. WADDELL: Lack of planning ahead and lack of time. People take shortcuts, rely on convenience without price

shopping. Also, a lot of people justify indulgences as they work hard and feel they deserve it. There’s definitely

nothing wrong with this, but people should find one or two things to splurge on, such as a daily latte, and then

focus on bringing lunch from home or trimming the budget in other ways.

 

MS. WEBER: You don’t want to be seen as the bad parent or the cheap parent who is not giving their kids all of the

life experiences and education that they could.

With older kids, there’s a lot of sympathy for how difficult it can be for new graduates to get launched in a career

and they’re having a little bit of a tight budget. I think learning to live on a tight budget and learning to do without

when you need to is a valuable life experience.

 

With automation, we are not forced into reviewing purchases every month, like in the old days when you got a paper

bill statement. So, it’s very easy for those things to creep up. I know I’m guilty. My cable bill has crept up. I know if I

took the time to call the cable company and talked to them I could get it knocked down. But, have I done that yet?

No.

 

DR. BRICKER: People are avoiding discomfort and they’re seeking pleasure. Often that conflicts with what they

care about in the long term and in terms of what’s important to them, what gives them purpose, what gives them

meaning in their lives.

 

DR. KIM: To show that they are something, perhaps something they currently feel that they are not. In other words,

to compensate for what they don’t feel that they have. We have found that people who have purchased items that

symbolize a discrepant area of the self actually do worse in subsequent tasks, like solving math questions or

persisting in a difficult task.

 

WSJ: How do high- and low-income earners waste money differently? Similarly?

 

DR. KIM: There’s research saying that higher-income groups are happier buying experiences, whereas low-income

groups are happier buying things and materials that are obviously more tangible and long-lasting. So, in the context

of compensatory consumption, perhaps higher-income groups will try to signal success by going on uber-fancy

vacations, whereas lower-income groups will try to signal success by buying branded objects.

DR. SHILLER: At every income level, within your group, you want to be respectable. Sociologist Leon Festinger

said it’s natural to compare yourself with others, but when people do, they tend to compare themselves with others

close to them in the hierarchy.

 

WSJ: What are some ways consumers can curtail wasteful spending?

MR. BACH: Start by tracking where you spent money for a day. The fastest way to find money is to go through what

you’ve already signed up for that you pay for automatically every single month. There are a lot of apps that make

this easy.

 

MS. WADDELL: Meal and grocery planning is one of the biggest ways to trim your budget. If you plan a week’s

menu and grocery shop once per week for those items, you’re far less likely to stop at the store and spend on

unexpected items. My own personal version of this is getting a subscription to a meal-delivery kit. While not the

absolute cheapest thing, it cuts way back on grocery-store stops and saves me a lot of money in the long run.

DR. BRICKER: Take 30 seconds just to notice the urge to make a purchase, and say: “Can I let this pass?” And if

you can wait five minutes, you will very likely discover that urge to buy that thing will have come and gone.

 

DR. SHILLER: When it comes to housing, there are books about this in the last 20 years—including “The New

Small House”—that talk about designing houses to look impressive as well as function with a smaller scale.

Just like we’re developing Uber and Lyft and Airbnb using existing resources more efficiently, we can also build

houses that are better at serving people’s needs without being big.
It Adds Up

 

Coffee Run

$1,277: What you would save annually if you didn’t spend $3.50 daily on coffee

 

$85,305: What you would earn over 30 years if you instead invested the money monthly and earned an annual 5%

return

 

Bottled Water

$548: What you would save annually if you didn’t spend $1.50 daily for bottled water

 

$36,608: What you would earn over 30 years, if you instead invested the money monthly and earned an annual 5%

return

 

Mr. Kornelis is a writer in Seattle. He can be reached at [email protected].
Share Your Thoughts

What purchases do you find most wasteful? Join the conversation below.

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Appeared in the June 17, 2019, print edition.

 

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