Frugality

In the summer of 1997 I had a plan to travel to Guatemala and teach English.  Between the time I booked my flight and my departure date I did an extremely poor job of managing my money and only had $450 left.  It probably would have been smarter to change the flight date but I just decided that somehow I would get by on what I had.

After arriving in Guatemala I had to take a 10 minute,$5 taxi ride and 4 hour,$4 bus ride to get to my destination.  Since my return flight wasn’t for 3 months I knew I needed to find some cheap accomodations.  I had a page with a map and a list of several cheap hotels that I had photocopied out of a travel book.  That night I couldn’t find any of them though and ended up having to get a $20 motel room. That might seem cheap but it was expensive considering how little money I had.

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You do not necessarily get what you pay for.   An earlier post “Cheap Wine is Fine” showed how wine enthusiasts rated wine higher when it had a higher price tag but in a blind taste test they ended up preferring the $5 wine over the $90 wine.  Now there is a similar example in which audiophiles couldn’t tell the difference between music passed through coat hangers from that which passed through pricey Monster cables. The full story is at the Consumerist.   This shows again that quality is often perceived rather than actual.

There probably is a general correlation between higher priced goods and higher quality but you shouldn’t assume that to be true.  Many times even if an item is higher quality it isn’t enough to make it worth the higher price.  Before spending more on an item in order to get higher quality determine if it truly is higher quality and if you actually need the higher quality.

My electric bill came this week and I can now evaluate the results of my heating experiment designed to reduce the cost of my natural gas bill.  My previous gas bill was $103 and the current one was only $69 for a savings of $34.  Quite surprisingly my use of an electric space heater only resulted in a $2 increase in my electric bill making my overall savings $32.  This is enough for me to consider the experiment a success.  The figures were probably helped a bit by the fact that I was gone on vacation for one week of the month.

In backpacking a common piece of advice to those who want to reduce their pack weight is to reduce the weight of their big three first.  The big three consists of  a backpack, sleeping bag, and shelter.  These are usually the three heaviest items one carries.  It makes sense to concentrate on reducing the weight of these first since this is where the greatest progress can be made.  It doesn’t make much sense to be drilling holes in your toothbrush when you’re carrying a backpack that is twice the weight you need.

The same concept can apply to personal finance.  There isn’t much point in washing out your plastic baggies and re-using them and then driving a luxury SUV that you can barely afford.  You need to identify what your big three are and then see what you can do to reduce them.  Most people would have housing and transportation as two of their largest expenses.  Taxes would probably also be in most people’s three biggest expenses but since you’re limited in how much you can reduce those you might want to concentrate on the next biggest expense. If you keep track of your expenses, which you should, then it will not be a problem to identify your largest expenses.

The old saying penny wise and pound foolish defines what this advice is meant to fix.  Of course once you are pound wise it is good to be penny wise as well.