- in Savings
When you start down the path towards financial independence, there will come a moment when you realize the importance of each and every dollar flowing through your life. Those money flows form the foundation of your emergency fund and financial buffer. Especially if you read Your Money or Your Life, your perspective on your finances may take a radical shift.
This is all to the good. Indeed, it may be useful to pass through a period of extreme frugality while you recalibrate how you relate to money.
However, once you pass through that phase, there is something crucial to keep in mind. Your return on effort for focusing on the big financial wins is massively more important than the day-to-day savings of a buck or two.
Let me illustrate the point.
As Mighty Investor never tires of saying, purchasing a used car is one of the simplest ways you can turbocharge your financial life. Indeed, as this post on buying a used car demonstrates, you can pile up hundreds of thousands of dollars over the course of your life by making this one simple shift.
I marvel at how people can invert these calculations. For example, I recently watched a friend of mine finance the purchase of a new car, then choose not to buy an energy bar at the grocery because it cost $1.50 more than usual. Making smarter moves would allow my friend to purchase a slightly used car and then buy thousands or energy bars and still come out way ahead.
This is why, when it comes to saving money, you have to focus on the big financial wins.
Where to find the big financial wins?
- How you pay for college. Do you ensure you get a scholarship or financial grants? Or, absent that, do you attend a state school for a couple of years (and even live with your parents if necessary)?
- As mentioned above, are you smart about the car you buy? Or are you unconsciously attempting to purchase status?
- Do you rent the swankiest apartment you can barely afford? Or do you purchase a home when you are young and then have roommates (a.k.a. renters) to help you build equity?
- When buying technology, do you consider if buying used or riding the trailing edge might satisfy your needs will saving you thousands?
- Do you maximize your use of the library? I include the library in the category of “big financial wins” because if you properly take advantage of what your library offers, you can replace buying nearly all books (both physical and digital, replace your cable tv subscription, and even download “books on tape” to listen to in your car or elsewhere. Heck, you can even include libraries as an interesting and inexpensive part of your vacations.
Pound Wise, Penny Foolish
These are just a few examples of the bigger picture financial wins that need to play a central role in your strategy to build assets. Bottom line: don’t be penny wise (saving money on trivial costs) and pound foolish (purchasing the huge items without strategic thinking). If you flip that equation and become pound wise and penny foolish (or penny wise as well), you will move the dial on your financial life very quickly without slipping into the scrooge mentality that makes life too grim for you and those you love.