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Today’s Lesson: Take a Guaranteed 20+% Return

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Last week, I got a haircut. Nothing exciting there... many people do that on a typical day.

Sometimes there are very interesting personal finance lessons hiding in the most mundane activities. This was one such case.

I noticed that place I get my haircut, Supercuts was running a promotion: 4 haircuts for $50 via a pre-paid card. I like easy math, so I'll happily report that comes out to $12.50 a haircut.

The normal price of a haircut: $15.95.

I've probably lost about 80% of the readers who did some other quick math: it saves less than $3.50 per haircut.

That doesn't seem like much, but let's imagine that I haircut once a month (usually I go longer than that). At ~$16 it is going to cost me $192 a year for those 12 haircuts. By buying the pre-paid cards, it is going to me $150. It's the exact same service for $42 less.

If you do the math, the savings is 20%. I don't know of a legitimate investment that will guarantee you a 20% return.

I've been thinking about buying up a bunch, since they don't expire. However, I need your help to know how many to buy. When does it stop becoming worthwhile to buy these cards? For example, if I were buy enough cards for 10 years, that's tying up a lot of money up-front, which maybe could be better used than saving me 20%.

Let me know in the comments.

Last updated on August 4, 2014.

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14 Responses to “Today’s Lesson: Take a Guaranteed 20+% Return”

  1. Mike says:

    I think of gift cards kinda like bonds: I’m buying something now and will get paid back with extra later. So what rate of return do I want? I like at least 5% and preferably 10% for gift cards because I spend time on it, lose them, or forget to use them as time goes on and I want compensated for paying up front. So, for the 1st year, I want at least 5% return. For the 2nd year, I want 5% for the 1st year and 5% for the 2nd year: at least 10%. And so on. This model maxes out at 4 years worth.

    The second thing I think about is how automated are the savings. If I buy an iTunes or Amazon gift card, it gets added to my account and used automatically. For something like this, it requires more handling and mental effort to get the savings, so I want a higher return (helps encourage me). For something like pre-paid hair cuts, I’d go above the 5% / year return rate. I’d be looking for more like 10% to 15% because I know I’m gonna bung it up a few years down the road. By this model, I’d get 4-5 pre-paid cards and call it a day.

    • Lazy Man says:

      I like the way of thinking of this Mike. I hadn’t thought of them as bonds, but in some ways that’s what they seem to be.

      While I do forget to use gift cards some of the time, I am pretty good about not losing them. This “breakage” as it is called in the industry varies with person-to-person. I’m going to make an educated guess that the people who read personal finance blogs have low breakage rates because they may be more financially aware.

      So four years worth of gift cards would be $600. It seems like a lot of money to put upfront on haircuts. Maybe it’s worth doing 2-3 years and hoping another promotion comes along during that time.

  2. robyn says:

    i am notorious for buying discount cards, using 95% of the value and then forgetting about the rest, losing the card, store closing, etc. if this is your regular haircutter, and they do not routinely offer other discounts [great clips runs 6.99 specials about 3 or 4 times a year] then i’d consider 3 or 4 cards. more than that is risking an overall loss. perhaps they can put it on an account for you and make it seamless? you could also buy these and use them as gifts for high school graduation, good luck on the new job, congrats on your divorce gift cards. i do that with restaurant and gasoline gift card promos.

    • Lazy Man says:

      I loved those Great Clips specials when I lived near one. I don’t any more. Even when I did, usually the timing didn’t work with when I needed a haircut.

      Supercuts is my regular haircutter, so 3 or 4 cards may make sense.

      It may sound silly, but I hadn’t really thought of using gift cards as gifts. Well, I haven’t thought of using discounted ones for that.

  3. Gretchen says:

    That’s an awesome way of looking at it! I sometimes am given a hard time by friends and family for wanting to save a buck, but looking at it this way makes saving a few dollars seem all the more worth it!

  4. Kevin says:

    Assuming you don’t place a premium on handling/storing the cards, you need to set up a discount model. You value this at 16 dollars now. If you think the rate of yearly return is 5% you would divide 16 by 1+.05 to see what you would value it at in a year. Mathmatically: 16/(1+r)^y, where year is how many years later it is and r is what you think your expected return on the cash would be. Plug in what you think r is and set the left hand side of the equation to 12.50, what you are paying now and solve for y to see how far out you should buy for. After 5 years at a .05 expected return/discount rate, the value of 16 is worth less than 12.50 is worth now. So you are better off keeping the 12.50 (or investing it at .05) rather than buying coupons to use that far out.

  5. Kevin says:

    also, 3.45/12.5 is .27 or a 27% return, much greater than 20% return

    • Lazy Man says:

      Confession time… I wasn’t sure if the denominator should be the $12.50 discounted price or the $15.95 typical cost. I spent 20 minutes searching for the math and correct wording without finding an answer. Finally, due to time constraints, I settled on the “over 20%” as a way to cover both.

  6. Michael N says:

    Don’t forget the price of the haircut can increase annually also. Your gift card is a fixed dollar amount, the haircut price isn’t.

  7. Cathie says:

    I think my biggest concern would be the possibility of them going out of business.

  8. Adriano says:

    If one considers each regular haircut price as a future value and the discounted haircut price as a present value, for each monthly discount rate one could calculate the number of months to the discounted future value [$15.95 / (1 + i)^n] worth as much as the present value [$12.50].

    If one chooses i = 0.5% (about 6.17% yearly), n = 49 months (approximately). As one should buy 4 haircuts per card, 48 haircuts or 12 cards would be the best to earn a monthly rate of at least 0.5%. Each haircut previous to the 48th would offer a greater rate of return than 0.5%, the first haircut with the greater rate.

    One can do the calculations with a financial calculator, at Excel or using some logarithms. I guess Google would help more than I at calculations.

    Please forgive my English writing mistakes, as I’m a Portuguese speaker with limited abilities at writing in English.

    • Lazy Man says:

      Seems like the consensus is 4 years of haircuts or 12 cards. However, given what Cathie points out with the potential that the company goes out of business and the breakage mentioned earlier, I think it is probably best to go with 3 years of haircuts.

      I wonder if they’ll fall down if plop down a request for $450 in gift cards. Maybe I should spread it out over a couple of days.

  9. With a chain like Supercuts, I’m going to guess that they have a somewhat regular sale / promotion cycle, and if you buy a years’ worth of gift cards, you will find a similar promotion some time in the next year. At that point, you can buy your next years’ worth of haircuts. So, I’ll go against the norm and recommend you buy 12-18 months of haircuts.

    • Lazy Man says:

      I thought the same, yet in living in the area for 18 months there hasn’t been a similar promotion like this to the best of my knowledge. It might be typical, but I suspect it is a way to raise short-term revenue. Is it for investors? Maybe for breakage? I’m not sure.

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