Why it’s better to splash out on expensive tech now rather than saving

It’s better to focus on buying expensive items instead of living frugally, reports Sendhil Mullainathan at The New York Times.

This is due to a common misconception about penny pinching, namely that “frugality isn’t just about saving money, it’s about being efficient with your money, using it in the best way possible”.

And as it turns out, in most cases being frugal with expensive purchases is more important than constantly bargain hunting.

“Most consumers make too much of an effort to save on cheap items and not enough of an effort when it comes to expensive items that can actually make a difference”, says Mullainathan, author of Scarcity: Why Having Too Little Means So Much.

Consider this situation: You’re shopping for headphones. An electronics store has the model you want for $50, a reasonable price. But a sales clerk says: “You know our other branch has this item on sale for $40.” Going to that store will take 30 minutes, and you can’t buy the headphones for that price online. Do you go to the other branch?

Before you answer, consider a slightly modified version of the same situation: Instead of headphones, you are buying speakers. You go to the same store and find the model you want for $400. Again, the price seems reasonable but the sales clerk says it’s on sale at the other branch for $385. What do you do now?

Research on behavioral economics, suggests that people are more likely to make the trip for the $40 headphones than for the $385 speakers.

“At first glance, this makes sense. By taking the trouble to go to the other store, you can save 20 percent on the headphones and only 3.75 percent on the speakers. The bigger percentage in savings is more appealing.”

“Though intuitive, this way of looking at the choices is mistaken. In each case it will take 30 minutes to save some money. But with the headphones, you save $10; with the speakers, you save $15”.

As a result, we are focusing on the percentage we save rather than the actual amount we saved which can become a dangerous illusion.

This example is only the tip of the iceberg when it comes to messed up frugality habits, posits Mullainathan.

“Consider how easy it is to fritter away time surfing the web for, say, a great deal on a $50 pair of jeans. Yet many of us spend no time at all on our investments. The result is that we barely glance at the fees charged by mutual funds.”

As a result, we give ourselves a pat on the back for saving R300 on a new game but then get junk food on the way home.

“Consumers make too much effort to save on cheap items and too little to save on expensive items.”