Let’s face it, we all love a bargain, and right now, we’re seeing sales and discounted items everywhere, but are we really getting a bargain?
What often goes unnoticed is that when using services, such as buy now, pay later and credit cards, there are fees and/or interest charges that add to the purchase cost. We know that the discounted price is on the recommended retail price (RRP), so any discount is not really that big when you consider we can buy the same item for less than the RRP if you shop around.
If we take a deep dive into the sales events like Black Friday and Afterpay Day, we discover that these are designed to entice us to buy items we don’t really need. The thought of getting a bargain pushes us to spend based on a concept known as financial abstraction. Adam Carroll talks about this in his TEDx talk titled ‘When money isn’t real: The $10,000 experiment”, and this week I had the pleasure of interviewing him on the subject.
Financial abstraction
The premise is that when we use credit cards, tap-and-go payments or buy now pay later, money doesn’t seem real to us, so we’re predisposed to spending more, as we crave the endorphins we get from buying something new. Unfortunately, this leads to overspending, which has very real consequences, as it creates higher consumer debt, financial hardship and bankruptcy.
The concept of financial abstraction is why companies such as Block Inc (NYSE:SQ). (who owns Square (NYSE:SQ) and Afterpay) and the banks will do very well. While Square did not perform well last year, it has risen strongly in the last couple of months, trading up 38 per cent, so it’s one to watch. In March, Afterpay ran the first of two Afterpay Day sales event with the second scheduled for August. As usual, their goal is to get consumers to spend cash they don’t have on discounted items using Afterpay as the payment vehicle.
While Afterpay is great for retailers, it’s not good for consumers because it’s putting people further into debt.
So what can we do?
If you’re enticed to look at the Afterpay Day sale next month, make sure you only spend on items you need and, more importantly, make sure you don’t spend more than the cash you have in your bank account, so you can pay off the items quickly and avoid any extra fees.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the bestselling and award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au