I read a lot of books: books about finance, investing, frugality and thrift, money management, the psychology of money, you name it. If it involves making, saving, or understanding money, I’m in. Often when I read a book, I start out by thinking, “yup, I knew that already”. Or, “yes, of course I already do that”. I may even like a book for reaffirming what I’m already doing. But I try to dig deeper in each book; it is my goal to take at least one good tip or piece of advice from every book I read.
I’ve read The Complete Tightwad Gazette
There was a story that stuck with me and has helped me align my spending priorities more than once. The author’s nine-year-old daughter has outgrown her boots and wants a pair of green L.L. Bean-style boots, just like her classmates are wearing. Always a thrift shopper, she takes her daughter to the church thrift store just hoping to find something suitable. Unbelievably, the daughter finds a pair of the very boots she wants, in her size, but plum colored rather than green. The price tag? 25 cents. The nine-year old insists that, although she doesn’t care if the boots are new or used, they must be green. In a stroke of genius, the author counters with an incredible question: OK, a pair of green boots (purchased new, because they didn’t find a used pair in green) costs $25. A pair of the same boots in plum costs $.25. Is the green pair worth 100 times more than the plum pair? The author wins; the daughter wears the plum boots happily for the rest of the season.
Although I considered myself frugal before I ever read the book, I had never used this type of analysis in my purchase decisions. It is a powerful tool now, and can be applied in many types of situations.
1. Dining. I go out to lunch and see a tasty dessert item on the menu for $5.99. What’s an extra 6 bucks while I’m out enjoying myself, anyway? First, remember to add in taxes and tip, bringing the cost of the one serving of dessert to $7. I know that I can pick up an equally tasty dessert of about twice the size (so, two servings) at the grocery store on the way home for $2 ($1 per serving). That means I have to decide if eating the dessert in the restaurant is 7 times better than eating it at home later. (And yes, I could possibly save more by baking it myself, but for simplicity I’ll go with this example). And an added benefit of picking up dessert and eating it at home means I can wait a bit between my meal and my dessert, something I’d prefer to do anyway.
2. Clothing. My friend just told me the other day that she’s asking her husband to buy her a pair of designer pants for her birthday. The price ticket? A whopping $300! After gasping, my first thought was: “I’d be afraid I’d spill something on them!”. But back to the example. She ought to be able to find a nice pair, new for $50 (and maybe much less at a discount store, yard sale, or a thrift store, but again I’ll keep this simple). Is the designer pair 6 times nicer or will they list 6 times longer? Probably not.
3. Entertainment. A cable TV package with all the bells and whistles costs around $100. Basic cable is about $20. Will the all-inclusive package give 5 times more enjoyment?
You can apply this line of reasoning to many things - I’m sure you can come up with plenty of examples in your own life. From cars to vacations to home furnishings and even homes themselves, it is a valuable exercise that I try to remember when making my purchase decisions. The author points out (rightly, in my opinion) that most people choose which item to purchase based on which one they like more, and whether they can afford it. Truthfully, I suspect this is how I made decisions before considering the price ratio.
Oh, and at the end of the discussion about the boots, we learn that the daughter tells her mother/author that once she started wearing the plum-colored boots, she noticed a lot of other girls wearing plum-colored boots as well!
September 16th, 2008 at 7:00 pm
I don’t admit my frugal ways. I find that most people think it is ridiculous and they figure out after a while that I am a tightwad anyway. They make fun of it somewhat but they also know I have a lot of money which they are quite envious of.
September 16th, 2008 at 11:57 pm
I was with you until you got to the entertainment example. I pay about $85/month for cable (including the upper tiers of cable channels but not digital, or movie channels or pay-per-view) and internet together.
So, is my cable bundle worth 4 times the basic cable (which doesn’t include any of the sports channels my hubby watches, or the kid channels my 5 yo loves, or my sci-fi/food/home decorating channels)?
Absolutely! Not to mention that I also get my high speed internet included! If we didn’t have this we’d spend much more money renting movies, hubby going to games, we wouldn’t have internet at home etc. etc. and none of us would be happy.
Do I wish it cost less? Of course. Do I wish that our cable company would allow us to pick and choose the channels we want and just pay a couple of dollars per channel? I think that would be great and we could save some money, but it’s not likely to happen. So, in the meantime, this is the best value for my money.
September 17th, 2008 at 3:00 am
It’s a good trick.
However, the utility curve is not linear over the entire range. (It is more like a logistic or an S-curve). For instance, for very low priced items, an item costing twice as much probably provides more than twice the value. For very high priced items, the opposite holds. Frugality is exactly about finding the sweet spot.
September 17th, 2008 at 12:52 pm
@Retired@40 - Good for you! Anyone that makes fun ought to read the “Millionaire Next Door” series of books for a good eye-opener. A lot of my friends and coworkers used to make fun of me (good-naturedly) for driving a 19-year old car. But they were envious that I was able to leave the job at 47.
@Shevy - It sounds like, for what you are getting, it is probably not 4 times the basic cost. With internet included, it may be significantly less than 4-to-1. But even if it is 4 times more, you have answered the critical question: is it worth to you? Yes! My mistake in the past was simply not asking myself the question. As long as we can afford it, it’s fine to say “Yes” to ourselves.
@Early Retirement Extreme - I absolutely agree. I rarely go with the “cheapest” item, but try to find the best price I can get for items of quality. I just like to make sure I know what my options are and ask myself where that sweet spot is.
September 23rd, 2008 at 4:27 pm
That is a highly original way of thinking and I like it. It questions the value of each purchase in a new way.
I think that everyone will have a different answer to the same price ratio question. Some people will value dessert more than others and that is fair enough but the key thing is to get into the habit of looking at the price ratio.
September 25th, 2008 at 4:44 pm
@Until Debt Do US Part - I love the blog name, really clever!
Thanks for the comment - once I started using this logic, it really helped me focus on how I wanted to spend my money, and how much things were worth to me. And you’re right, everyone’s answer will vary, which is fine. It’s just a matter of asking ourselves the question and making sure we are happy with our own answer.