My wife — the NPR addict — pointed me to a Marketplace commentary by
Amelia Tyagi. Tyagi says not to focus on small expenses, but to focus on big expenses. You can listen to the piece in RealAudio format from the NPR web site, or read this transcript:
Clip those coupons. Shift to that cheap, scratchy toilet paper. And whatever you do, don’t buy any more lattes at Starbucks.
You’ve heard it before. Some famous financial advisor, shaking his finger and telling you how all you have to do is save $5 a week and all your financial problems will disappear. Before you know it, you will be debt free, investment rich, and lighting cigars with Donald Trump.
Yeah, right. The bottom line is, the little stuff really doesn’t add up. Unless you live to be 500 years old, saving five bucks a week is not going to pay for a retirement home in Tahiti.
The real advice is that the big things add up. The fact is, one-third of Americans live in a house they can’t really afford. Even more of us drive a car we can’t afford. Fifty percent of us aren’t saving a single dollar for retirement, let alone the 10% of our salaries that most experts recommend. So clipping a few coupons isn’t going to build that nest egg.
If cutting the lattes isn’t going to fund a comfy retirement, why do we hear that old advice so much? Because it is easy. It is easier to pack a brown bag lunch than to sell your car. It is easier to give your husband a haircut at home than to move to a smaller apartment. And it is easier to boil your own beans than to sell your house.
But of course, just because it’s easy, doesn’t mean it’s right.
So the next time some expert shakes a finger at you for enjoying a lunch at an upscale restaurant, go ahead and roll your eyes.
Just try not to roll your eyes when it’s time to make the real money decisions.
Tyagi’s advice on big expenses is great. Some people spend so much time sweating the small stuff that they miss the big stuff. They’re penny wise and pound foolish, negating their daily scrimping and saving through stupid financial choices that burden them for years. (My wife told me yesterday of a co-worker who wants to sell his Ford Expedition, which he bought new last summer. The problem? He owes $43,000 on it but can only get $23,000 in trade-in. Ouch.)
But I don’t like Tyagi’s advice on the little stuff.
Her Marketplace piece is basically a condensed version of passages from her book All Your Worth: The Ultimate Lifetime Money Plan. Here’s a paragraph directly from the book’s first chapter — compare it to her opening sentences above:
We are [...] not going to say that if you’ll just shift to generic toilet paper and put $5 a week in the bank, all your problems will instantly disappear. A few pennies here and a few pennies there, and the next thing you know, you will be debt-free, investment-rich, and lighting cigars with Donald Trump. Nope, we’re not selling that brand of snake oil.
The problem is: neither is anyone else. In Tyagi’s revised version of that paragraph, she makes a direct swipe at David Bach’s latte factor. What has she got against Bach? And what has she got against saving money? Yes, many people — including myself — advise you to exercise frugality, and warn you of the danger of small expenses, but nobody’s claiming that these are quick paths to wealth. They’re tools in a toolbox. When used in conjunction with other techniques, they can help you establish sound financial habits.
It turns out that Tyagi doesn’t have anything against saving money on the little things. In fact, she believes that some people need to cut the little expenses, which she terms Wants. She recommends a budget structured thusly: 50% of after-tax money spent on Needs, 30% on Wants, and 20% on Savings. She says that if any of these are out of balance, you’re not financially healthy. (Note that this is a refinement of the Andrew Tobias three-step budget.)
I’m reading All Your Worth for a future review here, and I like it (in fact, I love parts of it), but I don’t like the way Tyagi presented her condensed version on Marketplace.
Sure, give up the big things, but pay attention to the small stuff, too.
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Interesting. I always criticize myself for being “pound wise and penny foolish”. We’ll resist the $2000 smooth black fridge for the $900 textured white one, but we’ll then forget to return a $5 trinket to Target that we’ve decided we don’t want.
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I agree that it is important to save on big and small things. As for cars, if you have a Zipcar service in your neighborhood, that is great way to get rid of your car (along with all the pricey maintenance, repairs, insurance, etc.) but still have the use of a vehicle when you need it.
