Sunday, March 20, 2011

Sodas or Saturns

There is a lot of advice on how to budget and save and where to put your priorities, some of it conflicting. One that I came across online years ago and seemed to be a popular "theory" was, in a nutshell, don't sweat the small things, do all your savings on the big things.

This idea, promoted by several writers, all men for some reason,  basically centered around the idea that saving a dollar or two here or there wouldn't make any difference and tracking exact expenses was a waste of time; you should go for saving on big purchases like cars, then don't put your money into safe savings, invest!

I can only think these ideas are written by men who have no involvement with their families' daily budgets and make considerably more in a stable industry than most of us. Yes, shopping carefully on the big purchases is important. If you can spend 20 or 30 hours shopping for a car, and save $1500 on the price, that's at least $35 an hour return on the time.

But little things DO add up over time, especially if your income is much more limited. First you need to know where your money is going, THEN you can look at the areas you can save in. Lots of people spend $5-$10 a day on odds and ends like vending machines and magazines, amounts that quickly add up to $1000-$2500 a year.

For instance, an example I've used before, you buy 2 sodas a day at $1 each from a vending machine at work. That's $2 a day (2x$1), $10 a week (5x$2), and $500 over a 50 week work year (50x$10---most people get at least 10 holidays and sick days a year). If you buy a couple of two liter bottles at $1.50 of the same soda at the grocery store to drink at work, $3 a week instead of $10, you save $7 a week (for no work), and over that same 50 week year, $350 over that year (50x$7).

Another example, even more dramatic, that I touched on in my very first post was lunch. If your average lunch out at work runs $6 (and that doesn't include the gas and any other expenses), you spend $30 a week on lunch (5x$6), and $1500 over the course of that 50 week year (50x$30). If, instead, you bring some of that cheap bean-and-rice soup at $.50 a lunch (this is the fancy version including meat, etc.) on two days (2x$.50=$1), a nice sandwich and fruit for $1 on another day, leftover that you would have thrown out (free) on a fourth day, and then go out to eat with the gang and have an $8 lunch on the fifth day, you'd spend about $10 a week ($.50+$.50+$1+$0+$8=$10), saving $20. Over a year, that would add up to $1000 (50x$20). Cut that $8 lunch to once a month and have leftovers instead, and you'd save about $300 more ($8x3x12=$288).

Switch brands on just four items on your weekly shopping bill that save you $2 total, only buy meats on sale, saving about $5, buy grains and pasta and flour in bulk or on sale to save another $2 a week, and eliminate even two convenience foods to save another $3 a week gets you a total of $12 a week ($2+$5+$2+$3=$12), or $624 over a 52 week year (52x$12=$624---groceries don't get sick days).

Do all of these things, virtually no extra work, and put the savings away safely, and you'll have $2262 ($350+$1000+$288+$624=$2262). If that's "pin money," then I'm thrilled for you. Your best bet is to put 25% of your takehome into pension and savings before you spend a penny, and you'll be set. But you aren't my main target here. For 90% of the US population, $2200 is huge. Enough to be a down payment on a modest new car, or buy a clunker in cash or pay for a major car repair without using a credit card. Or about 6 classes worth of tuition, fees, and books at our local community college, an investment that could get you a new job skill and a higher salary in the future...

And as to the question of sodas or Saturns, obviously you can save up as much over a year on the little things with virtually no effort, so why not do both? You'd have $3762 plus interest at the end of a year ($1500+$2262=$3762). Keep saving the "small" money and keep driving that car for 5 years, and you'll have $12810 plus interest, enough with  your trade in to possibly buy a replacement car in cash ($2262*5=$11,310; $11,310+$1500=$12810). If you had a four year loan on the car and saved up the payment for that fifth year before trade in, you'd definitely have enough for a modest new car in cash. So, DO sweat the small stuff as well as the big stuff.

1 comment:

Ami said...

In line with my philosophy of don't sweat the petty things and don't pet the sweaty things.