What are areas where people THINK they’re making money, but actually don’t?

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I love discovering delusions about the psychology of money, so here’s a question for you:

What are areas where people THINK they’re making a lot of money, but actually don’t?

Examples:

  • Buying a house (people hate hearing this)
  • Day trading and picking individual stocks (see chapter 6 of my personal finance book for an entire expose on how fancy fund managers fail to beat the market…and how you will fail at picking stocks, too)
  • Investing in hedge funds (most fail to beat the market)
  • Venture capital (only top-tier funds beat the market; the rest underperform it…but everyone thinks they’re top-tier)

What else? Where do people think they’re making a lot of money, but they actually don’t?

Add a comment below and let’s watch the delusions roll in.

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141 Comments

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  1. Purchases rationalized as “investments” like jewelry, but have no plans to actually sell at a later time

    • You actually don’t make money on ‘jewelry’ per se, no matter how long you keep it, no matter when you sell it. Precious metals, maybe. But the only watches that may appreciate in value are Rolexes. You don’t make money on diamonds (they’re not a fungible good) and most jewelers will tell you that a diamond ring loses 50% of its value once the customer walks out the door with it. You don’t make money on pearls, either. Buy jewelry because you love it and it makes you happy to wear it or to give it to someone.

    • Ugh, totally agree. I’ve seen everything from expensive perfume to limited-edition DVDs (that they already have) to ancient PS1 games. Insanity.

  2. - Credit card points programs where you get 1 point for every $1 you spent, and then have to convert those points to merchant cards usually worth 1% of the points. So you’d have to spend $10,000 on your card to get a $100 off coupon for a store. Not realistic for most people and encourages over-spending.

  3. Anything “for the tax deduction”

    Mortgage interest is the most common one…most people would be better off saving up a down payment (or buying a house with cash…even if it takes years to gain the cash!)

    Saying you’re doing something for the tax deduction is exactly like saying “I just spent a dollar to save 25 cents!”

    Another one is being loyal to a store with higher prices because you get cash back or perks from buying there. I wrote about that in “How Loyalty Card Schemes Suck You In and Rip You Off”:

    http://www.erica.biz/2009/loyalty-card-schemes/

    -Erica

    • These are AWESOME.

      From my Twitter feed

      “The poker table, no seriously. They only ever pay attention to their big wins but never keep track of when they lose.”

      “costco/samsclub, buying in bulk can be more expen$ive. tax-writeoffs, it’s ~16-33% discount, but you have to spend $ to get it.”

    • Agree 100% re: tax deductions, mortgage interest and the idea of the house as the investment.

      What’s funny about buying/owning a house (in my opinion/experience) is that even if you could get someone else to pay 100%+ of the P&I for you (as I do), it’s not really a lucrative venture — and I say this without having incurred any major house-related expenses yet.

    • The purchase of my home wasn’t because of the tax deduction. I bought it because I saved enough and it made more sense to buy and have a $670 mortgage for 1000 sq ft than to rent 600 sq ft for $900. Granted I know I have taxes and insurance and repairs, but my utilities are far lower than any apartment I’ve ever lived in my yard is desert landscaping (rock).

      If I’m lucky I’ll break even when if and when I decide to sell.

  4. Earning that 3% cost of living raise by working overtime when in the given career field can easily garner at least a 10% raise by landing a job at another company.

  5. Buying Gold- a product that rarely beats inflation

    Credit card rewards/cash back. “I made $600 this year”. But don’t mention that they spent $20,000 on purchases to get the $600.

    • I bought (physical) gold and am getting ready to sell it. Since I’ve bought it, the price has gone up ~30%. It will probably go up even more, but I think at some point it will plunge. I’m still waiting for the TIME cover or the “taxi driver story” that will let me know it’s topped out.

      Gold is, right now, what real estate was 5 years ago…the only question is, how long will the bubble last and how far up will it go?

      -Erica

    • Without investing, I’ve seen the price of gold skyrocket and plummet repeatedly. I’m 25. I’ve given up arguing with people about the realities of “investing” in gold. Or unbuilt property. Or penny stocks.

      Combining gold buying with Forex-trading is especially dangerous and you can get burned on the “gold” more easily than in your home country.

    • You’re not really making money with cash back reward cards. You’re saving money. It’s a built-in discount. They’re not bad, really, so long as you don’t look at them as an incentive to spend more.

    • It’s very apparent that most people, like yourself, have no clue as to what the mechanics of gold are.

      You do not invest in gold for profit, you invest in it for wealth preservation during times of high volatility.

      Gold has throughout history been ridiculously stable in it’s real value, even if demand goes up or down, the value of it as a precious metal rarely changes that much. Gold mostly fluctuates in nominal value because of currency inflation and deflation.

      For example, let’s say the US dollar goes 2% down in value, and the Euro stays at 0% inflation, then the price of gold in terms of dollars goes up, but stays the same in Euros. When you see gold go up and down like a rollercoaster, it’s because of high volatility in currency values, not the metal itself.

      Right now gold is a good investment for wealth preservation because there’s a race to the bottom going on. As sovereign debt problems mount, nations around the world have to devalue their currencies for two reasons, making debt interest payments denominated in their currency cheaper and make their exports more competitive, the other option would be to default on their debts, which essentially has the same inflationary effect.

      I don’t see this stopping anytime soon because the sovereign debt problems are so astronomically humongous that it boggles the mind.

  6. Equating “50% off” to “I saved 50% because I would have bought it anyway”

    (sometimes leading to “I was good, so now I can buy something else”)

  7. Regarding people saying “they made $600 last year” with credit card cash back. I agree with them as long as they didn’t buy stuff they wouldn’t have just to earn more cash back.

  8. Coupons. Their point is to incentivize you to buy things you wouldn’t normally buy.

  9. Plus one for gold, which should be stressed given the up-tick in marketing hype its gotten lately.

  10. Gotta be Costco. Yes, you pay less per item by buying in bulk, but in the present, you’re spending large amounts of cash (or racking up credit card bills.) You only realize that gain months later by not purchasing something.

  11. Clearance Sales! I have friends who constantly are telling me “I just got this awesome deal from because it was 50% off!”. I groan every time I hear that, because while they think they are so clever, they don’t realize that they’ve still spent more than they would have had they only come in for one thing. They rationalize the $50 extra they spent as money saved because if they had bought the extra 2 items, it would have cost them $100 more at sticker price.

