Large Amounts Matter Too
This article is the sixth of a fourteen-part series that explores the core tenets of Get Rich Slowly.
Last winter, Kris and I re-financed our mortgage. In one fell swoop, we trimmed our monthly payments for principal and interest from $1386.60 to $1137.69, boosting our cash flow by $248.91 per month.
If we had consumer debt, that’s $248.91 per month we have could used for our debt snowball. It’s $248.91 per month we could stick in our retirement accounts, or to put into savings accounts for our trip to France next year — or to pursue other hobbies and interests. Really, it’s $248.91 we could use for anything we wanted. (As it happens, we chose to use that money to accelerate our mortgage payments.)
Note: Sierra Black gave us an article on this subject in September when she described how she and her husband are sweating the big stuff. They made a big change that saved them $1,000 a month.
There’s no question that frugality is an important part of personal finance. It’s good to clip coupons and to mend broken furniture and to turn the thermostat down. But it’s even better to shop around for the best deal on a mortgage. Everyday frugality can save you a little money consistently, but by making smart choices on big ticket items, you can save thousands of dollars in one blow. Or you can boost your cash flow by hundreds of dollars per month.
Some people spend so much time sweating the small stuff that they don’t bother to do the same on the big stuff. They’re penny wise and pound foolish, negating their daily scrimping and saving by making poor financial decisions that burden them for years. Kris has a co-worker who once bought an SUV for $43,000. After a year, he decided to trade it in, but could only get $23,000 for it. Ouch!
Now obviously, you only get a few chances in your life to save big on a home or a car. You rarely make financial decisions involving tens (or hundreds) of thousands of dollars.
However, you probably do make other big decisions several times a year. You buy a camera or a television or a new piece of furniture. You book a cruise or fly home for Christmas or hire somebody to work on your house. These are prime opportunities to save money. Whenever you anticipate a big expense, you should look for ways to maximize the value you get for your dollar.
As I’ve shared before, here are the guidelines I use to steer my shopping for big-ticket items:
Know what you want before you start
If you’re buying a vacuum cleaner, what are you going to use it for? What features do you need in a television? What features do you want? When I bought a small digital camera in 2007, I jotted a quick wishlist: wide-angle lens, large display, easy-to-use menu, good video quality. Some of these items (like wide-angle lens) were much more important than others.
Set a budget
Ideally, you’d set a budget for your purchase before you started shopping. That’s not realistic. You can’t know how much a dishwasher costs until you actually look at a few. But once you have a sense of the landscape, decide how much you’re willing to spend. If you don’t set a budget to start, it’s easy to succumb to “desire inflation”. When shopping for my digital camera, I had a budget of $300.
Research your options
Once you’ve created a features list and a budget, search for options that meet your requirements. In most cases, Consumer Reports is a great place to start. Your local public library probably has a copy of the annual Consumer Reports Buying Guide. But don’t discount the web. I often do product research through Amazon.
Make a selection
Once you’ve done your research, you’ll probably find one or two items that seem most promising. (There’s rarely one perfect choice.) I tend to write down the manufacturer and model number of my top three choices before I move on to the next step. In 2007, I was able to narrow my choices down to two camera models, both of which were within my budget.
Compare prices
Now that you have a shortlist, begin researching prices. Again, check Amazon. Check other online vendors. Check your local stores. Don’t forget to consider used or refurbished items.
Make the purchase
Once you find the best source for the item you want, buy it. Be confident that you’ve researched price and features so that you know you’re getting a good deal.
Protect your investment
The older I get, the better I am about saving warranty information and boxes. (If we had a smaller house, I’d only save boxes for a couple weeks. Because we have space above the garage, I save them forever.) A little foresight when you buy a product can save a lot of headache down the road.
But large amounts don’t just matter when you’re refinancing your house or shopping for a new plasma TV. One of the best ways to discover the power of large amounts is through boosting your income. Whether that’s through negotiating your salary, asking for a raise, or changing careers, a larger income can have a huge impact on your finances.
