Writers on personal finance blogs and websites are, on the whole, a frugal bunch. The reasons we started our respective sites are varied – influence, to chronicle paying off our debts, to spread uncommon knowledge, simple altruism, or to build a stage to have our financial opinions heard. Our readers are a much more diverse bunch – they come to us with their finances in various stages of disarray. While us writers, as a whole, have our finances in order (or at least on the right track), some of our articles tend to preach to the converted. I feel there is an overabundance of frugality articles in our corner of the internet – so I ask, “Is Frugality Overrated?”.
Ramit Sethi vs. Chasing Nickels around Dollars
I don’t want to turn this into a case study, but look at one of the most popular writers in the personal finance realm – Ramit Sethi of “I Will Teach You to be Rich“. Here’s a guy that created his own day job, and knows a fair amount about marketing and developing a dedicated following. I don’t want to call him an enemy of frugality, but he is a proponent of teaching people to find things they are good at and generating multiple income streams. He’s not optimizing the finances of people who are already saving huge amounts of their salary – he’s teaching ordinary folks what to do to get a leg up.
The phrase “penny wise and pound foolish” is a great summary of what I’m getting at. Frugality is great when everything else is in order. It’s great when you are trying to fit expenditures into a budget that has had a shock. In general, frugality is a great thing – once you clear out all of the other major obstacles to straightening our your financial house. When bloggers write about frugality, they are either preaching to the converted, writing for folks in dire straights who have to cut expenditures dramatically due to an emergency or shock, or writing to readers who should probably be taking other steps before joining the frugal ranks.
What Are You Saying? Don’t be Frugal?
Not at all – just know that the people who write about frugality, the writers of these blogs and sites, are usually already financially optimized elsewhere. They make more than they spend, and they have manageable debt.
People just starting to take an interest in personal finance should approach every financial decision with an eye towards minimizing costs and maximizing value, not necessarily thinking about how they can do without (or do themselves). There are (at least) four reasons why you should swerve from the frugal path:
- Comparative Advantage – The concept of comparative advantage, in this case, means there is an optimal way for you to spend your time. It may mean sewing your own clothes, but usually your time is better spent say, refinancing your mortgage, re-balancing your portfolio, or even working a side job. The term here is ‘opportunity cost’. Yes, you can save money by doing a certain activity, but most people, including most financial blog readers, have other places where their time would be better served. Once you take care of the dollars, pick up the nickels.
- Questionable Quantities – Some things make sense on a cost basis if you assume you have an unlimited amount of space. Food and consumer goods are very good examples of that. You may be able to get printer paper much cheaper if you buy ten cases, but there’s a thin line between cost-effective shopping and landing on Hoarders. Buy in bulk if it makes sense from a space and dollar perspective… and stay on the right side of that line.
- Major Effort or Danger – I’ve often thought that with the amount of eggs and meat eaten in my household I’d be better off with a small farm. It’s certainly possible – and maybe even cost effective. However, the sheer amount of time that would go into that pipe dream would be massive. The same reasoning applies if there is danger involved. If you aren’t sure what you’re doing, don’t try to install an electrical sub panel (for example) even though success means a fair amount of savings.
- Sunk Costs – Sunk costs are costs that have already occurred and irreversible. For example, if you already bought a bunch of tools to repair something and realize it’s more dangerous than you thought… Go ahead and hire out the work, and ignore the amount of money you already spent.
Sweat the Big Stuff.
The message I’m trying to get across, while directed at folks who are genuinely interested in financial advice, also goes out to fellow writers in this realm. Yes, a lot of people have their finances in order and the frugal lifestyle is a great thing to pursue. However, frugality is usually messing around at the margins. There are far more folks who should be investing time and money in retirement (and planning), optimizing their recurring payments, and paying down huge debts. All I’m saying is those people shouldn’t be buying chickens for the eventual eggs… they should be working on their debt repayment plan and re-balancing their portfolio, while thinking about ways to earn more money. Am I wrong? Tell me in the comments!