Saving Money on Parade

Parade Magazine had an article in this week's issue entitled "Secrets of Thrifty Families."

The sentence that caught my eye was: "It took one week of vacation time and a $4000 tax rebate (Brett and Sue purposely overcontribute to get a yearly windfall), but they saved at least $6000 on the bathroom renovation alone."

If you are trying to tell people how to manage money, you should not be telling them to give the government an interest-free loan. Instead, you should tell them to take an interest-free loan from the government. You want to underpay taxes by just a little under $1000. (If you go over $1000 you may face penalties. The government likes it when you give them an interest-free loan, but does not want to give you one.)

If you have a rebate of $4000, you have on average lent the government $2000 for the year. If you could get 4% interest, that is $80 you could have earned but did not.

Why do people do overpay? Mostly because they cannot control spending, and this is a way to force themselves to save. In fact, the tax preparation people have figured out that people who overpay in this way have big signs on them saying, "I have a hard time controlling my urge to spend." So they advertise that they will give them a loan when they file their taxes. That way they will not have to wait the two or three weeks, even though they have waited months and months up to now. They can have an instant refund. It is almost cruel to take advantage of weakness in this way. But where there is weakness, someone will take advantage of it.

Parade also had a piece by Tim Harford, "Bargains that Aren't." Harford is one of the major economics bloggers and his blog is at http://blogs.ft.com/undercover/. Harford and Dan Ariely have had an interesting discussion about rationality at http://www.omnivoracious.com/HarfordandAriely.html.