Remember: Saving money on the little things every day is great, but saving money on the big things can make an awesome difference to your budget.
This is the sixth of a fourteen-part series that explores my financial philosophy. These are the core tenets of Get Rich Slowly. Other parts include:
- Tenet #1: Money is more about mind than it is about math
- Tenet #2: The road to wealth is paved with goals
- Tenet #3: To build wealth, you must spend less than you earn
- Tenet #4: Pay yourself first
- Tenet #5: Small amounts matter
- Tenet #6: Large amounts matter, too
- Tenet #7: Do what works for you
- Tenet #8: Slow and steady wins the race
- Tenet #9: The perfect is the enemy of the good
- Tenet #10: Failure is okay
- Tenet #11: Financial balance lets you enjoy tomorrow and today
- Tenet #12: Nobody cares more about your money than you do
- Tenet #13: Action beats inaction
- Tenet #14: It’s more important to be happy than to be rich
Look for a new installment in this series every Monday through the end of the year.
Become A Money Boss And Join 15,000 Others
Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)
There are 46 comments to "Large Amounts Matter Too".
I enjoyed the step by step sequence of making a good financial choice. I would definitely say that part about price is important. Many times folks don’t look at what they can afford before purchasing. Good stuff!
I’m working being “penny wise and pound foolish.” I’ve had a tendency to focus on saving a few pennies at the grocery store, only to waste a ton of money somewhere else. It drives my wife crazy.
I’ve gotten much better about it. The thing that has helped me is to take a step back and focus on the big picture. Often with budgeting we get so bogged down with the details we lose the forest with the trees. When you take a step back, you’re able to get some perspective and see that saving a couple of hundred dollars on your mortgage or new car is a much more efficient way to advance your personal financial situation than scrooging it in the grocery store line.
I fall much more in the large amounts matter group. It’s so ironic when someone is clipping coupons and then goes out and leases or finances a new car. If you can control your housing, transportation and medical spending chances are you’re going to have solid finances.
My biggest concern with large spending items is ancillary or hidden costs.
For example, if you buy a home bigger than what you need, you will be spending lots of money hearing and decorating and cleaning and paying property taxes on rooms you rarely use.
Rob
I am actually in the process of buying a house with a 4.625% morgage rate that we locked in 2 weeks ago. Its an awesome rate that enables us to get more house for our money. Plus we are putting 20% down to get rid of that wasteful insurance money.
When researching a big ticket item I like to look for customer feedback as well. Generally the two best sites for customer feedback on items is Amazon and the product website. I focus on the negative reviews. What I take seriously are problems that a lot of people complain about, or everyone complaining about a different thing. The former indicates that whatever it is is truly a problem, the latter indicates that the product may be a lemon. Then I skim the positive reviews to find out what works well and whether the serious problem affects many users or just a few.
Sometimes the serious problem isn’t a problem for me. For example, many users of front-loading washing machines complain that water builds up in the door seal and gets moldy. This is a potentially serious problem. But for me, the solution isn’t a problem: leave the door open when the machine isn’t in use.
FYI: consider buying in person. You can’t bargain with a website. After you agree on a price, ask if you get an extra discount for paying cash. Since the store won’t have to pay the processing fee (typically 1-3%), you should get some of the benefit.
The hidden costs apply to other large purchases too, like if you finance a piece of furniture or appliance. They get you with nothing down and no payments until whenever, but when they payments actually kick in and the interest starts racking up, it doesn’t look like such a good deal anymore.
I think that “large amounts” always matter regardless of who you are. The “small amounts” are important for some but not everyone.
If you don’t have a lot of money then every penny counts. For others however who have more money than time – it’s not worth wasting time on small amounts.
Budget and features, as you listed above, are the most important aspects to consider prior to a big purchase.
If you only really wanted a normal candy bar, but upsell yourself to a king-size, not that big of a deal (financially anyway), but if you only need 2 bedrooms and a 1-car garage, well, you’re really gonna to be hurting if you accidentally buy a 4-bedroom with a 3 car carage because someday you might need the space.
