Jonah Lehrer wrote a brilliant little article about Costco over at the Science Blog. An excerpt:

The secret of Costco’s success – and the reason I’m willing to pay just to enter the store – is because I trust the company to give me a good deal. As a result, I don’t comparison shop on my phone when I’m browsing the Costco aisles, checking to see if I can get the same book, or sunglasses, or toothpaste for less on Amazon. My usual cheapskate anxieties have been quieted.

And then, later:

And this is where all those details of the Costco shopping experience make us more likely to spend money. The bare bones warehouse aesthetic, the discounted house brand, the constant reassurance that we’re paying “wholesale” prices – it’s all an effective means of convincing us to not worry so much about the price tag. As a result, we’re able to focus entirely on our anticipated pleasures, which is why I walk out of the store with all this stuff I don’t need.

Quite often in the past, I’ve discussed the advantages of shopping at warehouse clubs. I currently have a Sam’s Club membership (it’s the only warehouse club anywhere near my home) and have visited Costco several times in the past – the shopping experience is almost identical.

What I’ve learned is that almost always, you do save money when you shop there, but only if you buy things you would buy normally anyway.

Of course, that’s not where the profit lies for a warehouse club. If they earn a return on every item you buy, then they make a larger profit. It’s business 101.

Thus, the store is often set up to encourage you to buy more. They already have the psychological benefit of the idea that the stuff there is inexpensive – and it often is – but that often convinces people that things are a “deal” there and that they don’t really have to look at the price tag or think about whether they really need the item at all.

Take, for example, my last visit to Sam’s Club. I went there merely to buy Pull-Ups for my daughter. By the time I neared the checkout, I had several items in my cart – a paperback book, a large container of grapes, a two-pack of my son’s favorite fruit juice, and a few other odds and ends. Once I thought about each of them for a little while, I realized I didn’t actually need most of them – I was only buying them because I wanted them, thought they might serve a use for me, and believed the price was good. So I put them back and left only with the Pull Ups (a big win, in my eyes).

What can you do to avoid falling into this trap and spending more than you should on “bargains” (that aren’t really bargains at all if it’s not stuff you really need)? Here’s how I usually work it.

I don’t go in there without a shopping list. I know what I’m there to buy the second I walk in the door. The trip has a very specific purpose – I’m getting the items on my list and nothing else.

I don’t even go down aisles that do not contain items on my list. Wandering is the enemy of frugal shopping, because you always see something you “need” that’s a good “deal.”

I re-evaluate everything in my cart as I approach the checkout. I look at every single item and ask myself if I actually need it or even want it that badly. Does it really serve a purpose in my life? Is that purpose worth the cost?

I usually shop with a buddy. That buddy is usually my wife. We talk ourselves out of an awful lot of frivolous purchases, which saves us both money. A good shopping buddy is someone who talks you out of stuff and doesn’t talk you into stuff.

Warehouse stores are great tools for minimizing your grocery and household budget, but you have to be careful not to give into impulse buys, which warehouse stores make so easy. Good luck.

As much as we’d like to believe it, our lives aren’t a smooth journey from point A to point B. Unexpected things happen all the time – we do our best to overcome them and move on, but sometimes “our best” results in some pretty challenging consequences. We revert to old, bad habits. We put ourselves in debt. We make really poor snap decisions that seem like the best option in the moment, but really aren’t.

How can we create a smoother path over those bumps? Here are five things you can do to smooth your path, no matter where it takes you.

Build an emergency fund
Simply having a cash reserve for emergency situations can be a huge difference maker when something challenging happens. Instead of panicking, selling off items, going into debt, or failing to pay and destroying your credit rating, you can simply go down to the bank, withdraw a little cash, and take care of the situation. Emergency funds help you through car problems, home maintenance emergencies, job losses, and countless other painful situations.

How do I get started? Open a savings account at your bank. Set up an automatic transfer from your checking account to your savings account, transferring some small amount you can afford each week. Try $25 or $50 or $100 – an amount you think you can handle. Then learn to live on what’s left in your checking and forget about the savings until a true emergency comes along.

Envision challenging scenarios
Imagine what would happen if you lost your job. What would happen if your car’s transmission failed? If your hot water heater failed? If your home burnt to the ground? What are your game plans in these situations? Most people don’t even think about it and just play it by ear, but by thinking of those scenarios a bit in advance, you can make a big difference with regards to how they resolve themselves.

