The “Challenge”

A few days ago, I Will Teach You to Be Rich posted an article entitled 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 their 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 their interest rates reduced than they are 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 they take two hours and do both. The programmable thermostat won’t be as big of a boon as the interest rate reductions would be, 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.

First, there is a sizable group of people who really are only interested in the “big five” things. The only behavior that 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 $0.50 a month isn’t worthwhile. I think that Ramit is mostly speaking to this group.

There is also a sizable group that are interested in some degree of frugality. These are the people who are on board with the $0.50 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 quite a large portion of my audience is as well.

There’s also a group of what 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.

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 their 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 an unnecessary incursion into their life.

Other people are empowered by reductions in their spending and continue to seek out smaller and smaller solutions. They tend to adopt what are traditionally called frugal tactics into their lives. They re-evaluate all of their spending carefully and start trimming the fat that they discover. They try things like shopping lists and installing 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 life 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.

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