The optimization trap

Since returning to Get Rich Slowly in October, I've begun to receive more and more email from readers with questions about what they should do with their financial lives. I love reading what people have to say, and I love trying to help (when I can).

Often the folks who write to me are focused on frugality. They want to make the most of their grocery trips, their book budgets, and so on. Sometimes the questions come from people who want to know which index fund to choose: Is it better to buy Vanguard's Total Stock Market Index Fund (VTSMX) or Fidelity's Spartan Total Market Index Fund (FSTMX)?

In other words, many of the emails I receive — regardless the sender's financial situation — are about what's best to do with their money.

I think it's great that GRS readers are making deliberate decisions about their financial lives. It's awesome that they're looking to optimize their saving and spending, that they're clipping coupons and fretting over how to get the best returns on their investments.

However, I worry that sometimes people pay too much attention to small details, to minute aspects of personal finance, while neglecting the Big Picture. It's easy to fall into what I call “the optimization trap”, to believe that tiny tweaks will make more of a difference than they actually do.

Here's a real-life example from a reader named Dave:

We get coupons in our Sunday paper. I've contemplated getting rid of the paper because it's sometimes difficult to have the coupons subsidize the monthly cost of the paper. (The paper costs $12.45 per month.) Many times it ends up being a push. Should I ditch the coupons altogether and cancel the paper or stay the course?

Dave's dilemma is a perfect example of the optimization trap in action. He's spending $150 per year on a newspaper. By clipping coupons, he's able to defray some of that expense — but not all of it. Should he cancel his subscription?

My response? This isn't an important financial decision. Even if Dave only recovers half of his newspaper expense via coupons, it's only costing him $75/year. If he uses the paper and enjoys it, and if the $75 per year is worth it to him, then he should continue getting the paper.

Meanwhile, I worry that Dave (and people like him) are missing the Big Picture. Small economies are a terrific way to optimize your spending, but they're a terrible place to start. If you're at the beginning stages of getting your financial house in order, it's far more important to ask questions like:

  • How much of your budget goes to housing?
  • How much do you spend on transportation?
  • Have you taken steps to boost your income?

It's great that Dave wants to be sure he's getting value from his newspaper subscription, but he should be concerned with this sort of small optimization only after he's taken care of the Big Picture. Let me say this once again: It's far more important to get the big stuff right than it is to optimize the small stuff.

Look, I don't mean to pick on Dave here. Far from it. (Turns out Dave gets a kick out of frugality. “I get excited about saving $2 on sunscreen!” he told me in a follow-up email.) But I want to use his situation to warn Get Rich Slowly readers about the optimization trap.

A lot of times, the optimization trap is a way to avoid dealing directly with more important issues. It's easier to focus on which online savings account is best than it is to actually put money into that savings account. Choosing to move to a smaller home requires sacrifice; fussing over your newspaper subscription does not. The difference, though, is that the former can help you build wealth while the latter might save you six bucks a month.

Does it make a difference which index fund you choose? Sure. Some. But that's not nearly as important as choosing to invest in the first place. Does it matter that your home-brewed spreadsheet projects the exact date you'll reach Financial Independence? Not really. But it's vital to your financial success that you have a sense of purpose, that you know what your money is for.

I'm not saying that optimization shouldn't be on your financial to-do list. It should be. But it should be near the bottom of the list, not the top. Optimization is about taking what works and making it work better. You don't optimize something that's broken. If your budget is broken, you fix it by making big moves not tiny ones. Once you've made the big repairs, then you can concern yourself with optimal performance.

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Wise Money Tips
Wise Money Tips
2 years ago

Well said. Focusing on the “big picture” first and foremost will have a much larger and more immediate impact on your finances than fussing over smaller less significant issues. However, the “little things” should be part of your plan as well since they can add up and also help you to establish good money habits.

Kevin Rhoads
Kevin Rhoads
2 years ago

Speaking of the optimization trap… When I joined my small company we had a 401k that was awful. Three years later and now that I have risen high enough that my voice carries weight we are finally changing that thing. First realization once I got the initial people who built it in a room? They have wanted to do this for 4 years but they couldn’t decide on “the best provider”. 3 years went by while they tried to decide between two providers within 3 basis points in average cost of each other. The middle point? 15 basis points. Our… Read more »

CalLadyQED
CalLadyQED
2 years ago
Reply to  Kevin Rhoads

Wow. That stinks. The cost of nother taking timely action can be huge. Thanks for sharing this great real-world example

