I’m amazed at how often I hear people say they are afraid to invest in the stock market because they believe it is too high-risk. Often, the same people are already taking financial risks – albeit smaller ones – in order to save money. In fact, risk taking is an essential part of many means of saving money.
Take, for example, the saving opportunities presented by a broken vacuum cleaner, which our family had recently. Repairing something is generally less expensive than replacing it, so a repair has money-saving potential, but there’s also a risk. I have to risk the cost of new parts and possibly a repairperson in order to save the cost of a new vacuum cleaner. If I (or the person I hire) am unable to fix the vacuum, I have lost the cost of the repair.
Sometimes repairing something is too expensive or time-consuming to be worth its cost. Once we decide to replace something, savers are faced with another money-saving opportunity – buying a secondhand replacement. The very day our vacuum cleaner broke, my husband and I saw one at an auction. It looked like it was in great shape, but we had no way to test it. Once again, we had the potential to save a lot of money – the vacuum sold for a fraction of the cost of a new one – but we also had to risk losing money if we bought the secondhand vacuum and found that it did not work. (Secondhand items rarely come with a warranty or a guarantee.) We were outbid on the vacuum, but when we looked at the broken vacuum more closely, we found we could easily fix it for less than what we had bid on the replacement. We would have wasted money by buying a secondhand replacement, even if it had worked perfectly.
If we had been unable to fix the vacuum and had bought the vacuum at the auction only to find that it was a dud, we would have gone to buy a new vacuum. Once again, we would have had to take some risks to save the most money. We could have gone to one store and paid whatever it asked for the most suitable vacuum in stock, or we could have risked the cost of gas to shop around for the best vacuum at the best price. I say “risked” because it’s not unusual for us to look at four or five stores to find that the best bargain was at the first store we had visited. (True, we could save the gas money by doing some research online to get a general idea of features and pricing, but often the prices and selection are different in bricks-and-mortar stores. Calling stores for prices is another option, but it’s often time-consuming and a hassle; plus, it’s harder to evaluate an unseen product. Physically shopping around, in my opinion, is still the best method for saving on purchases.)
Like stock-market investors, savers regularly take risks to see a payoff. On a single item, a saver could find himself out the cost of repairs, a broken second-hand purchase, and the gas for shopping around before buying a new item at the first store he visited. Meanwhile, a spendthrift looking for the same item might pay less by going to just one store and buying the first thing he sees.
Repairing, replacing with secondhand items, and shopping around are not the only risks savers take (nor do these activities only apply to vacuum cleaners – think about your risks the next time your car breaks down!) Buying something of lower quality in the hope that it will work well enough for the purpose is a common risk savers take (though some won’t admit it). I confess that I often buy inexpensive clothes with the belief that most expensive, well made clothes will go out of style before they wear out, but occasionally my cheap clothes have torn or worn out long before I got my money’s worth out of them. Another risk is spending money to buy something that may save money in the future. I include energy-efficient light bulbs in this category. The one time we splurged to buy one, the bulb burned out even faster than our regular bulbs, and I doubt we saved enough in our electric bill to make it worthwhile. We risked money and lost it that time.
Saving money also has at least one inherent risk – by saving money instead of spending it, you risk not buying something that will unexpectedly and significantly increase in value. The odds of losing money this way are so low, however, that it’s a risk I’m always willing to take.
Risk-taking savers – what an oxymoron! Yet, most savers are risk takers, even if they don’t think of themselves that way. So if you’re great at saving but are still keeping all your money in low-interest investments because you’re afraid of the “risky” stock market, reconsider. You may already be taking more financial risks than you realize.
Image credit: MildlyDiverting