How To Do Frugality Right

What’s the optimal way to save?

In my IKEA post from yesterday, I mentioned that some experts believe we prioritize the percentage we could save over the amount we could save and, thus, do frugality wrong. If we can save 30% on a pair of jeans, we’re more likely to put the effort in to find a sale rather than putting a similar amount of effort into getting a slightly more advantageous deal on the fees charged by the managers of our investments — though a lower fee will, of course, serve us better in the long run.

We tend to focus on the percentage rather than the amount we save, and fall prey to a mental illusion. After all, when your shopping is done, it is dollars — not percentages — that will be in your bank account. …

This kind of foolish frugality is common. Consider how easy it is to fritter away time surfing the web for, say, a great deal on a $50 pair of jeans. Yet many of us spend no time at all on our investments. The result is that we barely glance at the fees charged by mutual funds: Without thinking much about it, we will choose a fund that charges an extra 0.25 percentage point rather than spend the time to find a cheaper one. That’s reasonable on the face of it. What’s a quarter of a percent? But that seemingly tiny percentage difference can easily amount to thousands of dollars of lost money. We brag to our friends about how much we saved on the jeans — “30 percent off!” — never mentioning (or even registering) the money we threw away on our investments.

This philosophy seems related to our friend Helaine Olen’s “Latte Factor” theory, which we’ve discussed at length: don’t focus too much energy on giving up your daily indulgence; instead, reduce the large-scale expenditures that are actually the reason you’re broke. But the reason Olen needed to go on her initial Twitter rant on the subject, and the reason her theory remains at least somewhat counter-intuitive to some, is that it’s so much easier to deal with the small, everyday decisions that are right in front of us, the ones that are fully in our control, when so many other decisions aren’t.

Likewise, it can feel more exciting to get a good deal on something concrete, like a pair of jeans. Search → find → celebrate. That’s why people give such high ratings to the Honey extension on Google Chrome, right? There’s less of a mood boost associated with getting a fraction of a percentage shaved off of a fee.

When Ben and I were buying our apartment four years ago, a last-minute counteroffer came in. The sellers had already accepted our proposed amount, so they were somewhat apologetic when they told us that some other couple was willing to give them $10,000 more. Could we match that new figure? If we could, the sellers would continue with us.

We grumbled to ourselves and damned this unknown “other couple” to a particularly uncomfortable kind of hell and pounded the kitchen table. If we were the kind of people who sought solace in drinking and breaking things, we could have left our current place looking like a hotel room trashed by Charlie Sheen.

Then we got over it and agreed to pay the sellers the revised price. And honestly, though of course we were upset, $10K has never meant so little. We had it. Even with that extra factored in, the apartment was within our price range; and when you’re already signing away close to $600K, what’s another ten? The numbers are so large that they have become abstract, even perhaps unimaginable, already.

This is exactly the kind of relative rather than absolute thinking that experts ding us for (though how exactly would the experts have suggested we get out of paying that $10K?). Slippery slope!, they cry.

When you go to buy a new car, at the very end of the transaction, the dealer may suggest some add-ons. And you may be tempted to bite. Once you’re paying tens of thousands of dollars, what’s an extra $200 for a better sound system? It’s not just a problem with car sales. When you’re buying a $1,000 computer, why quibble over a little extra for a bigger hard drive? Or when you’re choosing a large flat-screen TV, why not pay a little more for one that is a few inches bigger? …

What all of this amounts to is a tendency to think in relative rather than absolute terms.

The article goes on to suggest that poorer people are often more likely to do frugality right: since they only have a limited number of dollars to use, they have to consider the absolute value of each. Which ignores the too-prevalent trap of credit, but okay. I get their point.

The real takeaway, I think, is to try to keep in mind the reality of money, even when it’s doing its best to appear unreal and abstract. That might mean taking a break while making a big purchase, like buying a car or a flatscreen TV, instead of letting momentum — or a desire to just be done already — compel you to spend more than you had intended.

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