The real personal-finance challenge
Posted
Mar 06 2009, 06:57 AM
by
Karen Datko
Rating:
This post comes from Trent Hamm at partner blog The Simple Dollar.
Recently, Ramit Sethi at I Will Teach You To Be Rich posted an article called "Trent says The Scrooge Strategy is ‘short-sighted' -- I respond with a challenge." The basic point of the post was that an average person is better off spending an hour eliminating big bills instead of focusing on little frugal tips.
For example, a person with $20,000 in credit card debt is better served spending an hour getting interest rates reduced than spending an hour installing a programmable thermostat.
I don't dispute that argument a bit. Instead, my feeling is that a person is in the best shape of all if he or she takes two hours and do both. The programmable thermostat won't be as big of a boon as the interest rate reductions, but if you can save $200 over two years from an hour's worth of work, you should definitely do that, too.
It's easy to focus on the five biggest financial drains in your life and take care of them. It's a great way to get started on turning your financial life around. However, if you simply shut off the spigot after dealing with those five things, you're missing out on a ton of things that are quite worthwhile.
I think that this challenge actually reveals several interesting things about personal finance.
A sizable group of people really is interested in only the "big five" things. The only behavior they're interested in changing in their lives is the behavior that can result in a large, very tangible and very straightforward financial benefit. For people in this group, calling the credit card company to get a rate reduction that reduces the monthly payment by $50 is worthwhile, but replacing a light bulb that can save 50 cents a month isn't worthwhile. I think Ramit is speaking mostly to this group.
A sizable group is interested in some degree of frugality. These people are on board with the 50 cents a month saved due to a light bulb change, but they start to balk at things like rewashing Ziploc bags. For the most part, this group is governed by some form of "hourly rate" of frugality, whether they quantify it or not. Is this frugal act worth my time over the long haul? That's the key question for this group. I'm in this group, and I think a large portion of my audience is as well.
There's also a group I would call "frugality extremists." These are the Ziploc bag washers, the people who will gladly invest quite a bit of time to save a dollar or two. I find these people and their ideas interesting, but not necessarily applicable to my life.
The stages of recovery
I think people tend to go through a few big, general stages during their financial recovery. At first, people try the "big" things. They make a debt-repayment plan. They make a budget. They get the interest rates reduced on their credit cards. They eliminate a few monthly bills. They set up some automatic savings and automatic investing plans.
And, for some people, that's enough. These steps get their financial lives under some semblance of control, so they stop here, viewing further steps as unnecessary.
Other people are empowered by reductions in their spending and continue to seek out smaller and smaller solutions. They tend to adopt frugal tactics. They re-evaluate all their spending carefully and start trimming the fat they discover. They try things like shopping lists and new light bulbs and preparing meals at home, and even things like making their own laundry detergent.
Eventually, people find a balance between the way they want to live their lives and the desire to save more money. For some people, homemade laundry detergent is a step too far; for others, it's a great tactic.
At this point, people tend to start getting into good financial shape. Their net worth goes from negative to positive, and they start building up some serious savings. They pay off their house. They start investing.
And eventually, they reach a point where they can make serious life decisions. They can jump to the career of their dreams. They can retire really early.
As you can see, there is no single path that everyone follows to financial success, but there are some milestones that many of us share. The challenge, in my eyes, is simply figuring out that path for yourself. How far down the frugality path do you want to go? What are your dreams?
That, my friends, is the real challenge.
Related reading at The Simple Dollar:
Do you want to be rich?
A step-by-step guide to building a big, healthy emergency fund
The cost of the psychology of new