    If you went to a clothing store to buy ONE shirt, and you get ONE shirt for half off, great, but when you leave with THREE shirts, spending more than the ONE would have cost full-price, well that’s just stupid in my book, because you will do it over and over.

    • Not everyone does this, but it’s pretty common. I usually shop clearance sales only for stuff I actually need, and I am very conscious of the price vs. what I had planned to spend (or would spend otherwise).

  12. @moneymonk- i wish more people listened to your gold advice, the press loves it, and many americans are falling into the gold trap. before the recent run up, gold had actually been a very poor investment as the stock market generally far outpaced gains in the value of gold. obvisouly gold looks attractive now during a global downturn, but unless you think paper money and currencies in general are doomed, gold is not a wise investment decision for people looking to make money longterm.

    Preferred Financial Services

    • Well, right now severely indebted governments, like the US, UK and Eurozone nations, have only two options: default (declare bankruptcy) or inflate (monetize debt, print money) as they have no capital left to bail out mismanaged banks and corporations, even with radical austerity measures. If these governments default, currency devaluation is an obvious outcome. So they will probably monetize their debt, which will create massive inflation (devaluation), until they either get out of the problem (unlikely) or eventually default (more likely).

      The only thing they can do, politically speaking, is kick the can down the road until it’s someone else’s problem. But they’ve been doing it for a few decades now, the intensity and frequency of the boom-bust cycle is increasing and it’s becoming harder to do. The future of fiat paper currencies as they stand, is bleak.

      As for the stock market being a better investment than gold, in 1999 maybe, but since 2000 gold has outperformed the Dow. Take a look at this graph of the Dow priced in gold.

      http://blogs.reuters.com/rolfe-winkler/files/2009/11/dow-vs-gold.jpg

  13. Here are a few that come to mind:

    - Refinancing a home and cashing out
    - Day-trading
    - Credit cards or banks offering incentives for enrolling (i.e. $50 cash after first purchase)
    - Small business owners who exchange their day job for a job that they now own.
    - Purchasing liabilities and considering them assets (i.e. a boat, a house)

    • Would you please elaborate on “Small business owners who exchange their day job for a job that they now own.” ?

    • @Tyler F, quite a few people would make more money at a minimum-wage job than they would with their business. But the perks of owning a business and the training you receive is amazing compared to the day job they would otherwise have.

      It’s a lifestyle decision as opposed to a financial one.

  14. Chasing higher interest rates by switching banks. Not worth it for the time spent!

    • “Chasing higher interest rates by switching banks. Not worth it for the time spent!”

      Not true for me; about 5 hours spent once means a difference of no less than $4,000/year *after* taxes.

  15. Ramit, can you give some more detail on VC failing to beat the market? I’d be interested to see where that comes from.

  16. Selling stuff at garage sales, Craigslist, and eBay. In most cases, they’d be further ahead if they didn’t buy the crap in the first place.

    • But with the money I earn, I can build a time machine and stop myself from buying those items in the past!

      Thanks for the tip…

    • You’re right he or she should hold onto it instead… *exaggerated liz lemon eye roll*

    • Sometimes. But it depends on what it is you are selling. My boyfriend sells his old cell phones and laptops on eBay, and then uses that money to buy his new cell phone and laptop. He has gotten use of these items, and gets to upgrade for a fraction of what it would have normally cost.

    • Do you mean “buying” instead of “selling?”

  17. Do I dare bring up buying hybrid cars to save money on gas? Likely purchased by someone who won’t keep it long enough (150,000 miles or more) to even break even on the gas savings vs. extra initial cost of a hybrid.

    • GREAT EXAMPLE!!

    • Though realistically environmentalism introduces a new currency. Yes you may only save $2000 on a $5000 hybrid upgrade. But assigning value to other things may make it a break-even or profitable transaction to some. It will may be a long time before many environmental products make sense purely from a personal economic perspective, but once we put a value on health and the actual environment itself as a form of currency (ie clean air is clearly more valuable than dirty). Then we may start to see the personal and corporate (group) profits from acting in an environmentally friendly way.

  18. I find that people think they are making a lot of money in their entrepreneurial business, but oftentimes actually don’t. And in many cases are spending far more than they are bringing in under the aegis of having to spend money to make money. I certainly know about this first hand!

    • Alexis, that’s a GREAT point. There’s a fascinating article called The Entrepreneurship Myth that is a damning look into the realities of entrepreneurship.

      Thanks for your comment.

    • I’d say it’s a bit 50/50. Some people go into business with badly planned half-baked ideas that they refuse to let go of, and they get themselves into debt and all kinds of problems.

      But then there are those that have some bad ideas but they learn from them, move on to other ideas, and keep at it until they succeed. These people however aren’t usually in it ONLY for the money, they also want to realize their vision. As Seth Godin would put it, they are artists.

      So I guess it depends on what kind of person you are if entrepreneurship is worthwhile. Some people do make a decent living on it, others become filthy rich and then there’s the majority that fail.

  19. I would say, buying jewelry thinking they can sell it later. Diamond engagement jewelry is a big one – you will never get what you paid for it.

    My boyfriend lived in Vegas for a summer (internship), and he tracked his wins and losses at every form of gambling. I think he made enough playing poker to cover his losses at every other game. But I agree that if people are going to gamble regularly, they should a) play games of skill and b) track all their wins and losses at all games.

    Coupons, rewards points credit cards and loyalty programs work – IF you only buy exactly what you would buy in any case. I agree that people who buy all sorts of stuff just to take advantage of those “discounts” are being foolish.

  20. Pyramid schemes – I think people have caught on to these for the most part.

    Flipping houses – I’d be curious to know how many people actually make a decent profit vs. those who make a marginal profit or do not make a profit at all. I suspect that more fail than succeed.

    Full life insurance – These often only benefit those with lots of extra cash.

    • Ross, nice one about pyramid schemes. I’ve written a huge post about this before called, “I hate Indian network marketers so much

    • Flipping Houses – agreed. My mom thinks this is how she will retire. She made $5k on previous house but put a LOT of time into it.

