Thursday, October 22, 2009

Watch your pennies and your dollars will watch themselves!

I was skimming through some finance books at a local thrift store awhile back and came across a similar message in each: Skip the whole penny pinching stuff like reusing tin foil, that's NEVER going to make you rich. Focus instead on the big stuff- getting a good deal on your mortgage, your cars, and concentrating on your investments.

I fundamentally disagree with this idea. I think you MUST focus not only on the big picture but also the nickles and dimes for several reasons.

People often brag how much below sticker price they got their car. And that is great - let's say you saved $1000. But if you're telling that to friends over dinner at your once a week trip to Olive Garden, where you drop $45 with tip a week for pasta and salad, that $45 sounds like peanuts after all the money you've saved. But at the end of the year, you will have dropped $2340. If you'd decided to cut back eating out to every other week, you'd have saved $1170, more than the car savings.

I use the car example for two reasons. First, saving so much at one swoop does make you feel rich and in so doing, you can lose track of how much the little expenditures are adding up. It's hard, other than buying a car, to "save" $1000 in a day. The flip side of this is when you buy a car and they offer you floor mats for $200, you may think, "well I've already spent $16,000, what's another $200?" But if you walked into Walmart and saw floor mats for $24 and floor mats for $200, you'd likely think the $24 ones were fine and $200 for floor mats was kind of crazy. Getting caught up in the "big numbers" can be misleading.

Also, to accomplish a major goal, you need to start somewhere. Coming up with $3000 to open a Vanguard money market account may seem daunting, but saving $57.70 a week seems more doable. And if you can cut $30 off your weekly grocery or takeout or fast food expenses, you realize you only need to come up with another $27.70 per week or $3.95 a day, and all of a sudden, that latte effect concept seems to make a whole lot of sense.

Another point to keep in mind is that sometimes the more tangible our savings, the more "real" they seem. And that can keep you motivated. You can see the tin foil that you've reused five times, you can see the potatoes you did not toss out, but instead used and just cut off the bad parts. You can touch the coins you picked up off the sidewalk and the tea mug you brought to work so you would by-pass Starbucks. Unless you're hauling your mortgage papers out each day, that initial $20,000 you got off the asking price is pretty abstract, though also valuable.

My English roommate in graduate school had a phrase I loved. Hers involved pounds, but using American vernacular, "Watch your pennies and your dollars will watch themselves."

So start with the little things and gain confidence. Start with the little things and realize how much they add up each day. Start with the little things and get a true grasp of your cost of living. Start with the little things, and you'll be opening your Vanguard account and have enough for the down payment of your house and the cost of your car. And all those days of watching your pennies will put you in a good place to realize it's worth your time to negotiate and read the fine print when you do. All that practice will serve you well!

Best Wishes! Eileen

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