When Spending More Doesn’t Get You More
This blog post is in partnership with Metromile Auto Insurance.
Despite how they’re marketed, some higher-priced items aren’t any better than their more affordable counterparts.
Raise your hand if you like expensive things. Who doesn’t?
It’s no secret that we’re drawn to shiny objects, but here’s the problem: our brains are wired to assume that pricier items are necessarily better in terms of quality and experience…when that’s not always the case. We may, in fact, be better off purchasing the lower-priced item.
According to Business Insider, “Studies show that we tend to value expensive items over their cheaper counterparts. It’s known as the ‘marketing placebo effect.’ And it doesn’t just apply to things you buy for yourself, but also to things you may purchase for others — making the holidays an even more expensive time of year.”
For example, in 2017, some folks took a wine taste test. The wines were identical, unbeknownst to them. The drinkers were only told that one of the bottles was more expensive than the other. In the end, the taste-testers believed that the pricier wine was more delicious. Their brain scans also showed that the area of the brain linked to reward and motivation, which ultimately determines their taste experience, became more active when they drank what they believed to be the more expensive wine. In short: Our mind plays tricks when we *think* something costs more.
There are many examples of how human psychology can mislead us into making irrational financial decisions. Like that bottle of wine, here’s a rundown of four more purchases that we tend to pay more for, but don’t actually lead to better results, experience or benefits. It may just be in our heads.
Actively Managed Mutual Funds
The idea of a financial professional actively managing a mutual fund sounds like something that would produce tremendous value over time. But here’s the thing: it costs a good deal of money to invest in these types of funds, and they don’t necessarily earn you the greatest bang for your buck.
Many actively managed mutual funds charge high expense ratios, or investment fees, which can compound over the years and lead to thousands of dollars in fees per year (whether your fund makes or loses money). A typical expense ratio for a managed mutual fund is between 0.5 and 1.0 percent. Is this worth it? Research suggests no. According to one study, funds with cheaper expense ratios predictably earned better returns, while those with higher expense ratios earned lower returns.
So Money podcast guest, financial advisor and author Sarah Catherine Guitteres writes in her book, But First Save Ten, that “the people picking stocks and bonds in these mutual funds are smart people. I have met many of them. But their Achilles’ heel is one thing alone: their fees. They simply cannot beat the market on a sustained basis and beat their own fee.”
I woke up to this fact a number of years ago and requested that our financial advisor swap out any actively-managed mutual funds costing more than 1% with a similar passively-managed fund, such as an index fund or exchange-traded fund that’s typically just a fraction of the price. My calculations predicted that one move would save us hundreds of thousands of dollars from now through retirement age.
Pricey Car Insurance
What if I told you that I am now paying half of what I used to for car insurance, all without sacrificing any of the protection or benefits I had with my previous insurer? I drive the same car and maintain the same driving record.
Instead, I’m taking advantage of the fact that I’m a low-mileage driver (if you drive 30 miles or fewer every day, chances are you’re low-mileage, too) and working with an insurer who understands that I should pay as little as possible because of it.
When we moved to New Jersey, we made the switch over to Metromile, a car insurer that offers pay-per-mile car insurance, which means our bill is based on the miles we drive. We pay a base rate and a few cents per mile.
I recently told my friends about Metromile, and they looked at me in disbelief. Their jaws dropped. I could tell they thought I must have fallen for a scam. They doubted and thought that insurance costing so much less necessarily meant weak coverage or a tough time getting claims approved. But it’s not the case.
Metromile can afford to pass on these lower rates because their business model focuses on underwriting mainly low-mileage drivers who get into far fewer accidents versus other insurers who underwrite a really wide range of drivers and need to base rates on group proxies.
Also, Metromile has a 24/7 claims service, roadside assistance, and a free app with features you can use to check your car health, fuel costs, and more. If you’re interested, you can go to Metromile.com to learn more and see if it’s available in your state.
Brand Name Drugs
Is that $8 bottle of Advil any more effective than the $5 bottle of ibuprofen from the pharmacy’s own label? On average, store brands offer a 50% savings compared to the more familiar and popular labels, thanks to low marketing expenses. And it seems the professionals prefer them. A University of Chicago study found that most doctors and pharmacists are loyal to store brands. Always consult with your physician or the pharmacists if you’re not sure which direction to take on an over-the-counter drug.
According to the study: The more informed or expert consumers are less likely to pay extra to buy national brands, with pharmacists choosing them over store brands only 9 percent of the time, compared to 26 percent of the time for the average consumer.
Fancy Food Labels
Fancy food brands carry higher price tags partly because of giant marketing costs. But store brands don’t need to pay a third-party a cut of its revenue and can pass on those savings to its customers.
In many cases the taste and quality are just as good – if not better. Sure, some things like our affinity for Jif peanut butter cannot be substituted, but in other cases, we’re more than fine swapping out the more expensive brands for store-labels from Target, Whole Foods and Costco. And in the current pandemic, more shoppers are experimenting with store brands as a way to save.
Sources also tell me that Costco’s Kirkland label is slapped onto some of the same food and beverage items that are priced higher, including some wines, spirits and coffee.