    • My parents are in the flipping market and are doing very well. This year they have bought and sold three with the average return (after taxes, expenses, and realtor fees) has been right around $20k per investment. It is a business that you can make money in, but it’s not easy and takes a lot of elbow grease.

    • I would caution you to equate network marketing with pyramid schemes. They may be pyramidal in shape when drawn on a board. But they different in one major way. Pyramid schemes enforce the fact taht those above MUST earn more than those below. In network marketing many individuals below will earn more (significantly so) than those above.

      You can contact me if you need clarification.

  21. many sorts of collectibles. comic books, cards, watches, jewelry, etc… granted, a nice watch will have a better resale value than a timex, but it loses a lot of value as soon as you’ve opened the box. that rolex is not an investment.

    side businesses. i know ramit writes quite a bit on developing a side business, but for many people it would be more productive to focus on their day job. ever watch the shark tank? how many people have poured endless amounts of time and emptied their own bank account on completely horrible ideas? a lot of wannabe entrepreneurs also account for their income wrong and think they’re making money when they’re not.

    cash. today people talk about cash being king, and keeping money in savings accounts. but the interest from a savings account is negated by inflation. oh… and your interest is also being taxed as ordinary income (which in most cases is higher than the qualified dividend rate and long term capital gain rate that you’d be subject to with a stock or stock fund).

    individual stocks. ever heard of the beardstown ladies? they thought they were performing as well as warren buffet. when the accountants went through their numbers, they actually underperformed the market. people screw up accounting all the time whether it’s stocks, real estate, or some other investment.

    i have a friend that’s into day trading. i tried to convince him to stop before he loses way too much money. he thought i sounded condescending, and the more i argued, the more he was conviced that he wanted to prove me wrong. the people that i know that day trade professionally have access to a ridiculous amount of information, are able to execute incredibly fast trades, and make their money through things like arbitrage… things which i don’t think you can do with an e-trade account.

  22. @Ross

    i agree with you on whole life (permanent) insurance policies. a lot of people say that whole life policies are forced savings plans. to me, it seems it would be more effective to buy the cheaper term insurance and have the difference in premiums between the whole and term automatically deposit into an investment account. with automatic investment set up, you’d be on a forced savings plan as well. i do realize that there are some tax advantages to a whole life policy (deferred tax basis), but would they really outweigh the lower cost and better performance of an index fund? perhaps someone in the insurance industry could shed some light.

  23. College. So many degrees are just worthless, and the people getting them would be better off getting actual work experience for four years then going into debt for a Musical Theory degree.

    • Yes! College can be hugely overrated! Guess how highly my degree in Anthropology was valued in the workplace? Not at all. So I had to go to grad school.

    • One reason I’m glad I went to my city college instead of going to a private school. In all likelihood, I’d have the same job I have now, but would be paying off my student loans.

    • People should always go into this with their eyes open. More and more people are double-majoring with a field they want to learn about (music, art, HCI) vs. the field they can make money in or move forward with (business, graphic design, psychology).

    • I think that college debt will be a defining factor of our generation. Because of the economy a lot of people have gone back to school to peruse advanced degrees (several in fields with absolutely no practical application) to avoid the work force. I have friends who are nearing the $100k mark in debt between student loans and credit cards. These folks are going to have to spend the majority of their working life paying off a couple of degrees that may or may not ever help them find sound employment.

  24. These are great comments.

    The only one I have to add is when people extremely restrict their spending over a given time period, only to unleash the spending flood gates later when their “resolve” is through.

    Reminds me of a time when I got a wonderfully myopic e-mail forward admonishing me, not to buy gas on a Wednesday.

  25. In the insurance industry, and Ramit might hate me for saying this…

    but permanent/ whole life policies can be an appropriate wealth accumulation tool depending on your tax bracket, time horizon, and of course need for insurance.

    ALTHOUGH literally 95+% of the time it’s a waste of money. Shop around; the company matters. If you’re the kind of person who reads this blog, you should be able to find an agent who can show you, without BS, where life insurance fits into a financial plan, compared to your alternatives.

  26. I think the #1 has to be their jobs. So many people don’t realize how underpaid they are for what they do and the ridicumouse hours they put in these days.

  27. My hard-earned lesson about buying in bulk:

    For a several years I had a Costco membership. I bought shrink-wrapped flats of bottled water, gallon jugs of cleaning products, three packs of marinara sauce, 50-packs of batteries, etc. I stored all this stuff in my basement.

    I felt so proud that I “saved” so many dollars per volume. I had enough Windex, mustard, paper towels, and light bulbs to last for years! Then we unexpectedly had to move cross-country for a job opportunity. As the movers packed up our house, I realized that it was not cost-effective to move all that Costco stuff. And the movers would not take on liquids, nor batteries, nor light bulbs, all considered hazardous.

    I didn’t have time to sell the stuff, so I gave two trunkloads of Costco bargains to my sister. I joked that I was giving her an early Christmas present worth $400. She still expected a real gift at Christmas!

    In my new home, I’ve resisted the lure of the Costco membership. I shop carefully, but I don’t use too much of my time comparison shopping. My time is too valuable.

  28. Half-kidding, half-serious: the dollar spot at Target. I always end up buying useless crap from there.

  29. I think one tricky area is leveraged buying of stocks (i.e., buying on margin).

    I understand the way leverage works. But I think people are seduced by the idea of being a high roller – and they forget the possible downsides. While the idea of leverage is attractive, the reality is sometimes gruesome – especially when the market goes down over a long period of time.

  30. Buying premium products thinking the quality will come cheap.
    The other way around also applies.

  31. @Stephan concerning gold –

    Many people DO believe the global economy is doomed. Enter Rand’s “Atlas Shrugged” and the gold hoards to have a definite value in the economy.

  32. I have to agree about collectibles/antiques. Remember the beanie baby craze?It’s even worse when they become “family heirlooms.” I can’t tell you how many times I’ve been told I can’t get rid of something because it was once owned by a “second-cousin third-times removed from George Washington, who sold it to my great-great-great-great grandfather in the middle of the revolutionary war, during a blizzard, while being chased by the British” and thus has to be worth lots and lots of money. Meanwhile, it’s old, rusty, heavy, unusable with half its hinges worn off, and many generations of my family has had to pay for its upkeep and moving expenses. But someday (always “someday!”) some magical person is going to see it from the street, know that it’s valuable, and offer us a gazillion dollars for it!