Know up-front what you need and ignore yourself when you start questioning if you’d like more while you’re out shopping.
Personally, I’ve tended to progress through three types of expenses:
1. Low hanging fruit – eg. got rid of a land line I didn’t use, stop buying steak
2. Bigger expenses – keeping mortgage and student loan payment low
3. Smaller expenses – gas, entertainment, etc.
I wouldn’t limit negotiations to salary. When you find a big-ticket item you want at the best price, if it is a bricks and mortar, act like you are on the fence and just ask “can you do any better on the price?” Often, there’s some deal they can give you, especially appliances/furniture. You may also get them to match an online price you printed out, which will save you costs of shipping/handling. The worst case is they say no, but often you can tens or hundreds of dollars for less than a minute of effort.
Doing research before buying a large ticket item is key. You can usually shop around and find the best quality item for the best price that way. I agree, Consumer Reports is also a great way to investigate brands, especially cars.
I also used savings from re-fi to accelerate mortgage. Even though the rate is low, it’s like found money, and I’m satisfied to ‘invest’ it at 4.875%
It takes 5 years off the mortgage.
I agree with Four Pillars – I think this tenet applies to everyone, rich or not, but worrying about small amounts only makes a big difference for those with more limited means.
Great post.
For everyone getting on the mortgage refi bandwagon, it’s also worth it to reshop for homeowner’s insurance as well. For a couple of phone calls, you can sometimes find another A+ rated insurer who will cut your annual premium in half. (which can be hundreds or even low four figures in a high cost insurance area)
Re Consumer Reports : Many public libraries also have a subscription to the electronic version of Consumer Reports, with all their back issues and searching capability. You can frequently log on from home if you have a library card.
The hazard is taking out a lot more equity and using it for dream purchases, just reassigning the debt to the mortgage.
John DeFlumeri Jr
Large amounts actually matter THE MOST!
It’s kinda silly to sweat the small stuff, when we aren’t busy working on how to negotiate a raise, figure out a big idea and monetize, and in your case, refinance a mortgage to a lower rate.
It has always been about the big stuff for me. Once you have that high paying job for example, everything else becomes easy when you lock your costs in place from your low paying job.
It’s all about PROCESS and we will all be rich one day.
I remember reading an article a while back that talked about this very thing, and how research was indicating that when we think about money we think about it in relative (and emotional) terms. So we *feel* like we’re getting a better deal saving 50% on a $20 item than talking the car dealer down $100 because it’s relative to the overall purchase. That’s why a coupon clipper might think nothing of paying an extra $1500 to upgrade a stereo, or $5k to upgrade the floors in the house they’re building, because it’s a relatively marginal cost, without thinking and realizing that all dollars are worth the same no matter what you’re spending it on.
Another tip with large purchases: Save a copy of the receipt and the serial number in case you need to file an insurance claim for fire or theft. We keep a three ring binder of this info. It’s also handy if you have something break under warranty a year or two down the line.
This is where the focus needs to be at first, not on the small things (I would have swapped the order). You can’t save three grand a year on cutting cable and cell phone bills like JD did with his mortgage.
The other part of this is assessing major annual costs. If buying a new car means putting $5k down and $3k a year in payments (nevermind increased insurance), but maintaining your current vehicle will be half your monthly payments, why buy unless you have to? Over the course of the five years you’d make payments, you’d save $12,500 total. That’s more than if I cut my entire cell phone, gym membership, and cable/internet bills out completely over five years.
Little things help. Big things make or break you.
It’s is so true, big items do matter. Last year,My friend bought 50 inches Samsung LCD for $2100. I told him to wait, do not hurry, but he did not do that. Last month, I got a deal of 47 inches LG just for $699. He was surprised to see so little difference both TV’s had. I waited and saved money. I’m paying of my car loan with the money I saved.
@Jonathan (#21)
I think it’s important to focus on the small things first for a number of reasons: they’re quick to implement, you can do them everyday, they help build good habits with the big things, and they really do add up.
