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Wednesday, December 21, 2011

Bargains vs Savings

A lot of individuals, even those that are frugally minded, don't have a good grasp of the difference between a bargain and a savings. And if you aren't careful, a failure to recognize the difference could cost you money.
You'll see people buy something on sale and claim they 'saved money', when really all they did was find a bargain. The difference between the two is important, but simple enough:

- A SAVINGS is when you are able to spend less than you ALREADY had planned or budgeted. The result is that in the end you have MORE of your income remaining than you planned or expected.

If you pay 150 bucks a month for electricity, and by using a clothesline instead of a dryer you end up paying only 140, then you saved $10. you  have $10 that you can put into a jar that you wouldn't have otherwise had. If you buy beans anyway, and find a coupon for $0.25 off, then you saved 25 cents.

A BARGAIN is purchasing something for less than market value. The result is that in the end you have LESS money remaining than you were planning or expecting. This is true no matter how extraordinary the bargain is.

If you find a gold coin worth $1500 on sale for $10 and buy it, you did not save $1490. In fact, you spent $10 more than you budgeted that month. So you have $10 LESS money that month than you would otherwise.

So while in the earlier example the coupons for the beans represented a savings since you were going to buy them anyway, a 50% off coupon for a restaurant is not a savings if you weren't already planning on going there. Be very careful with coupons because this is what they are designed to do: get you to spend money that you weren't otherwise going to, simply because it appears to be a bargain. I strongly encourage coupon use, but only if it's done PROPERLY.  Don't play their game. Remember, if it wasn't making them money they wouldn't be doing it.

Now it's true that getting things at a bargain can give the opportunity for a profit, and that shouldn't be overlooked. From the previous example, you could instantly sell the gold coin for a $1400 profit, and that's good, but it doesn't mean it's a savings. And while I encourage the buying and selling of items for a profit, I don't recommend speculating with budgeted money. Because the profits you envision won't always pan out.

I would always have a stash of cash ready to take examples of profit-making opportunities like that, but don't spend money that you don't have - even to make more money.

-The Money Monk

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