  33. Personal success workshops and investment seminars. These are feel-good seminars, and the new found motivation invariably fades after the event. Sorry, but for 95% of people who attend these things, it’s just so they can sit for an evening or weekend and imagine becoming rich/successful. Some speaker tells you about how to focus your positive energy or how you can wrap a mortgage and end up somehow making a bigger profit by selling a house to your renter or whatever. Most people are just dreamers, though. Save your money and buy a $1 lottery ticket. You can fantasize about spending the big bucks that you will likely never see, just like attending an overpriced conference!

  34. 1) Cooking. The cost of ingredients, plus the time required, can easily exceed the cost of ordering takeout.
    2) Buying the cheaper version of something, then having to upgrade because of its low quality. Shoes are a good example: The cheap shoes might last a year before they fall apart, while more expensive ones last longer to begin with and can be resoled.
    3) Investing in actively managed mutual funds
    4) Any do-it-yourself repairs or maintenance. Your money saved is offset by the time you spend doing it yourself and the likelihood you will mess it up, which will require you to call in the professional anyway.
    5) Spending hour after hour online researching coupons, discounts, special offers, and other personal finance tips, each of which results in tiny amounts of savings each and often require you to buy or sign up for something.

    • I agree with you on pretty much everything except the cooking…
      1) The average take-out meal (not fast food) out is about $12.00 (depending on where you live). For dinner alone in one week, that would be $84.00. I spend between $60.00 and $70.00 a week on groceries for ever single meal, and not too much time either, since I make casseroles and other dishes that have leftovers… Unless you’re being paid a whole lot of money per hour (and maybe you are), this wouldn’t make sense…

    • Agree with everything except cooking and DIY. In my personal experience, it’s cheaper to cook my own meals vs order them in a restaurant (and these are 1:1 comparisons on things like pad thai and chicken marsala). And if there are DIY repairs to my house or car that I know I can do, I can do them cheaper. In both cases I end up learning more about what I’m eating or how my house or car is doing.

    • I disagree re: cooking.

      Yes, cooking costs time, and time is worth money… but there’s a huge blind spot in the mentality that leads to thinking/statements like, “I make this much money, therefore my time is worth $X per hour, so if I can save an hour by spending less than $X on food, it’s worth it.”

      That blind spot: would you ACTUALLY spend the hour you saved by not cooking on doing something that ACTUALLY makes you $X?

      If so, then by all means, order takeout. But it seems to me that for most people, the time saved by not cooking is instead spent on activities that don’t generate revenue.

    • re: Cooking.
      I also disagree, but for a bit of a different reason… I love to cook! It’s recreational for me, so time cooking is time well spent; it’s not a negative waste of time for me, especially if I get to cook for friends…

      Plus, it is cheaper and better. I’ve only had a small handful of steaks in my entire life that are better than what I can cook on my grill, and those were in the $35-50 range. I may spend $20-30 for the ingredients for lasagna or a pot of soup, but both of those provide enough leftovers for days and days. A package of 3–4 large chicken breasts is under 10 bucks… Wine costs double in a restaurant compared with buying it from the store…

      I’ve cooked meals with friends at home that we spent in the neighborhood of $75 for everything, but it easily would have been $200.00 in a restaurant after tip…

      Of course if you hate to cook, or you’re not very good at it, then I can see eating out being a better choice… but for me, cooking saves money and improves the quality/fun of my life.

    • Ok, lets also get into this one. “People equating time and money”. They say ” “Cost of ingredients plust time required” .. No, im sorry to correct you, it actually only cost you ingredients, plus any money you could/would have made in that time. If you are on salary (ie no overtime) that means your time beyond earning your salary is worth next to nothing (short of upgrading your skills).

      Again same story with do it yourself. Consider the 2 scenarios: 1) I fix my sink myself for $10 in parts and 4 hours of my time. 2) I hire someone to fix the sink, for $25 an hour for 2 hours. Which cost more money? Clearly #2 did. Now if I missed 4 hours of paid time (say at an hourly job) because of the time spent fixing, then yes, my time had some value.

      Heck I could go really deep and say time spent fixing stuff actually is money saved because you wont be bored and going to the mall to spend :P

    • Clearly you are not handy and you must live somewhere where food prices are completely out of whack. What grocery store do you shop at? Have you ever seen the price of pasta versus what you would pay for takeout?

      I have saved thousands of dollars doing my own car and computer repairs. I’ve never messed up a job which required I called in a professional. Plus the self-sufficiency skills are worth far more in my opinion for repairing something when nobody is around to help you.

  35. People who receive tax refunds and think they made money…this pisses me off. You just received payment on your interest free loan to the government…you didn’t make money.

    • What is even worse is when they go blow it on something just because they feel it is like “found money”… I don’t understand why people can’t get the concept that this was their own EARNED money in the first place just like all their other $ that they earned during the year lol

  36. stealing – you do the crime, you do the time :)

    • if you are going to buy gold @1200+ an ounce,you need12,000+ to buy just 10 ounces and if it goes up 10 dollars an ounce you made100(onan 12,000 investment.i was buying silver at 4-6 dollars an ounce3 -5 years ago,in my eyes if you dont already own gold and silver you win sell.REMEMBER TO THOSE HOW ARE OLD ENOUGH,1980;S WHEN SILVER WAS 50 DOLLARS AN OUNCE AND IT WHENT BACK TO 4 DOLLARS AN OUNCE.

  37. Well, according to me on mutual funds,on Money saving coupons are areas where people think they are saving lots of money.

    • I use coupons to buy things cheap & then resale to others. 75% of the things I sale I got for FREE.

  38. These are all really good points, except for cooking. Although dependent on your existing skills (which can always be learned), the cost of ingredients and time rarely exceed buying an equivalent prepared meal, and in those cases the time and possibly money needed to recover from any adverse health effects might negate the gain.

  39. Buying junk at yard sales to sell on Ebay. I come across a lot of people who expect to make a killing that way.

    Someone mentioned buying hybrid cars. I have a minivan that gets 15-17MPG, but it’s paid for. I did the math once. To buy a new car that gets 30 MPG, I’d have to drive it 150,000 miles to break even on the cost of replacing my paid for gas hog.

