Size Really Does Matter
Are You Penny Smart, Pound Foolish?
This article is the sixth of a fourteen-part series that explores the core tenets of Get Rich Slowly.
A few years ago Chris re-financed his mortgage. In one simple decision, he trimmed his monthly payments for principal and interest from $1050.60 to $650.50, boosting his cash flow by $400.10 per month.
If he had consumer debt, that’s $400.10 per month he could have used for his debt snowball. It’s $400.10 per month he could stick in his retirement accounts, or to put into savings accounts for his trip to Germany next year or to pursue other hobbies and interests. Really, it’s $400.10 he could use for anything he wanted. (As it happens, he chose to use that money to accelerate his mortgage payments.)
Note: Jamie Walkingstick gave a guest post on this subject in September when she described how she and her husband are sweating the big stuff. They made a big change that saved them $1,000 a month.
There’s no question that frugality is an important part of personal finance. It’s good to clip coupons and to mend broken furniture and to turn the thermostat down, it’s even better to shop around for the best deal on a mortgage.
Everyday frugality can save you a little money consistently, but by making smart choices on big-ticket items, you can save thousands of dollars in one blow. Or you can boost your cash flow by hundreds of dollars per month.
Some people spend so much time sweating the small stuff that they don’t bother to do the same on the big stuff.
They’re penny wise and pound foolish, negating their daily scrimping and saving by making poor financial decisions that burden them for years. Chris has a co-worker who once bought an SUV for $43,000. After a year, he decided to trade it in, but could only get $23,000 for it. Ouch!
Now obviously, you only get a few chances in your life to save big on a home or a car. You rarely make financial decisions involving tens (or hundreds) of thousands of dollars.
However, you probably do make other big decisions several times a year. You buy a camera or a television or a new piece of furniture. You book a cruise or fly home for Christmas or hire somebody to work on your house.
These are prime opportunities to save money. Whenever you anticipate a big expense, you should look for ways to maximize the value you get for your dollar.
As I’ve shared before, here are the guidelines I use to steer my shopping for big-ticket items:
Know what you want before you start. If you’re buying a vacuum cleaner, what are you going to use it for? What features do you need in a television? What features do you want? When I bought a small digital camera in 2007, I jotted a quick wish list: wide-angle lens, large display, easy-to-use menu, and superior video quality. Some of these items (like superior video quality) were much more important than others.
Set a budget. Ideally, you’d set a budget for your purchase before you started shopping. That’s not realistic. You can’t know how much a dishwasher costs until you actually look at a few. But once you have a sense of the landscape, decide how much you’re willing to spend.
If you don’t set a budget to start, it’s easy to succumb to “desire inflation”. When shopping for my digital camera, I had a budget of $800.
Research your options. Once you’ve created a features list and a budget, search for options that meet your requirements. In most cases, Consumer Reports is a great place to start. Your local public library probably has a copy of the annual Consumer Reports Buying Guide. But don’t discount the web. I often do product research through Amazon.
Make a selection. Once you’ve done your research, you’ll probably find one or two items that seem most promising. (There’s rarely one perfect choice.) I tend to write down the manufacturer and model number of my top three choices before I move on to the next step. In 2007, I was able to narrow my choices down to two camera models, both of which were within my budget.
Compare prices. Now that you have a shortlist, begin researching prices. Again, check Amazon. Check other online vendors. Check your local stores. Don’t forget to consider used or refurbished items.
Make the purchase. Once you find the best source for the item you want, buy it. Be confident that you’ve researched price and features so that you know you’re getting a good deal.
Protect your investment. The older I get, the better I am about saving warranty information and boxes. (If I had a smaller house, I’d only save boxes for a couple weeks. Because I have space above the garage, I save them forever.) A little foresight when you buy a product can save a lot of headache down the road.
But large amounts don’t just matter when you’re refinancing your house or shopping for a new plasma TV. One of the best ways to discover the power of large amounts is through boosting your income. Whether that’s through negotiating your salary, asking for a raise, or changing careers, a larger income can have a huge impact on your finances.
Remember: Saving money on the little things every day is great, but saving money on the big things can make an awesome difference to your budget.
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