How do I get started? Make a big list (twenty or so long) of the “emergencies” you can see happening in your life. Job loss? Check. Health crisis? Check. Home maintenance emergency? Check. Car emergency? Check. Think about each of these scenarios and imagine what happens to your life if they occur.

Solve those scenarios with “if/then” statements
Once you’ve envisioned all of the problems, it’s time to think about solutions – the “then” part of the “if/then” statement. You’re trying to come up not only with solutions for those problems that will eventually happen, but also with things you can start doing now to make those eventual solutions much easier to execute.

How do I get started? Consider each item on your list of crises. Imagine how you would handle that solution if it happened tomorrow. Come up with a plan in your mind for dealing with it. Then, imagine what things would help you solve the problem – an emergency fund, an insurance policy, and so on. Make a plan to implement some of these things in your life.

Profile your worst tendencies
How do you react to a bad situation? Most of us have a “crutch” or two that we rely on in tough situations. For me, it’s usually buying books – I fall into a “crutch” of buying a book to cheer myself up when I feel like the chips are down. For others, it could be a bad, expensive habit like smoking or drinking or overeating. Whatever your crutch is, it’s usually expensive and actually makes the problem worse rather than better.

How do I get started? Figure out what your crutch is, then seek out a replacement for that crutch. For me, the best replacement has been long walks. Instead of going to the bookstore and buying a book to be a balm for the bad feelings, I go on a long walk in my neighborhood, usually a few miles long. On this walk, I can usually calm my mind, think about happier things, and then often come up with a plan for solving whatever the problem is. When I get home, I feel much better and no longer feel like I need a “balm” to improve my mood.

Divest yourself of potentially bad situations
All of us have things in our life that are on the verge of causing problems. Bad relationships. Something that’s in imminent need of repair. A job that’s very tenuous. Those things eat up our minds and our energy and, often, our wallets, too. They’re simply poisonous, and they hold us back even before they have the chance to fall apart.

How do I get started? Figure out the bad situations in your life. Bad habits. Bad friendships that bring you down. Items in need of repair. A tenuous job. Figure out what you need to do to either improve that situation or divest yourself of it. Yes, this may mean ending a friendship or selling a car, but if these things are creating a net negative in your life, why are you keeping them around?

Preparing for the bumps in life makes it much easier to simply ride through them. Good luck.

Quite often, you’ll see personal finance writers talk about the big things – the single moves that will save you quite a lot per month. Downgrade your living quarters! Sell that car! Buy a used car! Change your insurance!

Those things are flashy because they can save you a lot of money with one action. Yet, they have several serious limitations (that I’ll get into below). Simply using a short checklist of these big things and calling it good enough will certainly help, but they only take you halfway to your big goal.

It’s the small things, the mountain of pebbles, that can really carry things over the top. Here are seven reasons why – and seven small things you can easily do.

There are many more tiny things than big things
Our lives are filled to the brim with choices. We choose what we do with our time and money virtually every second of the day, whether we’re at work or doing chores or sleeping or watching television or anything else we do. Those choices, as a whole, are very simple and minute, but on the whole they add up to a lot: our day, our week, our month, our future.

Almost all of those little choices have a financial implication. Do I make something at home or do I go out to eat? Do I watch television or do I read this book from the library? Do I flip the light switch on my way out of the room? They pop up over and over and over again throughout our day – we have many more opportunities to do the little things than the big things.

Tiny thing #1: Train yourself to flip off the light switch every time you leave a room. Every hour a single 75 watt light bulb stays on costs you roughly a cent. If a single switch can turn off several lights, it quickly adds up.

The tiny things usually don’t alter your quality of life
Yes, some of those little choices can alter your quality of life. Do I go out to eat or not? Depending on your values, the answer to that can certainly alter your life quality.

Many choices, however, have virtually no impact on our quality of life. Choosing to flip off the light switch on the way out of the room has no impact. Choosing a bulk purchase of laundry detergent? Minimal impact. Choosing to pick up a penny off the ground? Virtually no impact. Reading a book instead of watching television? No impact except possibly a positive one. All of those choices have a small but positive influence on your money, though.

Tiny thing #2: Drive the speed limit instead of five or ten miles over. It will improve the fuel efficiency of your car (a small thing) but also reduce your chances of a traffic ticket.

The tiny things help you get into a “money saving” mindset
As you grow more conscious of all of these little choices and start actively choosing the ones that save you money, this begins to feel like it’s the “natural” mode. The choice to save money rather than “living large” begins to feel like the normal option.

