Personal Finance (Sec. 5.4)

Fundamentals of Finance by Adam J. McKee

SECTION 5.4: Being Frugal

For some reason, there is great social value in wasting money, at least in some circles.  We have derisive names for people who don’t waste money:  Cheapskates, tightwads, and so forth.  There are even racial slurs about entire groups being thrifty.  Remember that our goal is to make you wealthy; we’re not interested in making you look wealthy by ostentatious displays of poor judgment when shopping.  Save the “bling” for the truly wealthy that can afford it, and the poor “wannabes.”  For what some people have “invested” in gold chains and diamond earrings, you can be well on your way to building real wealth.

Some people care about frugality to an excessive degree that actually degrades their quality of life.  We have all heard stories about rich old ladies that will not run the heater in winter because they don’t want to pay the power bill.  These folks have their hearts in the right place, but their minds have taken a back seat to an emotional process.  What we want to do is strike a balance between waste and prudent savings; our goal is to save without diminishing our quality of life.  The trick here is to carefully define what a quality of life issue is and what really doesn’t matter.

Wasteful Things

When we discussed budgeting, we went over some things that are very wasteful.  We’ll explore more of those insidious items here.  The underlying theme of most of these items is that most people spend huge sums of money and don’t realize it because they are doing it in small increments that seem negligible.  For example, more people would quit smoking if you made them buy their month’s supply of cigarettes all at once.  The psychological pain of shelling out a couple of hundred bucks would be too great for a lot of people.  But if you do it incrementally by spending $6 every day, then it doesn’t seem so bad.

Convenience stores.  Most of the time, things are convenient because someone else is doing something for you.  Convenience stores are different; the primary reason that we rely on them so much is speed.  You get in, you get a beverage, you get out in just a couple of minutes.  They are often faster because of their location.  This convenience in the form of speed comes at a premium!  The bottled drink you paid $2 for at the convenience store would have been a six-pack if you had gone to Walmart or Costco.  It doesn’t seem like a big deal.  It’s only two dollars, right?

If you do that every day for a year, you will have spent $730 on bottled beverages.  If you had bought 12-packs from Walmart, you would only have spent around $125.  Throw in a snack (which is almost always unhealthy anyway), and you find that you are spending thousands of dollars per year at convenience stores that could have been saved by buying in bulk.  Choose the healthier option of taking a reusable water bottle with you, and you save a ton of money over the course of a year.  Buying in bulk saves you big money, and convenience stores can’t do it.  They pass on the huge markup to you.  Avoid them when possible.

Cell Phones and Plans.  Cell phone companies exist in a very competitive market.  If you watch TV, you can’t help but notice the huge volume of service provider commercials.  Frequently determine what services you actually need and evaluate your plan to see if you are paying for extras you don’t need.  Also, check with your carrier’s competitors to see if they offer a better deal for the same service.  Unless you live in a very remote area with poor coverage, most of the companies offer very similar coverage and call quality.

Brand loyalty doesn’t make a lot of sense when it comes to cell carriers.  Also carefully consider what kind of phone you have.  Often, we want the latest and greatest device as soon as it hits the market.  Most of the time, the release of a new model means that the last generation goes on a huge sale. You can save many hundreds of dollars just by choosing a little older phone.  Check Consumer Reports or some other unbiased source for side-by-side comparisons of the kind of device you are looking for.  Often people pay a lot of extra money for a name that offers no extra value.

Soft Drinks.  I’ve already mentioned the huge markup on soft drinks at convenience stores (along with everything else they sell).  They are also very expensive in restaurants.  If you eat out often, you can save thousands of dollars per year just by switching to water when you eat out.  The markup on soft drinks is so high, many restaurants will have a “dollar menu” of items that they don’t really make any money on.  They are banking on the fact that you will likely pay a couple of dollars for a soft drink to go with your dollar burger.

Bank Fees.  You can get by not using credit cards, but you have to have a checking account to survive in today’s financial world.   All banks are not created equal.  Some charge tiny fees for every little thing, and these add up to an impressive sum over the course of a year.  Banks also charge exorbitant overdraft fees–just another reason to make sure you know where your money is going!  When you put money in the bank, the bank makes money off of it while you are not using it.  This is enough profit for them!  Always look for banks that have free checking and no ATM fees.  If you travel, be sure to check on fees for using ATMs that don’t belong to your bank.

Books and Magazines.  Those books and magazines next to the checkout at your friendly neighborhood grocery store have a huge markup.  All new books usually have a big markup, especially if you are buying them someplace that isn’t in the business of selling books.  If you know that you love Sports Illustrated and buy a copy pretty much every month, then you can save a lot of money subscribing.  Most magazines allow you to buy a subscription on Amazon, so it isn’t inconvenient.  Check out the cover price versus the subscription price!

Be honest with yourself before subscribing to anything.  Will you actually read it?  A lot of people subscribe to magazines that end up collecting dust and eventually getting thrown away unread.  If you are an avid reader, be sure to check with used bookstores and the used books for sale on Amazon.  Amazon lists a ton of books that sell for one cent plus a $3.99 shipping charge.  Getting a book for $4 is a pretty good deal!  Do you really care if a paperback novel is in perfect condition?

Textbooks.  If you are a college student (or just need a book on a specific subject) you can save a ton buying used books and older editions.  Textbook publishers release new editions every year or so.  This makes sense for those businesses because they don’t make any money when bookstores sell used books.  They only profit from new book sales, so that’s where they put their energy.  In today’s world, there are a lot of free textbooks out there.  These are often developed by prestigious faculty at top-notch universities to help students by making college more affordable.  Higher education professionals refer to these free learning tools (it’s not just books) as Open Educational Resources (OER).  If you are a student that pays thousands for books every semester, get involved in student government and collectively demand that your school start using OER!

Credit Card Fees.  I’ve already said that these things are tricky.  You should have credit cards, but you shouldn’t use them.  Not all credit cards are created equal.  If you are young and broke, you will have a hard time getting a good card with a good rate.  You will get tons of offers from card companies that have monthly and yearly “membership fees.”  They give you a terrible interest rate, low credit limit, and make you pay money to them for the privilege.  Obviously, you will want to avoid credit cards that have any kind of fees.  All credit cards will have late fees and over the limit fees, so you have to be careful.  In addition, even good cards go bad when you pay late.  They stick you with a “penalty” interest rate that should be illegal.

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