Why I turn down free money
Posted
Jul 31 2008, 09:19 AM
by
Karen Datko
Rating:
This post comes from Philip Brewer at partner blog Wise Bread.
There are certain ways to get free money or free stuff simply by paying attention, keeping track, and being careful. I don't do these things. It's not because they don't work; it's not even because the risk-adjusted earnings don't pay for the time spent.
It's because time -- and especially time spent paying attention -- is very precious.
The clearest example of the sort of thing I'm talking about is getting a cash advance from a new credit card with a 0% teaser rate. Slap that money in your high-interest savings account, pay off the loan when it's due, and you can pocket the interest. Borrow $100,000, and you could pick up close to $2,000 of free money in six months.
The thing that makes these schemes tempting is that they seem so easy. After all, you already pay your other bills on time. By paying one more bill on time for six months, you get paid $2,000. What's not to like?
Well, one thing not to like is that there are a dozen ways to screw up. Accidentally use the card for an ordinary purchase, and suddenly the interest rate is no longer 0%. Make a payment late and suddenly the rate jumps up high enough that you owe more for one month than you were earning in six. In some cases, making the final payment late can allow them to retroactively change the 0% teaser rate to their regular rate, and suddenly instead of coming out $2,000 ahead, you find yourself $10,000 behind.
So, I don't do that sort of thing. I'm organized enough to be successful at it, but I know from experience that things go awry. If you're 99% successful at paying your bills on time, but you've got a dozen bills that need to be paid every month, you can expect an average of 1.4 late payments per year. The list of things that can lead to such a mistake is endless--busy at work, busy at home, illness, injury, family emergency -- and that's not counting the possibility that someone else might screw up in a way that costs you money.
Even if you automate your bill paying, things can go wrong. Maybe your bank merges with another bank and you have to move all your automated bill paying to the new bank's system. If you make a mistake with your power bill, it's no big deal -- just fix it. If you make a mistake with the $100,000 zero-rate card, it could cost you a lot. Maybe your bank makes a mistake and bounces one of your checks. They'll admit that it's a mistake and refund the bounced-check fee, but good luck on convincing them that they need to reimburse you for several months' interest on $100,000.
The strict way to analyze this is to do a probability-weighted payoff analysis. If 99% of the time you make $2,000 and 1% of the time you lose $10,000, then your expected return would be $1,880. (0.99 times $2,000 minus 0.01 times $10,000). Now calculate that as an hourly wage. If you spend, let's say, one hour setting the whole thing up and then 10 minutes a month making sure everything's on track, then over six months you've spent a total of two hours, giving you an equivalent wage of $940 an hour.
Woo hoo! Not many people get paid that much.
Even so, I never do this. The reason -- the real, fundamental reason -- is that it would take my attention. I'd end up spending way more than 10 minutes a month with this on my mind. I'd be lucky to keep it down to 10 minutes a day -- at which point my hourly wage drops down to about $60, which, although nothing to sneeze at, is a wage I can probably match by doing work that's a lot more rewarding -- work that helps other people or that produces something of value or that furthers my career or that teaches me a new skill.
Because of that, I avoid all schemes of this sort. I don't take "free" magazine subscriptions or "free" credit-monitoring services that you have to remember to cancel after a month or else pay for a full year. If I want a copy of a magazine, I'll pay a few dollars and buy one (or, if I just want to look at it, I'll go to the library).
My time and attention are very precious to me. If I'm going to spend them, it's going to be on something that earns more than just money. Whenever I can possibly manage it, it's going to be on something that's really worth doing.
Other articles of interest at Wise Bread:
Treat yourself like a child to be more grown up
Should your standard of living rise?
You can't save if you don't try