The end result of that? You make lots of little choices that save you money and it begins to add up quick. Of course, to get started, you have to start actively making little choices…

Tiny thing #3: The next time you go to buy something nonperishable that you use regularly, buy the bulk version.

The tiny things don’t require a lot of active thought
Most of the little choices in our lives are considered and done so quickly that we don’t even really consider them. When we walk by the light switch, the decision to flip or not to flip the switch is made almost instantaneously. The decision on which version of a product to buy at the store is made extremely quickly.

Compare that to the “big” saves, like selling your house or buying a used car. Yes, they make a huge impact, but the time investment is substantially longer, too. When you calculate both to an hourly rate, they’re often surprisingly comparable.

Tiny thing #4: On your way to the grocery store, go over what you’re going to buy in your mind. If you have someone in the car with you, make a list together. Better yet, make a list before you go.

There are many more opportunities to use the tiny things
You can only save money on a car purchase once every few years. You can use an energy saving trick once every few hours.

That adds up. Yes, by all means, save $500 on your car purchase. But you’ll be doing that once every five years. Alternately, you can save eight cents on something three times a day. 365 days a year. Five years. $450.

Tiny thing #5: Eat the fresh food in the fridge when you’re thinking about a snack. If you choose the preserved food, the fresh food might get old and spoil.

The tiny things often improve your skill set and your social network
You can either drive to the oil change place – or you can learn how to change the oil yourself. Either way, you’re burning an hour. Yet, the “hard” option is not only cheaper, but it also teaches you a useful skill, one that you can use elsewhere.

This pops up time and time again: cooking, landscaping, minor home repairs, and so on. Choosing the slightly harder path almost always saves you money, but more importantly, you learn something new. That new thing might later on come in handy in helping out a friend or building a new relationship.

Tiny thing #6: Buy unshredded cheese, then shred it as you put food on the table. The cheese is less expensive, plus it tastes a lot better since the cheese surface is fresh.

The time investment in most tiny things is miniscule
Most of the “tiny things” take very little time to do. Flipping the light switch? Half a second. Using a generic product? No time at all. Doing a price comparison? A second or two. Driving the speed limit? A minute or so.

If you make the choice to do the tiny thing to save yourself money, you’re usually not investing much time in it at all. It doesn’t disrupt your schedule or eat up a bunch of your spare time. It usually just takes a few seconds or a moment or two – and given the amount of idling in our lives, it’s often easy to fit these things in.

Tiny thing #7: Turn your tap off when you brush your teeth. If you do this for two minutes per brush twice a day, you end up saving hundreds of gallons of water a year, trimming easily from your water bill.

The little things really add up. Given the little effort they require, there’s no reason not to add a lot of them to your life.

I am a big fan of three sports: basketball, baseball, and golf. The next week and a half is perhaps the most exciting period of the year for someone who is a fan of those three sports. The Masters. The men’s and women’s Final Four. The opening of the baseball season.

Why do I like sports? I like watching competition. I know the incredible amount of hard work that goes on when we’re not watching that makes it possible for those people to perform on the screen. I like the strategic choices of it.

And every once in a while, all of that clicks together into something sublime.

Do interest rates fluctuate over time, or do you get locked in to a certain rate at the time you sign up?
- Jamison

Bank interest rates definitely fluctuate over time, at least with online banks. Some banks – usually large brick and mortar ones – do maintain the same rates over many years, and it’s usually a low one. Smaller banks and online banks tend to vary their interest rates more.

How do they vary it? It varies based on what the Federal Reserve does with the prime lending rate (going up when the Fed raises rates and so on). It varies based on the marketing goals of the bank. It varies based on what the competitors are doing.

If you sign up for an account at an online bank, don’t be surprised to see the rate you earn vary over time. Right now, I would say that rates are definitely at the low end of the spectrum, but the Federal Reserve rates are also very low, too.

I have a private student loan at 6.54% (154/mo) and a car payment at 3.9% (493/mo). The car will be paid off in 30 months and both loans currently have a balance of 13k each. Also, I do not receive any tax benefits from either debt.

I’m a math/stats guy so paying off the student loan at the higher rate first would be my best instinct. However, would it make sense to pay off the car loan first, even though its a fairly cheap interest rate, to free up more cash flow on a short-term monthly basis (with sights on real estate purchase from 6-18 months away)?
- Bryan

What you’re essentially doing here is comparing the Dave Ramsey snowball debt repayment method against the “maximize every cent” repayment method. If you pay off the smaller loan first in order to improve your cash flow, you’re basically using Dave’s method.