At this very moment, I’m writing about this in Your Money: The Missing Manual. Last night I completed a tally of just a few of the things I cut during my first year of frugality. My total savings? At least $2281.61 annually. Not the $3000 saved by re-financing the mortgage, but close. And these are cuts I could make instantly and every day. Opportunities like the mortgage come along infrequently.
Both small amounts and big amounts matter. I give them equal weight in my worldview.
Very good article JD. Personal finance bloggers often talk about how to save money on everyday items.
I think that readers mistake this for advocating that small savings are more important than bigger savings. In reality, big purchases offer a much better area for saving lots of money. However, there are less things to talk about. Therefore, we write a lot about saving money on small purchases more than bigger purchases.
A few years ago my husband bought a Kirby vaccuum for $1800 without consulting me first. A salesman came by and talked him into it. Yes, we needed a vaccuum, but our house has hardwood floors upstairs with two area rugs. Downstairs we have three carpeted rooms. The Kirby does have a shampooing function as well.
After a day, my DH realized that perhaps it wasn’t the best purchasing decision.
You can’t beat yourself up when poor decisions are made but you certainly can learn from them.
Hey J.D.,
Maximize results and minimize time spent getting them by focusing on the big wins.
By following the 80-20 rule–focusing on the 20% of actions that’ll get you 80% results–you’ll be able to get those large amounts of money saved while not having to spend all your time getting miniscule savings here and there.
If we focus on the large amounts, we’ll get the biggest savings but still spend the same amount of time had we been coupon hunting or doing some other small savings actions.
Nice reminder to–even if we want to do the smaller savings–go for the big wins with the large amounts first,
Oleg
No mention of haggling or negotiation?
-Erica
Big wins are great since you can take the money saved and redirect it.
A few months ago we cut our car insurance bill in half by checking around and seeing the rates. I found out that we could get a great deal by being Costco members.
We’re shopping around for homeowner’s insurance and I was surprised by the huge difference between companies for the same coverage.
I definitely agree with this post. I guess I try to maximize my savings on big and little ticket items, but the huge purchases definitely should be researched thoroughly.
Like Erica (#27) mentions, I too thought of where haggling fits into all this. I worked at a furniture store for several years while I was at school, so I know that asking for a discount is ALWAYS a good idea. The worst someone can say is “no”. I won’t argue at a clothes store for them to reduce a shirt, but you can argue for discounts at lots of different stores. When I bought my cell phone I had every intention of buying the extended warranty since I had bad luck with my previous phone and wanted to be better safe than sorry, but I let the salesperson talk me into it by throwing in $50 worth of accessories (I think the warranty came out to $30). If you can’t get them to change the price of an item, 95% of the time you can get them to give you a discount on the warranty or throw in an accessory (this goes for pretty much any electronic item). It never hurts to ask!
I haven’t bought many big ticket items recently, but as I become more financially savvy, I do research things more and more and take several days (or even weeks) before I buy something I am not 100% sure about. It pays to look around.
I think the key to financial success is saving on big and little things, and really focusing on purchasing only thing that you truly want vs. squandering your money on Stuff you don’t think thru before slapping it on the Visa.
My gross monthly income from my base salary is about $8300. My housing costs $1450/month.
This means that I’m spending about 17% of my income on housing. If I did the typical “1/3 of income towards housing” thing, I’d be living in a house thats cost about $2750/month. That’s a difference of $1300/month. All my other bills combined don’t add up to that much.
J.D. says he was able to save $2281 on the small things in a year. I saved $15,600 on a single big thing. It makes the cost of lattes at Starbucks or the price of gas or buying store-brand groceries pretty insignificant.
I have to agree with a number of the other posters…I think the Big Things matter MORE. Like Tyler, our housing costs are way below what we could manage if we followed traditional guidelines, so I don’t waste any time clipping .30cent coupons for baked beans. I am able to focus all of my energy on the ‘big things’…earning more money, lowering the management fees on my investments, etc. etc.
