Why You Should Pay Too Much – Sometimes

You might really love to bargain like a camel trader and if so, I get it. But once in a while it’s smart to actually pay too much for something if you want to spend less money in the long-run. I know this isn’t very “pc” these days – but it is true. Let me give you a few good examples and then a bad one just to clarify.

When we bought our last house the market was really hot. It was 1998 and prices were climbing about 1% to 2% every month. Of course that growth was exaggerated but it wasn’t really a bubble yet. I knew that it cost us an much as $8,000 for every month we didn’t make a decision. To make matters worse, we were very particular about what we wanted and there weren’t that many homes on the market that fit our needs. Finally, because of some unique family circumstances, we really needed to find that home fast.

As a result, when we found the house we wanted, we offered $4000 more than the asking price and snatched the deal. I knew that we’d recoup that premium in the first month we owned it. When I amortized that cost, I realized that over the life of the investment, that $4000 was nothing. And I also knew that it was costing me a fortune (in lost time from work) looking for the house. The least expensive way for me to solve my problem was to spend more money that we absolutely had too. Cabishe?

Let’s slide over to you. This concept absolutely applies when you think about your job. If you want to advance in your career, you also have to “pay too much” in a way. You must give more to your employer than what your employer pays you. That’s the best way to keep your job, move up the ladder and receive promotions and pay increases. Right?

Now let me share an example of when it’s really dumb to pay too much. The last time I bought a new car (my first mistake) was in 1994. I went to the lot when I was hungry and tired (second and third mistake). I didn’t do my homework (forth mistake). Finally, the salesman was a friend of a friend who sold cars who I just relied on (fifth mistake). What an idiot I was. I got hosed. I ended up paying up a lot more for my Camry than I had to for no good reason. I won’t repeat that mistake I can assure you. This kind of behavior is one of the best ways I know of going broke. No thanks friend.

Let’s look at these examples and try to draw some conclusions about when it’s smart to pay too much and when it isn’t:

1. Are you trying to create a business relationship?

It’s OK to pay a little too much when you are building a long term business relationship. The worst thing you could do when you negotiate with partners is to try to take them to the cleaners. It creates an atmosphere of distrust that will hang over your dealings with this person for many years. You are best served by being both fair to the other party and fair to yourself if you want to build a healthy long-term business relationship with another person. If you give up a little too much, that’s OK. Just make sure it’s not a one-way street. If you give and your partner is only willing to take, start looking for a new partner pronto.

2. Do you really have to overpay?

The best way to start any negotiation is from a position of strength. And you create lots of bargaining strength when you have time and other alternatives before you make a deal. If you have neither and you must come to an agreement, you’re in a tougher position. If you find yourself in such circumstances, you may have no choice but to pay more than you otherwise would.

But make sure you really have no alternatives or time. When I bought my Toyota I artificially created the pressure. In reality, I had both time and alternatives. And had I walked out of the show room, it wouldn’t have cost me a thing. There was no pending price increase and was no need to get that purchase done so quickly.

With the house purchase however, I really didn’t have any bargaining power. And waiting was costing me a lot of money. It made sense to overpay. It was actually a good use of money.

3. What will it cost you to pay too much?

Financial decisions are all about trade-offs. There are no perfect decisions. If you overpay for something you give up something in order to get something else. But sometimes you pay more than you realize. For example, let’s say you enter into a business relationship with someone and you give up a little more than the other party does because you want to seal the deal. Are you setting up a precedent? Are you giving the other person carte blanche to walk all over you in the future? That could be very costly and prove unwise.

4. What do you get out of paying too much?

What are the benefits you receive by paying a premium? If you are “paying a premium” for your job by putting in more hours than everyone else, how is it going to pay off and when? Sometimes it’s very difficult to quantify these returns I know. But it’s important to have some general idea of what you are aiming for – and make sure it’s reasonable.

With the car, I got nothing out of paying too much (other than a terrible guilt feeling that survives to this day). But with the purchase of my home, I saved time and avoided future price increases. It made sense.

You can see that it doesn’t always make sense to fight for the rock-bottom prices. Indeed, sometimes that ends up being the most expensive way to go. When you are involved in any purchase or exchange of consequence, think about the price, your time and other alternatives. With these three issues in mind, it will be easy for you to determine if you are really paying too much for something or not.

Are you better off spending more money sometimes or is it smarter to always seek out the lowest price? What’s your experience?