Frugality isn't just about saving money, it's about being efficient with your money, using it in the best way possible. It also means not wasting your time. For maximum efficiency, focus on being frugal with expensive purchases, not cheap ones. Photo by Joseph Francis
In a recent article, Sendhil Mullainathan, author of Scarcity: Why Having Too Little Means So Much, explains that most consumers make too much of an effort to save on cheap items and not enough of an effort when it comes to expensive items that can actually make a difference. Mullainathan writes:
Consider this situation: You're shopping for headphones. An electronics store has the model you want for $50, a reasonable price. But a sales clerk says: "You know our other branch has this item on sale for $40." Going to that store will take 30 minutes, and you can't buy the headphones for that price online. Do you go to the other branch?
Before you answer, consider a slightly modified version of the same situation: Instead of headphones, you are buying speakers. You go to the same store and find the model you want for $400. Again, the price seems reasonable but the sales clerk says it's on sale at the other branch for $385. What do you do now?
Research by Daniel Kahneman and Amos Tversky, the psychologists whose work helped spawn behavioural economics, suggests that people are more likely to make the trip for the $40 headphones than for the $385 speakers.
In a way, the decision seems to make sense, Mullainathan says. With the headphones, you save 20 per cent, compared with 3.75 per cent for the speakers. Of course, the actual dollar amounts are a different story. You save $10 with the headphones and $15 with the speakers.
It's a simple example that proves a greater point: As consumers, our priorities with frugality are kind of messed up. We brag about saving $50 on a pair of jeans, while we easily overpay consistently in other areas, from our monthly bills to our investments:
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 per cent? But that seemingly tiny percentage difference can easily amount to thousands of dollars of lost money.
This isn't to say it's always a bad idea to save money on the cheap stuff. Sometimes, it's easy enough to save a few bucks, so you might as well do it. However, it might help to come up with some rules and guidelines for being frugal without wasting your time. For more on this concept, head to Mullainathan's article at the link below.
How to Pinch Pennies in the Right Places [The New York Times]