Posted by Maneesh Sethi :: November 23, 2007 @ 10:22 amIn my last article, I wrote about the difference between being cheap and being frugal. Here is how I defined the two.
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• Being cheap - You are unwilling to spend money on anything. Even stuff you need. You go out of your way to save money, even when it might not be a great idea.
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• Being frugal - You don't waste money. You spend it on things you need, and save it on things you don't.
The difference is mainly that being cheap actually hurts you, while being frugal is typically beneficial and will save you money in the long run.
So how can you determine if an action is cheap or frugal? Ask yourself these questions:
1. How much money are you really saving by not spending some money?
For example, my mom loves to fill empty shampoo bottles with water to make them last longer, rather than just buying a new bottle. How much money is she saving? Maybe a few pennies, because it only saves us the cost of one or two showers.
If you are going to buy a cheaper item, how much is the price difference between the more expensive and the less expensive items? Is the difference very small?
2. What is the difference, qualitatively, by spending less money?
If you were planning on buying a book, and decided to save money by buying a cheaper book, what is the difference in the quality? If you are buying a piece of clothing, is the more expensive one significantly better in quality or aesthetics? For example, I had to buy a wallet, and I paid $10 extra to get one that was inlaid with a sweet red cloth. Although it was $10 extra, I smile every single time I pull out the wallet---I consider it $10 well spent.
3. What are the long-term negatives of saving that money?
Buying books is a great example of this---if you save $20 on a book that could have potentially given you a great idea, did you actually save money? Sometimes, spending money is an investment. A book can give you an idea, an investment can get you a monetary return, and money spent can become money earned.
We at Lending Club want you to save money as part of your overall financial plan. Put some money into different types of saving and investment vehicles including P2P loans on Lending Club. If you want to spend a few extra dollars to get a nice pair of shoes, that's okay. Just make sure you aren't spending enough to ruin your finances.
1 Comment
I identify with your mom (i.e., stretching the shampoo use by adding water to the bottle), and I think you've understated the savings in such actions. There is more to it than gaining a few days worth of shampoo. Rather, the idea is to delay expenses as long as possible. If you can stretch out expenses, they become proportionally smaller when compared to your income.
In the case of the shampoo (as well as similar items like hand or dish soap), my experience has shown me I can get at least a week or two more of use out of them. Squeezing every last bit of toothpaste out of the tube can do the same.
I haven't crunched the numbers, but it seems to me that if actions such as these were applied widely, the conglomerative result (in conjunction with a monthly budget, of course) would be a significant pushout of expenses. Instead of three bottles of shampoo this year, perhaps only two. Instead of five tubes of toothpaste, maybe only four. Applied across the board, the difference is obvious - and very much frugal.
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