  40. @48: My uncle is an example who made a very good living buying junk at yard sales and reselling it on Ebay. That was all he did for 2 or 3 years. He had a narrow focus and only dealt with stuff he knew he could make a good profit on, based on years of experience, but it CAN be done.

  41. 1) Mortgage Interest. Yes, you get a credit on your taxes – but paying 15k to get 3k off your tax bill is not as good as just keeping the 15k and paying the tax.

    2) Hybrids – most people who buy these overpriced cars will never see savings vs a comparable gas efficient vehicle.

    3) Tax Refunds – no comment.

    • Keep in mind, this assumes that hybrid buyers are primarily in it to save money. It is far more likely that they are motivated by a desire to reduce their personal consumption of fossil fuels. The notion that people buy hybrids to save on gas strikes me as somewhat of a straw man.

    • I agree with Pat…the people that I know that have hybrid cars (including me) have them for more reasons than just the savings on gas. I do get over 50 miles per gallon, but I realize this would take a while to even out with the cost of the car. However since the car was a gift to me, the extra cost didn’t really cost me anything, and I get to benefit from the awesome gas milage!

  42. I don’t agree with the cooking comment. Cooking is much, much cheaper (unless you’re cooking 5 star meals everyday which you shouldn’t). I could spend less than $100 a month on food for 2 people if I cook but eating out is at least $10 per meal PER person.

    • How do you spend so little on food?

      I spend $200 a month for just myself on groceries.

      My mom spends $100 a week on groceries, for herself and her boyfriend, and occasionally, me.

    • You can do it with a lot or rice, beans, and pasta. They’re cheap and filling and easy to cook. However, as someone who ascribes to a low-carb lifestyle none of these food are good options for me and I thus have a higher grocery bill. However, it is worth it for me because of the health benefits.

  43. When we sold our home just before the market crashed in Boise, ID, we proved (to ourselves at least) that not only did we THINK we were making a lot of money on our home – we actually DID.

    For the other commentors:
    – @Roy Rodenstein & Moneymonk – I routinely receive free airline tickets from my credit card which I use for things I normally would have bought with cash anyway. I never carry a balance and I don’t fall victim to thinking a credit card is a loan for money I don’t have, so this is a value for me. I have to spend money (my own and that of my company for business purposes) so why not spend it in a way where I receive an additional benefit?
    – @Erica Douglass – I run a small-scale cattle operation on my land that will never make money as a cattle operation and I own it “just for the tax deduction.” The tax deduction more than pays any expenses generated by the cattle and at the end of the year, I have more money than I would have without them.
    – @MC – my wife routinely visits stores where she absolutely “rapes” them with coupons. Contrary to the common conception that coupons encourage one to buy more expensive products, she uses coupons intelligently and routinely leaves the store in a state where (get ready for it….) the store OWES her store credit for her “purchases!”
    – @Holly – I’m going back to school for my MBA degree in January. I am tired of being ineligible for jobs just because I lack the 3-letters. The uneducated can rail against it and tell me that the $50K in tuition coupled with the opportunity cost of the time spent out of the work force aren’t worth it, but it’s a fact that 90%+ of the graduates of the school I will attend increase their pre-MBA salaries by nearly 100% – straight out of school! You don’t have to be an MBA-holder to run the pay-back analysis on those numbers. Americans need to listen to Obama and start putting more value in their educations. Of course it is possible to succeed without education, but that alone doesn’t discount the multitude of benefits an education can provide.

    • Is this a top-tier MBA school? I remember reading something from Ramit that generally MBA degrees don’t pay off ROI-wise unless you are going to a top of the line school.

    • I agree with Ramit that MBAs generally aren’t a good ROI, but that is probably due to several factors that can’t really be addressed in this comment. A lot of the comments on this thread almost go too far in the direction of the flavor that almost nothing has any value that is justifiable under any circumstance whatsoever. MBAs cost a lot of money, but they can offer additional opportunity. I too was kept out of a position I was SOOOO qualified for because I didn’t have an MBA. In that particular situation, it would have been particularly beneficial for me to have had those letters trailing a comma after my last name. My brother just got a 70% discount in tuition from a European MBA program, so considering the significant break he’s getting on tuition, maybe it WILL turn out to be a good ROI.

      If you want a quickie way to make a decision about pursuing an MBA, you can buy into the generalization that only MBAs from top 25 (or WHATever) schools will ever be financially solvent. The naysayers join in chorus to say “Why don’t you just start your own business?” As if everyone has the drive, extra time, luxury of failure to be able to do that. At least for some, an MBA offers a clearer path. If your company wants you to have one and will pay for it and will increase your base pay when you have it, you would be an idiot not to do it. Even if you had to pay half of your tuition and needed to take out loans to do it, you would STILL be an idiot NOT to do it.

      Also, you should really have a plan as to what you want to do in grad school, which profs you’d like to network with, which companies you’d like to continually network with through school in order to develop relationships that could translate into job offers down the road, and what kinds of opportunities you can create for yourself if none of the employment opportunities pan out. You have 2 years to test pilot your own ideas with a lot of people who have a lot of great experience. A lot of people like to make fun of MBA-goers by saying, “If these people were really into business, they’d just start one and not be putting off their REAL lives in school!” Who are these crazy moralizers??? Who died and made them God? If you’ve ever heard this, don’t let a stranger with an opinion dictate what you should do with your life just because they happen to be way more dramatic and emphatic with their opinions (it doesn’t mean they actually KNOW anything). In their quest to cut in line and save their money by skipping a grad program, thereby laughing at all the unwashed masses who do opt to go to school, they might end up alienating people from making the right choice for themselves by returning to school. You’d get better advice from a tarot card reader than from someone admonishing you not to return to school because the immediately forseeable ROI isn’t that great. Who knows what is going to happen and what a person with an MBA might create? Spending money on an MBA and being financially smart–not mutually exclusive, people.

      It’s kind of like saying you shouldn’t invest in the stock market since you don’t know if you’ll make any money on your investment.