I’d say that it’s the common, everyday small amounts that get you into the right habit so that when a big opportunity appears, you’re prepared to take advantage of it. 🙂
Saving on big things is definitely important.
Of course, depending on how much you make, the number of big things will be extremely limited. I have never bought a TV, never owned a car. But we all have things we spend more for. A computer. A trip.
Getting something second-hand can really help. Most people replace their computers very often, so you can grab one that’s only a few months old for a very reduced price (and it can last for years).
For trips, I make sure to buy early. The price can double as the date gets closer. Also, there are cheap months and expensive months to travel. But remember the cheap months are cheap for a reason. You might want to still travel during the expensive ones, depending on what you’re travelling for.
All the advice here is very good. Make a list of what you need. Then, when you see the specifications, remember to stop yourself for going “that’s so cool!” when it’s something you will never use. Consider alternate options that might do the job. Sure, a Palm might be nice, but if a notebook can do everything you need just as well, you might want to stop your cravings.
Sometimes the best option is just not to make the purchase. And sometimes it takes a while to realise that it’s something you don’t need, and wouldn’t actually end up using, no matter how much you want to have it.
It can help borrowing it from a friend, or renting it. It can give you a feeel of whether you’ll get tired of it after a couple of days.
And remember not to fall for the multitasking. Sure, that camera there can play mp3s. So? It’s less memory for your pictures, and if you already have an mp3 player, it’s definitely not useful. Plus, multitaskers usually aren’t as good. A phone doesn’t take camera-quality pictures. A camera doesn’t have a lot of options for mp3 playing. And so on.
Of course, sometimes it’s harder to find something that does just what you want, and not 10 different things as well.
Sometimes focusing on the small things help you do well on the big ones – spend a year decluttering and figuring out exactly where your money goes and thinking about what’s really important to you, and *then* go house hunting – especially if you can rent in the neighborhood you want to live in for that year.
If it turns out you’re just fine in less space, or you don’t really like the neighborhood that much, or your kids hate the school, you’ve saved yourself a chunk of purchase price before you ever get to negotiating interest rate.
And ancillary costs on a house are HUGE – we could have saved ourselves at least a few thousand a year by buying a stucco house instead of our wood-sided one, because the stucco needs painting about half as often.
I can’t stand nickel and dime-ing my way to save money. I’d much rather not stress over lattes or finding the cheapest gas station or constantly worrying about pinching pennies. So instead, I drive my car until its collapsing, live in affordable housing, and look at big ticket items.
Somehow I’m able to do that and have great quality of life. I doubt I would be happy if I cared about small stuff. As the saying goes, don’t sweat the small stuff. Worry about big ticket items.
This is a great, timely reminder as I’m getting closer and closer to pulling the trigger on buying a dSLR. 🙂
Not only that, but I’ll have to start readying for our move, too…. Now there’s something to make sure we research and are getting a good deal on. (Yeah, the military will help cover it, but if we do our homework we have the potential to make a tiny profit doing so too, which would help if we do decide to upgrade our tv or buy a coffee table or something!)
Sorry, but my transportation costs are non-negotiable. 😉 I’ll gladly trim both big and small expenses to be able to splurge in this category!!
Saving on big stuff wins hands down. If you think about it like a business, you have fixed costs and variable costs. Your fixed costs are very hard to change quickly when a crisis strikes(especially if you’re in an upside down mortgage or car).
When times get tough, there are alot of variable costs that can be quickly and drastically reduced if need be (food, internet, cable, phone, daycare, entertainment, etc).
I like to pinch pennies but not to an obsessive degree. The big wins can make the real difference in your cash flow, and penny pinching is the icing on the cake.
@JD – you saved about $250 a month on your mortgage, but it looks to me like you rolled about $6,500 worth of closing costs into your new mortgage ($212,900 borrowed – $206,345 balance on the old loan). You’re not really “saving” that $250 until month #27* and that’s not even counting the accruing interest on those closing costs.
*(6,555 divided by $250 savings = 26 month payback period)
I didn’t see any discussion in the original linked post or this one on why you didn’t just pay for that in cash and instead financed it over 30 years?
