Breaking Down the Numbers on Why Frugality Works - A different perspective

Recently on The Simple Dollar, Trent addressed a comment by one of his readers:

Most of your “money tips” are stupid. Why would I waste my time doing this stuff to save fifty cents? I want to learn how to make money not how to save a nickel.

Trent is a much more accomplished writer than I and did a great job of providing examples of how he saves way more than fifty cents. Out of the entire post the greatest two sentences were:

Most frugality tactics aren’t all that cost effective if you look solely at a single use. Frugality’s value kicks in when you alter something you do all the time, like eating a meal, heating your home, or doing the laundry. Shaving a few cents off of each of those uses adds up to a substantial chunk of change over the long run.

However,  I believe a great opportunity was missed to position the true impact of costs on our financial life in their true light.

We are born and raised in a culture of conspicuous consumption and trained from a very young age to focus on instant gratification. Sales and marketing people are champions in taking the expensive and making it look cheap. Did you know you can buy a new car for less than $15 each day? For that I am almost tempted to replace my wife’s 11 year old Honda…. NOT!

In business costs are looked at differently. A company owner or CFO doesn’t look at the straight cost of a product or service; they look at the long-term cost or the potential return on investment. Generally, if there is no ROI there is no purchase. Where a cost cannot be turned into revenue and profit, the actual cost to the business is often considered. The actual costs is often much more than the sale price itself.

Like any business, Trent’s, your and my goal is to put as much money on the “bottom line” (in our case, savings) as possible. Trent has an option to buy Tide or make his slimy concoction. If he follows Marco’s why bother saving fifty cents advice, Trent will spend about $60 more each year. That’s $60 that will not go to Trent’s savings.

The question we should all ask is the same any good business will ask, if we spend $60 how much do we need to earn to recover that $60 loss from our savings?

Trent provides his insight and was on the right track, but he only scratched the surface. None of us have the option of working an extra hour to pay for tomorrows lunch. The money we earn gets piled together to cover all our expenses and hopefully leave us with something to save.

Trent mentioned that to earn $60 he would also have expenses like transportation and taxes. The problem with Trent’s reasoning is that when we earn a dollar at work that dollar is not allocated in its entirety to  just pay taxes with it; we also pay all our other expenses. He mentions “transportation, childcare and so on” figuring he would need well over $100. But this only scratches the surface. What about the mortgage or rent and utilities and food? 

Remember that this expense came out of potential savings. If Trent is average he only saves about 5% of his income. Since Trent is an accomplished PF blogger and obviously goes to great lengths to save let’s give him the benefit of the doubt and guess that he saves 20% of his income. Using 20% means 80% goes to taxes, rent, transportation and the baby sitter.  

To answer the question above, how much do we need to earn to recover that $60 loss from our savings we only need to do a simple calculation.

Cost (divided by) Savings Rate = Income necessary to recover lost savings

$60 (divided by) 20% (or .20) = $300

Trent is a very talented writer; he is getting ready to release his second book. But even if it hits the New York Times bestseller list it is still going to be easy to justify making homemade detergent in lieu of earning another $300 each year.

The Marco’s of the world just don’t understand that when they are saving fifty cents they are not saving fifty cents; they are saving themselves the need to work the additional hours necessary to earn enough money to put that fifty cents back into their savings.

btw…. it would take $2.50 income to recover fifty cents at a 20% savings rate.

If you are an “average” saver it will take $10 income to recover fifty cents at a 5% savings rate.

If you are a poor saver it will take $50 income to recover fifty cents at a 1% savings rate.

 

It’s not what you make, it’s what you keep and every penny does count.

 

Does this make any “cents” to you?

 

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