      Also, I know several people in smaller cities in the U.S. who got MBAs from their local universities, which are not ranked in the single-digit neighborhood who are making a GREAT living in local, small companies. Who can really judge? They wouldn’t have gotten those jobs just through grit and uneducated pluckish-Horatio Alger-ishness, either. Not everyone needs to work at Cisco Systems in Business Development or at Goldman Sachs.

      The fact is, having a strong opinion about NOT attending an MBA school is just as much a cover up for anxiety surrounding making or not making a major life decision about returning to school as it is about plain balance sheet math that lulls you into thinking you made the right decision because the numbers just don’t add up! Get over it! Life is filled with a lot of things that just don’t add up. You will end up wasting money on something, eventually. Hopefully, what you wasted money on will have turned out to be an enjoyable life experience, in hindsight.

    • I think you’re right on all accounts. I think more people need to prize education.

  44. Multi-level marketing companies. I know people who appear to be making GOBS of money, but their expenses (and the lifestyle they lead to make sure the income keeps coming in) eat up all their commissions. Not worth it.

    The trick about Costco memberships: get other people to give you a membership coupon for Christmas/your birthday, then be conservative how you spend and accumulate goods. :D

    And here’s a great blog about how to keep your grocery bill down:
    http://40aweek4food.blogspot.com/

  45. Carrying around Credit Card Debt, and paying interest because of a refusal to touch savings. Yes, it’s important to have savings, but accruing interest when a debt could just be paid because of this strong emotional attachment we have to our savings always boggles my mind.

    Great post! Mental accounting, and how we allow our emotions to dictate the way we deal with our finances always fascinates me.

  46. Ramit, Fantastic collection of articles behind the whole buying a house (in the owner occupied sense) not being the pinnacle of personal investment! many times they may perform just about as well as my aunt’s ty beanie baby portfolio. (okay, you can’t live in a beanie baby).

  47. This is more an error in saving than making money, but when people drive across town, sit in their car (with engine running) and wait for an open gas pump for 20 minutes to save $.05/gallon. Often done because the local radio station announced that location as the one with the cheapest gas that day.

  48. Gold, ebay, blogging,

  49. Gambling would be a big one i think. People who play the lotto, with the hopes of hitting the jack pot. They need to realize the odds are stacked highly against them.

  50. Many think writing on blog will make them rich, not so, not for everyone. I know it from experience. :-)

  51. I have to disagree with all those who rail against coupons. My wife has the last 4 months of inserts filed in our filing cabinet with a spreadsheet that she downloads that inventories the contents of each weeks insert. She then compares our grocery list to the coupon inventory, pulls the correct coupons and goes shopping. the best savings are on the staples we use (cereal, shampoo, etc..). Our monthly grocery bill for a family of 4 is ~$320.

    Gold… I’m not touching it. If the economy collapses my bet is food, water, and guns are going to be the currency of choice.

    • you are correct,i bought and sold gold and silver and made money,that was 4-5 years ago.you can not eat, drink or protect yourself.the metals market is way to high.

  52. [...] 30. What are areas where people THINK they’re making money, but actually don’t? [...]

  53. Nice post Ramit!
    My top two ->

    Buying into a Franchise (you are renting a job AND assuming all the liability/risk AND paying through your nose to do it, yes, there are some benefits in return but they rarely outweigh the risk)

    Working overtime at a salaried job (ladies and gentlemen, the idea of a gold watch and a 50 year retirement party has gone the way of VHS), this is especially the case if you are poor at self promoting (which you probably are if you have time to work for free) because your boss probably has no idea what you’re -giving- them that they aren’t paying you for already.

    (I’m not even going near my normal third of the tax refund check, where people feel like they got a bonus after they file their taxes when actually they sacrificed the cost of capital for 9 months. Ramit and I agree to disagree on this one)

    People think they make money in these two (three :)) places when the truth is, they rarely do. Yes, there are some exceptions, but rarely so…

  54. For all the food people: The cheapest calories in America are the least nutritious. So while it’s possible to feed a family on very little money, it’s not necessarily a badge of honor. A Totino’s pizza costs the same as two apples – but only the apples are actually good for you.

    And in answer to the question: I really question a lot of the direct sales businesses that target women. My best friend is involved in one of these, and for four years has spent more money on it than she’s brought in. Then it’s claimed as a loss on the taxes. I feel that she’s really being taken advantage of, as you can be SURE that the company she’s selling for is making a tasty profit!

    • Lauren, I was going to chime in with this! Even if you’re an awesome salesperson and fully and go into it whole-hog, you can’t really make money. I believe companies change their catalogs and items intentionally to keep the reps buying and buying so much so that you can’t operate in the black.
      But a lot of personable, driven women are frustrated making so little money that they buy into the “independent” lifestyle they’re selling, put the kits on their charge and relish the commission checks without really doing the math.
      You guys want to come to my Cooking with jewelry and storing sex toys party?

  55. Oh and I forgot –>
    @FarmerJoe – kudos to you for being able to find an MBA program for 50K that will increase your salary 100%. I assume this is a part time program that will allow you to continue work in a day job and that’s the total cost of the program? I also assume that the MBA’s you know that increased their salary 100% went to a part time 50K program too. That being said, you’d return on your investment in about 2-3 years, which is reasonable.
    I assume you’ve also included the risk factors of your increased age at completion of the program (and yes we’d like to deny it but age discrimination is real and kicking) and the multitude of MBA’s that will be on the market at the close of this recession.
    I’m not asking because I’m one of the uneducated who wants to rail on this concept – rather, I have an international ivy league education. This MBA thing is an American phenomenon really and I’m truly curious because I have yet to run the numbers to show that getting an MBA not immediately after or adjacent to a bachelors has any substantial return on investment.
    The two biggest factors I see is that most MBA’s that return significantly in new income generated don’t come from an online part time program (Read, cheaper) – they come from a full time intensive NAME program (and thusly give you access to the network afterwards).
    And most MBA’s that come from a less expensive program generate a small jump in income (a raise or promotion). Rarely, the best of both worlds.
    Plus you have the additional confounding factor of the demographic that opts for choice #1 tends to be younger with more environmental wealth options and least risk and the demographic that opts for choice #2 tends to be older with more risk and less wealth options – for demographic #2, I think getting the MBA serves to motivate them to make better career choices, negotiate, move out of a dead end job etc. which they don’t need the MBA to do but the action is a result of the justification of the time and cost spent.
    I am however impressed with the store credit/coupon story. I analyze these sorts of things for retailers and it’s extraordinarily rare. Similar to the MIT kids who took Vegas rare. You may want to invest in your wife (who doesn’t need an MBA, but maybe a few nice business suits) because she would do quite well consulting as a business intelligence analyst for any of the big time retailers.

