Buying Stuff Isn’t Saving Money

Ah, well. I knew it was too good to last. A couple of months ago, I wrote a piece about how Fidelity’s latest ad campaign about managing your personal economy impressed me with its common sense message. Well, here we are three months later and their newest ad campaign has gone in the opposite direction. Instead of preaching common sense, they’re now preaching one of the top ways consumers get themselves in trouble. I’m adding them to my wall of shame.

The ad is for the Fidelity American Express Rewards credit cards. These cards place two percent of your spending into an eligible Fidelity savings account. While this isn’t a bad idea for the disciplined credit card user, the ad showcases irresponsible financial behavior. The ad shows a woman adding random, unnecessary stuff to her purchases just because she’s being rewarded for it. The cashier asks, “Anything else?” and the woman tosses extra stuff on the counter. You can practically see her thinking, “Great! I’m getting money in my savings account by purchasing this extra do-dad with my swanky credit card!”

And this is where so many people go wrong with credit card usage and rewards programs. There is no scenario where buying something that you don’t need is actually saving you money. Spending while thinking you’re saving money is called “Spaving” and it’s often the road to financial ruin. You think you’re doing something positive by purchasing something so that you’ll get rewards or money in your savings account, but you’re still spending money unnecessarily.

Here’s how the math works out: Let’s say you add-on a bottle of water that costs $2 and a magazine that costs $4. You’ve spent $6 and you’re thinking, “Wahoo! More money for my savings account. But two percent back on that purchase is only twelve cents. Doesn’t seem like such a great deal, does it? You spent six dollars that you didn’t really need to spend and you netted only twelve cents in “savings.” That, my friend, is a loss of $5.88. Had you saved the six dollars in a savings account earning only half a percent in interest, you would have $6.03 at the end of the month. Invest it more aggressively and your earnings will likely be higher. No, you didn’t make a fortune, but you have $6.03 instead of twelve cents. Which is the better deal, now?

And remember: If you don’t pay the credit card balance in full every month, any of your savings will be eaten by interest payments. Saving twelve cents but having to pay 18% in interest is not a good deal, either. It gets worse if you’re also paying an annual fee for the card.

Rewards credit cards can be a good deal when used to buy things you really need, you’re not paying an annual fee (or if you are, you’re certain that your savings and earnings are greater than the fee) and you’re disciplined enough to pay off the balance every month. Under those circumstances, you can come out ahead. But just tossing extra stuff onto the counter as you check out in order to save money is never a winning strategy. That’s simply spending money you didn’t need to spend which is always a losing proposition. (For you, anyway. It’s always a win for the credit card company which is why they make ads encouraging this behavior.)

(Photo courtesy of Crispin Semmens)