Here we see my father’s chihuahua, Chico, on top of 200 pounds of dog food I bought on clearance for $70 at Walmart. Presented with this, people will look at you funny and ask the same repetitive questions like “why are you buying so much?” In this case, Walmart was clearing out this dog food even though it still has over a year left on expiration. The price was 50–60% off the normal price so that an 18 lb. bag of Purina was $6.25 and a 20 lb. bag of Ol’Roy was $5.50.
Stocking up when items are on sale is a great strategy when a few criteria are met:
1. The price should be a “good” deal. This varies by person. Stocking up on Louis Vuitton handbags because they are at the lowest price ever might be a great deal for someone who has a bonafide purpose for them (e.g., projecting an image or enjoying a high-quality product) and is financially equipped. Otherwise, not so much.
2. You would use the item anyway. If this is something you would be using anyway but would be likely to buy at a higher price in the future, then buying it on sale or clearance might be a good decision. There is, of course, a certain amount of uncertainty here. For instance, a child could have a growth spurt and grow out of the clothes you bought for him or her.
3. You have the financial resources to stock up. If buying in bulk could end up making you overdraft your bank account or pay 28.38% APY of interest on the purchase, it might be a bad idea.
4. You know the product well, including historical pricing and competitive items. What if the price goes down later, or if you figure out that you could have met your needs by substituting a product that is cheaper? (For example, a generic instead of brand name.)
5. The risk of the item going bad, being lost, or being stolen is appropriately low. Buying a dozen gallons of milk is a bad idea if you live alone. Going back to Rule 2, it’s also a bad idea if you don’t like milk. However, if the price is low enough you might buy the product anyway and work it out later—for instance, if you could easily resell the item for more. Sometimes, there may be risks you do not foresee. For instance, five years ago, I learned that stocking up on boxed noodles is a bad idea because mealworms can spread between boxes and ruin the stockpile. If the noodles are in plastic bags, like the tarp bags that the pictured dog food is in, this risk is eliminated or at least greatly reduced.
6. The cost of storage is low and the logistics make sense. If you have to open a storage unit just to store the dog food, you probably shouldn’t stock up on it. If you have to drive out of your way, wait in line, or make a left turn to save a few cents per gallon on gas, are the increased travel costs, lost time, or increased risk of car accident worth it? Sometimes, the logistics of stocking up are beneficial, because you won’t waste time having to run out to the store due to unexpectedly running out of the item.
7. The opportunity cost is justified given the savings. What else could you do with your money, storage space, and time? If, to stock up, you have to visit many different locations of a chain to get around a purchase limit or use multiple coupons, is this worth the time and travel expense? What if you end up moving and the stockpile becomes costly and inconvenient? Should you be contributing to your 401(k) instead of stockpiling?
8. The package size is appropriate. A restaurant-size can of peas might go bad in a short time after you open it. Are smaller packages available at similar cost? What is more cost-effective for you? Sometimes, larger packages are a plus. For example, changing the toilet paper roll and squeezing the last bit of toothpaste out of a tube are both annoying, so larger rolls or tubes reduce the frequency of these annoyances. If the larger roll of toilet paper won’t fit on the holder, not so much.
9. Costs and risk due to deferred consumption are appropriate. If you buy enough dog food for five years, but in five years it still goes on sale for the same price, you actually lost money due to inflation and opportunity cost, plus storage and logistics costs. If you decide to get rid of your pets to move into an apartment without paying pet fees, your dog food becomes worthless to you—although you could resell it or give it away. A salient example of this rule are the U.S. Postal Service’s forever stamps, introduced in 2007:
In April 2007 when they were introduced, postage was 41¢ to mail a letter weighing up to one ounce. The value proposition remains the same (mailing a letter), but in January 2018, postage increased from 49¢ to 50¢, which is a 22% increase since 2007. While inflation has been about the same according to the consumer-price index, buying something that merely matches inflation but heavily restricts what you can do with your money is a bad proposition. If you stocked up on stamps before the 1/21/2018 increase but won’t use them for a long time, is this really a good use of your money? What if the value goes down? The stamp’s cost was 49¢ during the period of 1/26/2014–4/09/2016 but actually declined to 47¢ during 4/10/2016–1/21/2017. What if you mail a lot of letters now but switch to electronic methods before you use your stockpile? If you don’t run a post office or shop, you will be re-selling the stamps at a loss if you need to get rid of them.
My father often says that poor people hoard, but rich people stockpile. Connotation is everything—hoarding is bad, but stockpiling sounds prudent and responsible. The average Joe doesn’t think about stocking up on nonperishable items when they are on sale. He probably doesn’t even think about looking at the cost per ounce or unit between different package sizes of the same product (e.g., peanut butter). He probably thinks you are foolish or weird for doing either of these things. I think we should turn these beliefs on their head. It is foolish and weird not to save money buying sale or clearance items in bulk. Considering the above principles can help you figure out whether you are truly saving. Improving your beliefs and behaviors about buying in bulk puts you on the road to financial independence.