    • I think I got a lot of value from my MBA. It was not from a top name institution. I went part time while I worked and two different employers paid the tuition through tuition reimbursement programs. I sure didn’t increase my salary 100% when I graduated, but over the course of the last 14 years since I graduated, my income has gone up significantly. The MBA also let me get my foot in the door for new positions as it distinguished me from other candidates.

  56. Definitely businesses (side hustles or full-blown businesses). There are too many so called “entrepreneurs” thinking things are better than working for the “man” when in reality most aren’t nowhere near profitable and some even in serious debt…

  57. Re: cooking
    Cooking can often save money, but doesn’t *necessarily* save money, as many who criticize people who eat out too much seem to think. Sure, it does, if you are making pasta, rice and beans, and peanut butter sandwiches, or if you are cooking for two ore more people. But I don’t know how many times I’ve tried to cook a nice healthy dinner for myself, gone to the supermarket to get ingredients, and ended up spending more than it would cost to get equally healthy takeout (such as a big salad) that would last for two meals. Of course, this is easy if you live in a big city like NY where there are a huge number of takeout places and supermarket open at all hours. In the suburbs, if your supermarkets are cheap and your main takeout choices are McDonald’s and pizza, cooking is probably a better deal.

  58. Health is foremost in my opinion, so I don’t mind buying quality produce, but it can be done cheaply if you look at community supported agriculture (CSA) programs. It does take some prepwork, usually a Sunday to pre-wash/pre-chop vegetables and plan out meals. If you do that then it can work out. Eating out can be cheaper, but it’s difficult to eat well eating out without spending 15-20 a meal. McDonald’s salads are notorious for being worse for you than many of their other items.

    As a country we pay only 10% of GDP on food, lowest than any country in the world, yet the highest energy density of any country. 1/3 kids will be diagnosed with diabetes, and this is the first generation of kids not expected to outlive their parents.

    As an entrepreneur, quality food is incredibly important to my mood and productivity. Think of the average person going through a drive-thru window, does that picture match what you want for your self and your business?

  59. Another +1 on the cooking disagreement front here!

    A few things to add to the debate:

    1) The ‘economies of scale’ argument made by Lee could equally be applied to home cooking, as you can make a big batch of something, freeze it and voila, that’s another couple of nights you don’t have to cook! A fringe benefit is that your home cooking stands a good chance of being healthier than something bought in
    2) The more you cook, the faster you get at it, so it’s not as if opportunity cost can be factored in once you’ve been cooking for more than a few months (unless you’re terrible at it)
    3) You have more of a choice in how much you choose to spend when cooking for yourself than you might think. For example, the difference between a whole foods store and a massive chain supermarket will be considerable. That said, there needs to be a compromise between your tastes, shopping preferences and even ethics when it comes to buying food. In my personal experience, the difference between junk food prices is less varied, so there’s less room to save money.

  60. VEHICLES:

    People think they’re sooooooo smart for financing their car… and then they end up with a heavily depreciated asset that requires constant maintenance and has no warranty. Or people who buy used cars that require TONS of maintenance (e.g. low quality brand, or something with AWD/4WD), and then go on about how they got such a “deal” on their car, but it turns out they just had to put $15,000 into the thing because it’s falling apart.

    The point I’m trying to make is not that leasing is better or buying new is better, but that there is a different best option for everyone depending on the situation, and what they want out of a vehicle.

    • Or anyone who moves to the suburbs to save $20k on their house, only to put the $20k into a car that depreciates at 12% per year. At least the house is closer to break even.

  61. Peer to Peer Lending – ala Lending Club, Prosper, etc…

    I know someone who put $20,000 in to Prosper and after 3 years walked away with $20,012 (yes, $12 profit) after all his gains/losses were accounted for.

    That’s an annual return of .02%!
    Perhaps he’s lucky that he only lost the “opportunity” cost on his money for 3 years.

    I think the lure of making 10%+ returns is very enticing to many people, when banks are paying < 1%.

  62. +1 on the concept of “found” money. For example, people win $100 in blackjack and blow it all that same night, then say they “Oh well, basically broke even.”

    No, first you made $100. Then you spent a separate $100.

    It’s like the sunk cost fallacy backwards.

  63. My take on buying gold is that if you have the tendency to talk about your gold, you open yourself up to being robbed. Insuring the gold costs money. Safes and safe-deposit boxes offer little protection. And ANY losses in this area would eat away your profit.

  64. can you talk about ways to actually make money? thanks.

  65. Introductory Offers

    Especially the stupid cable/sat/ip phone promotions were they tell you if you sign up you get 6 months at a reduced cost…then they raise the price to the “normal rates”.

    Basically, nothing is “free”. Do a basic level of research to find a good rate for the service you want at your desired level of quality. Then you can skip the “introductory offers”.

    If you prefer not to think, then those introductory offers are probably right for you.

  66. having your money in US currency. hehe. seriously though the DEBT is getting larger and larger, money supply is increasing, high inflation. I don’t forsee such a rosy picture in the near future

    its about wealth preservation right now.

  67. I wanna take back my ” its all about wealth preservation right now”. But sometimes NOT spending or lets say “investing” in houses, individual stocks, cars, jewelry – are investments in themselves. You guys argue college degrees are bullshit yeah they are in many cases, but perhaps you gain reputation if its a from a elite school. Starting a blog is also way create reputation, far more valuable than currency.

  68. @Jennifer 102, do you actually read this blog?

  69. It amazes me how many people view a car as an investment (and hence make money). I have lots of friends that do….It should not really be veiwed as anything apart from a monthly expense.

  70. My husband and I are using our credit cards instead of our debit cards for safety reasons. We have the cash to pay the balance and are enjoying some very nice rewards as a result, for “cash” purchases we were going to make anyway. I haven’t paid for gas in several months, instead have been using the gas cards I’ve earned with my points. Of course, this requires having the cash available to pay off the balance so you’re not actually getting into credit card debt.

