Wednesday, September 14, 2016

Are You “Penny Wise and Pound Foolish”?

This is a post by reader, Nancy Evans.

Saving money sounds easy on paper. Avoid overpaying, take advantage of discounts, get creative, and the retained cash starts to build. Anyone who has actually tried their hand at saving money knows this perception is an illusion. Seemingly simple ways to save are in actuality more complex and slippery than they appear on the surface.

There’s a saying which applies here: “Penny wise and pound foolish.” It’s a phrase used to describe folks who relentlessly strive to cut costs on a small scale, but neglect to think about the bigger picture. Sometimes the short-term savings don’t lead to long-term benefits. In fact in many situations, penny-pinching only makes spending increase with time:

Workarounds vs. Repairs & Replacement

Patching things up and devising crafty ways to “workaround” malfunctioning appliances and expensive utility bills is an important part of saving money, no doubt about it. For example, our methods for saving money on heating during the winter are sure to lead to reduced energy costs. However, there comes a time when workarounds are an uphill battle not worth fighting.

Such is the case when heating and cooling systems are not operating at peak performance. Use all the insulation and duct tape you want, HVAC repair may be needed. It may not be “cheap” to pay for someone to service your heating and cooling system, but over time the cost of not doing anything about it adds up to above and beyond the upfront expense of opting for repairs.

Low Cost Options vs. Products Built to Last

Few families could succeed financially without access to generic brands, particle board furniture, and other low-cost options. In fact, in an overwhelming number of instances, store brand products are literally the same exact thing as the brand name alternative. Buying Windex versus Brandex, for example, usually boils down to paying for the big budget marketing of the former and not much else. However, there are situations where the low-cost options are not the same as the “brand” alternative, which inevitably leads to spending more money over time.

In many cases, this applies to electronics, appliances, and furniture. If the cost difference is relatively minimal, say $25, it’s usually worth it to buy the more recognizable, reputable brand in these categories. It remains true as the price difference spreads, but we know (from experience) not everyone can pay an extra $500 for a premium washer even if they know it will likely last longer. If discount brands are the only choice, just make sure to read more than one product review prior to purchase.

Size vs. Everything Else

Certain consumers (I’m looking at you, my fellow Americans) are obsessed with size vs. price. The more food for less money, for example, the better the deal. It’s a standard rule of thumb that seems to inherently crop up from common sense. Get more for less, what could go wrong? If saving money is the goal, it turns out a lot can go wrong.

Buying the largest home for the lowest price, for example, is not always the most cost effective decision aspiring homeowners can make. What about travel distance to school and work, local tax rates, insurance, crime rates, et cetera? Larger homes also mean more to maintain, repair, and replace. Detecting and evaluating the hidden costs of seemingly bargain rate property is critical for long term savings.

The key to saving money successfully is looking at the bigger picture. Choosing to be penny wise and pound foolish too often leads to losing money over time rather than the intended goal. Though opting for discounts and low cost goods is important, getting a sense of the long term financial consequences is critical for achieving real savings.

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