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Being Frugal is Foolish

Posted By Jim On 02/22/2010 @ 7:54 am In Devil's Advocate | 47 Comments

I bet this Devil’s Advocate is going to ruffle a lot of feathers! Frugality is a pretty big topic in the personal finance blog community because there are so many things you can do to trim a few cents or dollars off here or there. You can buy gadgets like a Kill-A-Watt to find out how much energy your appliances are using and disconnect them when they’re not in use. You can make your own detergent for your washing machine or buy a rack to line dry your clothes. There have been books filled to the brim with thousands upon thousands of ways to save a few dollars and cents here or there… however they never get to the heart of the issue – being frugal should be the very last thing you try to be when all other options have been exhausted.

If you think of yourself as a business, you have two ways of generating a profit. You can increase your income or you can decrease your expenses. When you focus entirely on being frugal, you only look at half of the equation. That’s foolish.

Know The Value of Your Time

It’s very important that you know how much an hour of your time is worth [3] because all of your decisions should start with that number. The point of knowing has less to do with actual dollar amounts and more to put those decisions into context.

Consider this – let’s say you’ve estimated that one of your hours is worth $100. Would you spent an hour making laundry detergent that you can buy for $10 or would you instead be focusing on finding more ways to earn money? Now what if your hour was worth $50… would you rather be spending that hour making detergent or finding more hours to work? While you might not be able to add more hours, I argue that your hour is better spent trying to find more worth instead of making detergent.

The point of my example wasn’t to pick on making detergent, or any household supplies, but the main reason for doing it shouldn’t be financial. We line dry clothes because it’s more environmentally friendly. We also save money on electricity but the main reason is environmental.

Frugality Offers Diminishing Returns

The second biggest reason why focusing on frugality is foolish has to do with limitations. There is no limit to how much income you can earn in your lifetime. You may impose limits on yourself, based on your environment and your decisions, but there is no immutable law that says you can only earn a certain amount. There is, however, a limit to how much you can save. If you spend $500 a month on groceries, the most you could ever save per month on groceries, with all the tricks in the world, is $500.

Not only is there a limit with frugality, but the biggest gains are usually discovered in the beginning. When you start making laundry detergent for yourself, the biggest savings will be in making it yourself. As you find cheaper ingredients or buy in bulk, you will continue to increase your savings over the store bought detergent but each step will be smaller.

The opposite is true when you focus on increasing your income. As you develop your skills, add to your list of certifications or education, you become a more valuable asset and income increases will become larger with each step.

The bottom line is that while frugality can be an excellent exercise in creativity, it’s usually never worth your time.


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[3] how much an hour of your time is worth: http://www.bargaineering.com/articles/how-to-quickly-calculate-the-value-of-your-time.html

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