I think your plan makes reasonable sense – paying off the car loan first because the monthly payments are higher. If I were you, I’d throw every dollar towards that car loan and get it out of the way, then re-evaluate where you’re at with your money and where you want to go next. If you still feel like the housing purchase is a long way off, then pay off the student loan.

I wouldn’t worry too much about “shadow inventory” and timing the purchase perfectly. The market isn’t going to suddenly overheat again. Buy when you’re ready with a down payment – you’ll save far more money by doing that than you would by timing the buy perfectly.

I have a car loan with a balance right at $15K @ 5.49%. If I were to pay it off with the normal amortization it will be repaid around January of 2013.

More on my story: I am single, no kids, stable well-paying job. No big purchases coming in the near term. If I no longer had a car payment I could stash away about $1,000 a month into my savings account to build my emergency fund back up. And yes, I’m contributing to my 401K (about 16% of my salary when you include my employer match). My only other debt is a mortgage with a balance of $165K @ 5.25% and a student loan with a balance of about $21K @ 2.1%.
- Nick

If you’re single with no kids, I would absolutely go ahead and pay off that debt. Dropping your emergency fund to “only” two and a half months’ worth of living expenses isn’t a deep concern in your position, particularly if you have other assets you can tap beyond that if you absolutely must.

Larger emergency funds are more important for people who have dependents – spouses and children. The more people that are represented on your tax return, the larger your emergency fund ought to be.

For single people, a two month emergency fund is just fine, though it doesn’t hurt to have a larger one.

At what point in the Dave Ramsey baby steps should I begin saving for a house? His advice seems to assume that I am already stuck in mortgage debt and discusses when to finish paying it off, but when should I actually purchase it if I am currently debt free?
- Kevin

Dave’s advice makes several assumptions about people’s lives, but it’s still sound advice in the end. You just have to do a bit of interpretation.

From the way I read it, saving for a down payment is part of the sixth baby step. In other words, you should get debt free, build an emergency fund, start saving for retirement, and start saving for college if you have kids before you start saving for a down payment.

From my perspective, I think his advice makes sense. However, I also understand why people are very anxious to own a home of their own. My advice? Be intense. Don’t let up when you manage to pay off your debts. Use every tactic you can to cover all of your goals. Think big (your home), not small (that treat on your way to work).

I’m 26 years old and in a high-paying field – my salary is $145K a year. I’ve only been at it for 2 months, though, and I don’t much like the job. Turns out I value my free time more than I value making money (as I suspected I would), and I’m sacrificing a lot of the former for the latter. As it stands, I’ve saved about $2,000 and put another $1,500 in my 401K, but I’ve got $160,000 in student loan debt ($130K at 7.6% interest, the rest at 4%). I don’t have any credit card debt, live pretty cheaply and could and would cut more.

My plan right now is to build up an emergency fund, try to save up a down payment for the house, and then make the move. I’m willing to be saddled with the debt for the next 30 years if that’s the price of freedom. I’m writing to you to try to put some solid figures on everything; how much do you think I should shoot for in savings? That question will determine how long I stay at my current job. I know I’ll have to get another job, but I don’t think I’ll ever make as much as I do now again. My hope is that I never have to work for someone else as much again either.
- Mike

My first question is whether or not you’re going to try to get a job in the same field as your current job. Are you going to continue your career or not?

If you are going to continue your career, then I would start job hunting immediately and move quickly. If you’re not going to continue your career, I’d stick around as long as I could possibly stand it, because that’s very good money and you’ll need a financial foundation to make a career leap.

If I were you, I’d pick a very clear “end date” and focus on it. Until then, cut all of your spending to the bone. Build a nice, healthy emergency fund, then throw as much as you can at your student loan debt (the higher interest portion). If you possibly can, get debt free before you leap, because those loans will seriously hamper your cash flow and restrict what job you can afford to get when you make your leap.

Good luck!

I am writing just to ask for your personal advice on what to do with approximately $10,000 (I received from the trust). I have absolutely no background in finances or any real understanding of it, except that I know I shouldn’t just let it sit there. When I look on my bank’s website, there are so many different options that I do not even know where to begin and I am left just waiting. Do you have any suggestions of where to start looking so that it is not so overwhelming?
- Joelle

There are really two things you need to ask yourself. First, what do you want to do with this money and when do you want to do it? Do you have any goal for this money? Will it be a home down payment in five years? Will you want it for a trip in three months? Will you want it as the foundation for a business you want to open twenty years down the road? Figure out a time frame and a goal for it.

