As an accountant, “Forever Money” is my kind of blog post title. That is if it’s written about revenue. Well, this post is all about expenses, but some of the issues I cover should still help your personal financial position. Remember, cutting an expense is almost as good as income!
What is Forever Money?
Basically, “Forever Money” is a term I came up with years ago for two types of personal expenditures that consumers make.
The first one is when you sign up for a service or plan that is automatically drafted out of your bank account or credit card on a routine basis. When that draft is put on autopilot, I see it as forever money coming right out of your pocket with no ongoing thought to it.
The second type of expense is when you buy some type of extended warranty or other coverage as a onetime expenditure at the time you buy the product. In this case, I like to say your money is gone forever.
A common thread between these two types of spending is that it is very easy to just forget about them. The monthly draft continues on for that service you may rarely use. The product breaks and you can’t find the extended warranty paperwork, or you simply forget you bought it. Maybe you just choose not to get it fixed as there is a newer gadget you now prefer.
Generally, the first type of expenditure has proliferated so much that almost any transaction can now be put in this category on autopilot.
Some basic examples are car washes, gym memberships, Netflix, Disney channel, auto insurance, pet food, vitamins, and Amazon Prime. There are even more custom types of plans like gourmet food delivery, bamboo diapers, epicurean wine, craft coffee, and my favorite, pasta of the month club.
On the warranty purchases, don’t just think about new car extended warranties. There are warranty options on most everything you can buy today. At the big box stores, I have been asked if I want to buy an extended warranty on an iron, a blow dryer, and even on a small $25 tech purchase.
While the lists can go on and on, I think you get the idea. The point I’m trying to make is that retailers are out to tap into your cashflow in order to generate Forever Money.
Don’t Some of These Make Sense?
Ok, I know at this point I am definitely stepping on some toes. I like to think of personal finance as a judgement free zone, so please hear me out.
First, I agree, a lot of these transactions are thoughtful, even necessary for some consumer goods and services. They provide convenience and can also be very good time savers. They even ensure that you don’t run out of necessary consumables (like coffee and diapers!).
Additionally, they can provide a safety net. For example, having your auto insurance drafted monthly can help to make sure you don’t lose your coverage simply for forgetting to pay the premium.
Finally, some consumers use these types of plans to spread big expenses out. An example of this is appliance service plans. We all know stuff breaks and it’s sometimes easier to have a warranty plan in place to avoid a big expenditure.
When Can You Justify These Expenditures?
Basically, there is not a one size fits all answer to justifying these types of transactions. One’s personal budget would seem to dictate, but that should not necessarily be the only guide. Being able to “afford” doesn’t mean you should put everything on autopilot or use extended warranties on every purchase.
Let’s take one of my favorite examples, cell phone insurance. Some consumers have found that this insurance is a necessity in order to sleep at night. I had one student use their insurance plan with every new phone that they have ever purchased.
On the other hand, I have never purchased cell phone insurance. I have never once needed it. In fact, on the last phone I bought, I calculated that I had saved enough money to buy three new phones with the premiums that I had not spent. Not to mention how many phones I could afford to just repair, like a broken screen, etc.
So, who is right? Apparently, both of us are. Well, technically you would have to add up the true costs compared to the insurance premiums over a period of time. I will state that generally the odds are not in the consumer’s favor. In fact, some money experts have found that approximately 50% of the cost of an extended warranty is pure profit for the retailer.
What are Some Other Considerations?
Here are just a couple of instances of what I have seen play out that I hope give you some guidance on things to consider:
On the auto insurance monthly draft, I commented how that can be a huge help in avoiding missing a payment that results in cancellation. But time and time again, I have seen people not pay any attention as that draft amount slowly creeps up. Then five years down the road, it has almost doubled with basically no accountability.
What should have happened is that the policy gets reviewed annually. You don’t necessarily have to get new bids every year, but at least on a periodic basis review the cost and the coverage.
Another example concerns those appliance service plans. Yes, they do work, at least the good ones. But, read the fine print. Most of those plans have very tight limits. You might be under the impression that if your AC goes out, they will buy you a new one, say for $8,500. In reviewing a lot of those, I found that most have caps as low as $1,500 on replacements.
Those are just a couple of illustrations to consider. Just know what you are purchasing and stay diligent.
Conclusion
I have found that sound financial planning starts with managing the small stuff. As I discussed above, there are some very logical rationales involved in buying these types of services.
In making wise financial decisions about these purchases, I would challenge you to do a couple of things: First, commit to reviewing these autopilot expenditures on a periodic basis, at least semi-annually. If you are not using it at least 75% of the intended time, cancel it.
Next, if you haven’t already, start an emergency savings fund. Make a monthly payment into it and try to fund your own extended warranty repairs and replacements. I can attest that this really works and can save you a lot of money.
Finally, I know many of us still need some luxury in our lives while we are trying to save for the future. Just ask my wife about my sweet tea addiction! It’s ok to reward yourself, but don’t go overboard. Try doing this. Rotate some of these services. Get fancy coffee delivered for a year, then stop it and switch to another service. I suggest the pasta plan, but you know what you like.
Have a rich life while you make more deposits than withdrawals!
To learn more about the various business degrees offered at the West Texas A & M University Paul and Virginia Engler College of Business, click here.
David W Clark, MPA, CPA
Instructor of Accounting & Healthcare Management
West Texas A & M University