JoeHx
JoeHx
2 years ago

This is great. There’s always a much bigger difference between not doing something and doing something than there is between doing something “right” and doing something “okay.” Another example is what brand oil to use in your car. A car that regularly has its oil changed with cheap stuff will last longer than a car that never has its oil changed. If you get “better” oil, the gains aren’t nearly as big. It might be a car only lasts 20k miles never changing its oil, 150k with cheap oil, and 200k with quality oil. Here, the first difference (130k) is… Read more »

Eileen
Eileen
2 years ago

Great post and great reminder. Just a week or so ago, I finally went out and bought a ‘bullet blender’. I’d been thinking about it for a few months. I used it almost every day last week (for healthy smoothies) but on the weekend, used a recipe to make a really nice sauce for some potatoes. I commented how I’d used it so often since I bought it. My spouse said “why did you wait so long” and I said something like “I didn’t want to spend the money on another appliance for the kitchen, but I also didn’t want… Read more »

Coopersmith
Coopersmith
2 years ago

10 years ago I use to get the paper. I love comics and that was the first thing I read. Then flipped through and read interesting articles. Sunday paper with coupons was fun. Then things changed. Paper became smaller and thinner. Comics started being dropped. Articles became less content. Sunday coupons became less of what I needed and then the final straw was delivery only 4 days a week and price was out of control. Every time it was less yet costing more. I dumped the paper, got all my articles of interest on line, signed up to a subscription… Read more »

Eileen
Eileen
2 years ago
Reply to  Coopersmith

I agree that subscribing to a paper for its coupons is probably a losing proposition (I don’t even use coupons), but I subscribe to support professional, local, journalism. I hate how the sports section has basically evaporated (the deadlines are too late for evening events now), but I live in a capital city and coverage of our state govt is critical.

It’s outrageously expensive, but I can’t bring myself to cancel.

Jennifer Gwennifer
Jennifer Gwennifer
2 years ago

Love this! It reminds me of one of my favorite stories: The Big Rocks of Life. http://www.appleseeds.org/Big-Rocks_Covey.htm However sometimes big rocks can be daunting – income, housing, transportation. It’s why many people choose to snowball their debt by starting with the accounts with the smallest balances first instead of the highest interest rates. My mathematical brain would insist on saving more interest first, but the emotional half would sigh in relief whenever an account was closed out. Why not alternate? Take care of one big rock, then tweak a few small choices (like cutting back on lunches out), then repeat.… Read more »

B^2
B^2
2 years ago

I couldn’t agree more with you, I don’t think those small $50 a year here, $100 a year here is worth all that time and effort to go through at first. I think first priority should be increasing your income. You can only save what you make as there is a definite cap there, finding ways to make more increases the ultimate threshold.

Accidental FIRE
Accidental FIRE
2 years ago

Great advice JD, I wrote an article a while back about not sweating the petty stuff like lattes etc, as long as your really saving on the big stuff. Mainly the big two – housing and transportation/vehicle. After that you can cut more but it becomes diminishing returns. It all does add up and can be important for sure, but not as much as the big stuff.

Kate
Kate
2 years ago

Sometimes small optimizations lead to the momentum to make bigger changes, but I can see what you’re saying here JD. In a sense, people can get hung up in the minute details instead of taking slightly bigger uncomfortable steps in the direction they want to go. This can be seen in career choices, to finances, to health choices. Great point to keep the bigger goal and picture in mind!

Dean
Dean
2 years ago

My rule when I’m looking at costs is to always start with the highest spend categories and move down from there. Only after I’m comfortable with my top spend categories will I move to lower categories. Cutting $100/month off my cable bill and $20/month on auto insurance makes more of a financial impact and less of a lifestyle impact than the little costs.

Mike
Mike
2 years ago

Great read! Paralysis of analysis gets in the way of so many people achieving their goals.

Jesse
Jesse
2 years ago

Great advice. I went from earning $16,000 out of college in 2007 to six figures in 2014 through a serious amount of hustling, promotions and self education, and privilege and am now on track for early retirement. With that said, I realize I’m part of a select few who benefited from a college education and being a white male. I’m worried we’re in an economic bubble where people without the same means and background cannot get ahead despite their savings rate. If you’re only earning $2000 per month with a $600 monthly rent is going eat away 30% or more… Read more »

A Journey to FI
A Journey to FI
11 months ago

JD, I really like the framework you’ve used to explain optimization and the trap you could fall into. I for one find myself thinking about optimization 24/7; however, I’m starting to think more about progressing my plans as opposed to simply optimizing them. The reason I say this is because conditions change and so should your plans. In any case, totally agree with your last comment in that you should first have something that’s worth optimizing (or progressing) as opposed to trying to fix something that is inherently broken. Thanks for this post.

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