Saving money is a crucial aspect of financial planning. When we're conscious of our spending habits, we're able to make better decisions to build bigger cash reserves and prepare for the future. There are lots of ways to save – but sometimes our savings strategies end up costing us more. Nip these four in the bud right now.
1. Opening a store credit card to snag a discount
Many retailer credit cards feature enticing rewards programs that allow consumers to save on immediate, same-day purchases, and as a card member you're probably entitled to exclusive discounts in the future. However, if the only reason you're applying for the card is to score a discount on that day's shopping spree (at a store you don't frequent often), think again.
The opportunity to save on a purchase may seem like a good enough reason to apply, but unless you pay off the purchase in full by the next month, you'll pay interest on the items you bought. And unfortunately, store credit cards have higher interest rates than most major credit cards, which means that purchase could end up costing more than your discount, especially if it was a smallish charge. The hard inquiry on your credit during the approval process may affect your credit score as well. Not worth the 10% to 20% on the first day's savings if you're not making a major purchase and planning to settle up 100% when the bill is due.
2. Stashing cash in a traditional savings account
Maintaining and contributing to a savings account makes good financial sense, but don't count on it to grow your net worth. In fact, you'd be lucky to find a regular savings account paying an interest rate of more than 0.01% APR – which is right next to nothing. Even if you find a savings account earning slightly more, the monthly maintenance fee can chip at your earnings or cost more than your account earns.
Consider your options then. You'll make out better opening a high-interest online-only savings account or exploring other options like a certificate of deposit or a money market account. These savings solutions pay a higher interest rate, which is exactly what you need to maximize your returns.
3. Overpaying for a new car that depreciates immediately
New cars are beyond the average person's ability to pay in cash, so financing is necessary – and that generally means you'll need a loan. But loans are the last thing you want when trying to keep your debt in check.
Instead of trapping yourself in a five- or six-year payoff schedule, save up and purchase an older car with cash. You won't have to worry about a car payment or interest rates, and because the car's older you'll pay less in personal property taxes and insurance.
It's a sensible approach, for sure, but only if you choose a vehicle wisely. In other words, don't purchase the first car you find because you like the price tag. Since the idea is to save money, have the car inspected by a trusted mechanic, and crunch some numbers on the cost of owning an older vehicle. If it's not in the best condition, repairs could do you in more than the new vehicle would have. Shop wisely.
4. Buying cheap health insurance with limited coverage
Health insurance is an expensive and necessary evil that's not getting any cheaper, and the bottom line here is that you cannot afford to be without coverage. Even if you can't swing the best health plan, some coverage is better than none.
Choosing a health plan because it's the cheapest saves money on a monthly basis, but if you get a plan that doesn't provide the coverage you need, you'll end up paying more out-of-pocket for co-pays, deductibles, coinsurance, prescription drugs, and more over its lifetime. This doesn't mean you have to purchase a plan that leaves you bankrupt. But you should seriously evaluate your healthcare needs before signing off on a plan and buy as much coverage as you can afford.
One trip to the hospital on a junk plan could leave you in debt for years or even decades, but that fate is avoidable.