  71. Vacation Homes- It amazes me that people still buy vacation homes/time shares. By maintaing another residence, and in most cases another mortgage, you are taking VERY expensive vacations. The cost of hotels or home rentals is a drop in the bucket compared to what it will cost to buy and maintain another home.

    My aunt and uncle dropped $30k, PLUS annual fees on a time share that basically allows them to stay in a condo twice/ year. Their argument is ‘yeah, but we can stay anywhere in the world.’ (sub text- as long as there is a time share, and it’s open, and they aren’t going to charge us extra for fees for staying there). My argument, so can I and I didn’t just waste $30k!

  72. I actually think you can make a bit of money with a good credit card program (some offer 2% back in cash). In the past twelve months, I made over $4000 doing that. And I paid no interest either since I didn’t carry a balance. I put all my personal expenses on one credit card, and all my business expenses on another. I don’t overbuy, but the business expenses can be huge.

  73. Ramit,

    I agree with your point about losing money by trying to pick stocks. The problem is, there’s just so much data for non-professional traders to analyze. For example, there are literally thousands of options to choose from. How do you know which stock to trade? Do you go long or short? Where is your profit target? What time frame do you trade? With individual stocks, only about 30% of the stock’s movement is determined by factors related to the company. Another 30% is determine by the stock’s sector, and the rest is based on the overall market movement.

    I think trading a stock index is a much better option for people to look at as a viable trading opportunity. However, over 90% of traders still lose money trading stock indices, futures, options, or other instruments.

    The only way a trader has ANY chance of success is to use a high probability trading strategy with a focus on risk management.

    - Chris Dunn

    • you must do your homework,look at the earnings,cash flow,what they sell or service they offer.do not listen to anyone,make your own picks.(remember,you have to pay to buy the stock or stocks and pay to sell.) its buy low sell high.

  74. good post with alot of interesting advice , cheers folks

  75. A college degree is NOT a waste of money. Don’t blame it on the degree being worthless, blame it on the worthless person. You don’t necessarily have to graduate from an Ivy league school in order to be successful. That’s just an excuse unsuccessful people like to make. Ofcourse, a degree is like a tool and not a meal ticket. It is what you make of it.

  76. I learned this lesson some 30 odd years ago when my father taught me to
    “Never judge the value of another man’s dollar.”

  77. I have to agree with the “College” comments, though college tuition goes up every year disproportionately to inflation. When my parents went to college they were able to work another job and pay tuition. It’s almost impossible to do this now (especially if you are in a grad program.) Making matters worse, new graduates are entering the market with few job prospects and looming college debt.

    I’m still completely for a college education, I just don’t know why it has to be so expensive. Some countries, such as Germany offer free or nearly free college educations. I wouldn’t be surprised to see an exodus of sorts to other countries for more “affordable” educations.

  78. i made a ton of money on silver i flipped it 3 times.50,000,30,000,25,000.i bought it at 4-6 dollars an ounce.i would not buy in to the metals market right now.it is too high,no room to make money,1200 for gold and18 for silver.(plus remember to those that are going to buy you need alot of money and you always have to pay a spread).an ounce of silver is 18 dollars,you are going to pay anywhere from1-2 dollars additonal per ounce.best site is northwest territorial mint in washington state(ntm.com,min.50 ounces of silver 1 ounce of gold). no shipping or insurance charge when you meet there req. of 50 of silver and1 of gold.

  79. Some really good ideas here, but I also want to add something:

    Just because a particular person may not be making money in a certain area or you may not THINK they are making money in a certain area, doesn’t mean that that particular avenue to make money isn’t profitable.

    The comment that made me think of that was the person that mentioned flipping houses. I was a full-time wholesaler and made decent money and know other as well that make decent money. However, I know A LOT more that don’t make any money but THINK they are making money :-)

    I’ve since turned myself towards apartment investing and ATM’s. Looking more towards the passive income side now.

    Ohhhh I thought of another one. But again, this could be an avenue where some folks are making money and some THINK they are, but they aren’t: internet based businesses in general and affiliate marketers, etc. Some do well, most I bet spend more trying to figure things out then they actually do making money.

    Just a thought.

  80. I definitely agree with those credit cards reward programs!!!

  81. Doing anything you’re not good at.

    A lot of people here have mentioned stock picking, flipping houses, selling antiques, or whatever. They say that “most” people don’t make any money in those things. True. Most people lose money when they do something they suck at.

    It takes dedicated years of practice to be good at anything. How can one expect to be better than the established competition, and to be free of stupid mistakes, right off the bat?

    The truth is, “most” people are dabbling in any field. So if you say “most people don’t get a black belt in Karate” it doesn’t mean that getting a black belt is impossible. Actually, it’s quite easy–you basically just have to show up and put your time in for a few years. The same with making money in certain fields.

    Go tell Ramit that most people fail with their blogs and online businesses.

  82. I’ve never fully understood why people invest in companies when most people no little about investing.

    For me, I prefer to invest in building a business I have complete control over (i.e. my own) as opposed to one where I’m simply tossing my money in with the rest of the people in hopes that I made the right decision.

    Chris Guthrie

  83. gold coins

    • Explain what you mean about the $1 gold coins… I personally have made $ off it with basically doing no hard work or doing anything that took up a lot of time.

  84. Anybody trying to beat the market should reconsider it, especially if you have it as a weekend activity. No, you will not make money on Forex, commodities, stocks…Of course, there are successful people we all know, but come on – you can ‘invest’ the money in roulette, less time wasted and similar chances of positive outcome…sorry.

  85. Hunting to save money on buying meat is one though I doubt that applies to many on this board. After spending hundreds on your .30-06 rifle, hunting gear, license, and meat processing it hardly pays for itself. Of course, hunting should be considered a hobby not a way to save money.

    Another waste I see is people driving all the way across town for the sole purpose of getting cheap gas. Driving 15 miles round trip to save a dime per gallon on gas isn’t really worth it!

    And for people deriding purchasing commodities – remember many farmers (or people tied to farming) buy futures contracts not to get rich but as a way to guarantee stable income. Not contracting is an equally risky position!