Second, can you tolerate losing money in your investments? Some people can and some people can’t. If you think to yourself, “Sure, I can tolerate risk,” but then you get scared when you’ve lost 40% of your investment, you’re going to make the worst possible move you could with your money. If you can’t imagine being able to stand it after losing 40% of the money, then you should be in something safe and conservative that doesn’t earn a large return.

If you have a long term goal and don’t mind the risk, I would put all of it in Vanguard in their total stock market index fund. If you do this, just let the money stay there until you start to get close to your goals (in terms of time). If you have a long term goal and can’t stand risk, put it in a certificate of deposit at your bank. If you have a short term goal, keep it in cash (or in a very short term certificate of deposit).

What would be some safe(ish) ways to get my hard-earned money to do some legwork in this shaky economy?
- Adam

You should essentially re-read the answer to the previous question, because the same ideas apply.

Unless you’re incredibly rich (nine figure wealth or so), nvesting is about goals. What do you want to do with that money? When do you want to do it? Also, what is your risk tolerance?

Simply investing for the sake of investing usually leads to suboptimal results when you actually need the money. Think about your goals up front and they’ll practically tell you how to invest.

I wanted to know your opinion on cash vs. check card. In my case, I hardly ever carry cash. I used my Citibank check card mainly for 2 reasons: 1) I can more easily track my expenses using Mint.com; 2)I earn an American Airlines mile for every dollar spent (My wife and I have gone to Jamaica and St. Martin for “free” using our accumulated miles). What are your thoughts on this? Are you a cash carrier? Do you feel that using plastic makes you lose sight of the fact that you are spending money? I feel like I’m getting a better bang for my buck by using my card. Curious to know how you feel about this.
- Tony

I use plastic. I think that using plastic can result in losing touch with the idea that you’re actually spending money – unless you’re mindful of it.

For me, I’ve learned that any time I go to purchase something – no matter how I purchase it – I’m deducting from the future that I want. I keep that thought as front and center in my mind as I possibly can.

The end result is that the “trigger” for making me think about my spending isn’t pulling out cash. It’s simply approaching the “Buy Now” button or the checkout line. Every time I do either thing now, I think about what I’m doing and, sometimes, I talk myself right out of it.

We bought a house about 3 years ago, and looking back we were young and stupid and really had no business buying the house we did. But I cant change that now. We are basically able to make our payments every month, pay all the bills, and have a decent life, but at the end of the month, there is very little or none to put towards long term savings. We currently owe $290k on a house that is probably worth closer to $240k at this point in time. This is split up in a mortgage and a HELOC that we used to do 100% financing, which was yet another bad idea now that I look back. Both are with Bank of America. Neither of us can afford to stay there without both your incomes, but with our situation, staying really isnt an option.

So, any advice? is there an option I am missing here?
Looking for the quickest and cheapest way to get out of the house. Even if i could get the bank to modify and lower payments, I dont really want to stay in the house, its to far from my family/friends. Same with her.
- Jeff

The general advice of sticking with it is a good one and that’s probably what I’d recommend, but it sounds as though there are personal reasons why it’s untenable.

In that case, I’d look seriously at option #3. You have to talk to your bank about this, because it’s functionally very similar to foreclosure except you don’t get the negative credit bump out of it. It allows you to walk away scot free, almost as if you had just been renting the house for a while.

If you live in a recourse state, I wouldn’t walk away. You’ll end up being chased by them for years as they try to get their money back.

It is easy over time to have time wasters creep back into your life (perhaps TV and WoW for you) and an article like this helps to refocus our energies.

I haven’t played board games in a number of years but your bi-monthly get-togethers sound like a great idea. Any recommendations for board games or perhaps you could include them on another blog?
- Jason

My favorite game to play with people who don’t play board games much at all (aside from memories of childhood) is Ticket to Ride. It’s elegantly simple, yet can be as strategically deep as people want it to be. The pieces and graphics are beautiful, too, and it’s really flavorful, capturing a sense of riding the rails very well.

If you prefer trivia games, the best one I’ve found is Wits and Wagers, which basically combines the better elements of Trivial Pursuit with some wagering and a limited timeframe on the game (so it doesn’t go on forever).

Four other games that would fit if the above two don’t trip your trigger: Dominion, Pandemic, Carcassonne, and Modern Art.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.