JD – is accelerating your mortgage payments a big thing you are missing?
If you just refinanced you have an interest rate in the 4.X% range right? That is a historically low rate. It is difficult for me to believe that investing wouldn’t give a better return on your money. Looking at historical data it should be substantially more. How did you eliminate other alternatives? Even if you didn’t want to take any risks it hasn’t been that long since CDs and treasury rates have been higher than your mortgage. If inflation spikes they will be a LOT higher.
-Rick Francis
Rock: high cost of rental apartment; hard place: insanely high cost of homes. My DH and I choose to live in a central location and pay more in rent than many people allocate for their mortgage … *but* they have 60- or 90- or meshuggeh-minute one-way commutes. And buying our square footage would cost close to 3x as much per month. That’s a case where we feel we are truly getting value for our money and we’re not willing to cut that line item.
On the other hand, we are both perfectly satisfied to drive relatively old, economical, reliable cars (15 and 10-yr-old Accords) which are paid off (yay!).
DH gets his hair cut professionally and gets a manicure (it’s a write off for him as a therapist). I do all such stuff myself; that line item was relatively painless to mark through since the costs are crazy high in our area ($200 for cut/color; $100 facial!?) and the results weren’t, frankly, that much better than home remedies!
We have been gradually whittling at our indulgences to free more money for debt repayment. We feel the “small things” we’ve learned to do will train us to be content with a simpler standard of living later in life.
The “biggest thing” isn’t even on our horizon yet since instead of buying property in the city where we now live, we are waiting to buy in the area where we want to retire. So the opportunistic side of me is waiting, like a vulture, for the real bottoming-out of the housing market.
I think they both matter–and I really try to limit the amount of time I invest in the little things. If its going to take an hour of my time to save/generate $5, is it really worth doing?
And on the “home runs” I have to remind myself sometimes of this. What I mean, is that fi I am undertaking something that could save me $600 or so I could literally invest a week’s worth of time and it would still be cost-effective.
Thanks for the shout-out, JD! I’m glad to see you write more about this, because people so often miss opportunities to do these things.
I just posted over at Wise Bread last week about buying a used car using pretty much this process. Here’s the post: http://www.wisebread.com/the-game-of-haggling-how-to-get-a-great-deal-on-a-used-car
It’s amazing how many people overlook the large stuff and focus on the small stuff. I know someone who clips coupons (won’t go to the grocery store without them) and then turns around and takes the whole family (2 adults, 4 kids) to Olive Garden and lets the kids order whatever they want. Of course they order the $15 to $20 meal. I don’t even order expensive meals much less let kids do that. She then proceeded to complain that the bill was over $100! Go figure.
Thanks for the recommendations on credit repair on this amazing blog. A few things i would advice people is usually to give up the mentality that they may buy at this point and pay back later. As being a society all of us tend to try this for many issues. This includes holidays, furniture, as well as items we would like. However, you must separate your wants from the needs. If you are working to boost your credit score you have to make some trade-offs. For example you’ll be able to shop online to save money or you can turn to second hand outlets instead of high priced department stores pertaining to clothing.
This is several years late but I thought I had to add my thoughts to this great post. Despite being in Sweden I can still relate very much to the content of this post and its comments.
Firstly, I would like to say I am all for saving “large amounts” wherever possible. Myself I am very fortunate that my current apartment is my first and also likely my last one as it is a four-roomer with plenty of space, for when we are a family in the future. I bought it a few years back. By not having to move ever again I will, according to my calculations, save between $100,000 – $200,000 over the course of my life. This includes taxes, mover’s fees, new furniture, etc. As an added bonus I rent out one of the rooms which gives me some rental income each month.
However, small amounts really add up over time. If you cut down your grocery bill with let’s say $50 a month it really makes a difference and will amount to substantial amounts over time, even better if you use the saved money to invest in stocks or pay down debt.
Even if saving large amounts matters most I see no reason why you can’t do both.