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As I’ve said many times, I love Tyagi’s book. I think she does a great job of explaining why not worry about the little things in her book. If you’re scrimping in every way, you’ll have nothing you can cut back on when a crisis hits. (Read Two Income Trap for more on this line of thinking.) If you have a healthy emergency fund, then I guess that’s ok. Otherwise, you’re not doing yourself a favor.
Other than that, I don’t think she has anything against saving on the small things. I think, in fact, she’s selling to people who already are worrying about the small things and still wondering how they can get by. (That’s how I felt after reading Bach’s book, “I already do that, but I’m still getting by paycheck to paycheck.”)
My DH and I have followed her advice, but we’re also both naturally very frugal. As a result, we don’t feel any guilt when we wither away $40 in one night for dinner and dancing. (Doesn’t happen often, but the zero guilt part is great.) We know we’re financially balanced, and because we’re also frugal we’re currently at 50% Must Haves, almost 40% savings! (we’re saving aggressively for a house downpayment, and of course, retirement), and only 10% wants – and all this on only one small income.
It really is possible! The trick IS in the big ticket items. We’ve managed to find a living situation that is only $250/mo rent… but most people wouldn’t be willing to live like we do, with my in-laws. (We consider ourselves very lucky.)
And Rhea, in Portland we have Flexcar, it’s the same deal, and I think it’s awesome. My husband went through mechanic’s school and we drive old VW deisel cars he bought at low auction prices and then fixed up. We pay for car parts, but on VW’s they’re very inexpensive, and having a mechanic in the family cuts out another huge expense.
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Amberlynn makes some great points. I’m glad somebody who’s read the entire book left a comment, too. Also, this reminds me that I mean to link to a previous post about not confusing frugality with depriving yourself. It seems very relevant to this discussion.
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I can understand the condescending tone. It reminds me of whenever my mother tries to talk to me about money.
I buy coffee and a muffin at a local bakery every morning before work, and my mother thinks it’s the most horrific of financial sins. But when I bought a house last winter, I looked for one priced in a low range that would end up being the same or less than my rent payment. My mother tried constantly to get me to buy something bigger and to spend more money.
A smaller house gives me a lower mortgage payment, lower utility bills, disincentives for buying more furniture and other things, and lower maintenance costs. I’m saving many hundreds of dollars a month by living in a smaller house as opposed to the $60 or so I’d save from cutting out the coffee.
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I think it’s a matter of attitude toward life in general, not whether the items purchased are “big” or “small”. I pretty much view most purchases in the same way: I want to extract as much value as I can when I make a purchase. And guess what? I don’t worry about the small items *or* the big items!
For me, it’s all about value. It applies to little things (I can’t stomach the thought of paying $3 for a cup of coffee) and big things (we elected to purchase a Honda Accord instead of an Acura TL and a Honda Civic instead of an Acura TSX). Because I look for value, I can indulge in some things that go against what all the financial advisors say, such as purchasing my vehicles new instead of used. The value part comes in when I go for the lowest possible price and drive the vehicles for 12-14 years.
Tyagi’s piece on Marketplace (I happened to have heard that broadcast) pretty much tells me that she’s willing to tell people what they want to hear even if it gets in the way of the basic message. I suppose that’s the way it has to be if you only have 5 minutes to say what you have to say. You morph your basic message (save wherever you can) into a “focus on this” (save on the big items) message.
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[...] Remember how cranky I was about Amelia Tyagi’s advice to not worry about the little things, to only pay attention to the Big Picture? Tobias has some great examples of why the little things matter, including this classic bit about how to make a phenomenal return on your investment by purchasing wine in bulk. Earning 177% on Bordeaux by Andrew Tobias [...]
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[...] -Want to Save? Give up the Big Things! : by JDRoth @ Get Rich Slowly [...]
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I don’t agree with spending more on wants than on savings, after bills, you should put it in savings, then spend the rest on wants. I don’t like her advice.
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