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Don’t Overdo It

Jonathan Clements

THRIFTY. FRUGAL. CHEAP. Pick the adjective you favor, and you could apply it to me.

I’ve spent almost my entire adult life being financially careful. I haven’t carried a credit card balance or overdrawn my checking account since my early 20s. I was an early convert to low-cost index funds. When I worked at The Wall Street Journal and at Citigroup, I brought my breakfast and a thermos of coffee to the office every day, and occasionally lunch as well. I run a lean refrigerator, rarely throwing away food because I only stock what I’m confident I’ll eat.

But even I have my limits. I’m all for saving money, but some of the articles and comments I read leave me shaking my head. Want to lead the frugal life? Here are five thoughts:

1. Cars trump coffee. The criticism directed at millennials, with their supposed obsession with Frappuccinos and avocado toast, strikes me as silly. Partly, it smacks of misguided generational jousting. We shouldn’t be surprised that the current generation spends more than the generations that came before. That’s what happens in a society with a rising standard of living.

More important, a few cups of coffee pale in significance next to the cost of housing and cars, which together account for half of U.S. household spending. If folks are struggling to save, it almost certainly isn’t because of their coffee habit. Instead, they’re likely boxed in by high housing costs and steep monthly debt payments, including for cars and college loans.

2. Everybody has passions. To be sure, if somebody downs a $6 specialty coffee every day, the long-term cost could be significant. (Because no article on the perils of high-cost coffee would be complete without such a calculation, the answer is $212,000. The question: How much would you have after four decades if you invested $6 a day and earned 4% a year?)

But what if you really love overpriced coffee? Why shouldn’t you buy it? If mocha lattes are what make your heart sing, I see no reason not to buy them, as long as you’re saving enough for your various goals. This goes to my disdain for budgeting: If we’re diligently funding retirement and other investment accounts every month, it doesn’t much matter what we do with the rest of our money—and there’s no need to track where every penny goes.

3. Three basis points won’t kill us. In recent months, I’ve received multiple emails from readers, asking whether they should swap from index mutual funds into lower-cost exchange-traded index funds (ETFs). This is a particular issue at Vanguard Group, where there’s a corresponding ETF for almost every index mutual fund and making the switch to the ETF might save you perhaps 0.01 to 0.05 percentage points a year. In Wall Street lingo, those fractions of a percent are called basis points.

As I’ve argued elsewhere, shifting from index mutual funds to ETFs isn’t the slam dunk that many folks imagine. While ETFs typically have lower annual expenses, you’ll get nicked for the bid-ask spread when you buy and sell. Still, if you plan to stick with an ETF for more than a few years, it’s probably worth making the swap.

But don’t get too excited about the savings. Suppose that, by swapping to the ETF, you can lower your annual expenses by 0.03 percentage point. We’re talking $30 a year on a $100,000 investment. I wouldn’t turn up my nose at an extra $30. But I’m also not going to argue this is a must-do investment move.

4. We save now so we can spend later. Five years ago, at a financial conference, a fellow attendee sidled up to me and whispered, “You see that guy over there filling up a shopping bag with bottles of orange juice from the drinks buffet? He’s worth $50 million.”

I’m not greatly bothered by such cheapskate behavior. But it does raise the question: Will the guy ever get much pleasure from his $50 million, beyond admiring his net worth’s impressive size? We shouldn’t get so good at saving money that we can’t eventually bring ourselves to spend the fruits of our frugality.

What if we’re reluctant to spend on ourselves? I think there’s great virtue in spending on others, for two reasons. First, giving to others—whether it’s to family, friends or a favorite charity—often sparks greater happiness than spending on ourselves, so it can help us to get joy from money we’d otherwise be loath to spend. Second, by giving away some of our money, we may see that parting with a sliver of our wealth doesn’t necessarily trigger financial Armageddon, and that may make us a tad more relaxed about future spending.

5. Excessive frugality costs time. As I’ve noted before, time is the ultimate limited resource. If we spend hours hunting for the lowest price, we waste precious time. If we track every penny we spend, that’s time that could be devoted to something more enjoyable. If we’re so miserly that we spend our days worrying about how much we spend, we’re taking our good habits—which have the potential to free us from financial concerns—and turning them into the same mental burden that afflicts those who have no savings. The bottom line: There’s a point of diminishing returns in our efforts to save money and accumulate more and, if we overdo it, there’s a grave risk we’ll miss the big picture.

Jonathan Clements is the founder and editor of HumbleDollar. Follow him on Twitter @ClementsMoney and on Facebook, and check out his earlier articles.

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JClark
JClark
6 months ago

Given the astonishingly low savings of most Americans I don’t think being too frugal is what’s causing most of them to be out of balance.

And while I agree that a budget isn’t necessary, I think you must add that one should feel free to spend discretionary money after they’ve saved/invested and also after they’ve accounted for debt payments. Far too common, I’m afraid, are folks who buy the iPhone, Starbucks and Ubers before they’ve figured out how to pay their debts and other obligations.

Peter Blanchette
Peter Blanchette
5 months ago

The biggest problem millennials have is not the purchase of specialty coffee on a daily basis but that the cost of higher education skyrocketed to the point that student debt in the US stands at about $1.6 Trillion. That fact has inspired a lot of frugality on the part of millennials which I guess makes other generations happy who are annoyed by the coffee habits of millennials. Unfortunately, the rest of us have to be more frugal because millennials are not able to participate as fully in the economy due to that debt. If anyone is interested in the coffee drinking habits of millennials and the rest of us check out the link below:
https://www.bevindustry.com/articles/86796-nca-tracks-coffee-consumption-by-generation

Gozo Rabat
Gozo Rabat
5 months ago

This goes to my disdain for budgeting: If we’re diligently funding retirement and other investment accounts every month, it doesn’t much matter what we do with the rest of our
money—and there’s no need to track where every penny goes.

This statement, coupled with the axiom of “Pay yourself first,” comes close to covering the most-important bases when it comes to reasonable, productive, and minimally disruptive financial guidelines.

Regards,
(($; -)}™
Gozo

Nick Politakis
Nick Politakis
6 months ago

Really good points. I struggle with some of these myself

Newsboy
Newsboy
6 months ago

Tremendous post, Jonathan. The coffee example plays well into the idea of “investing on life experiences” that you’ve previously opined on. Particularly for younger folks, the occasional fancy coffee with a dear friend (likely sitting six feet away on the patio at the local coffee shop) is a very reasonable and socially validating expense when compared to me picking up the tab for a family trip to a beach house somewhere. Both activities can have immeasurable emotional value all the same.

It’s about balance and perspective. While in my early 20s (with limited resources), I fretted excessively about $5 and $10 discretionary purchases. Now In my 50s, the denominations are naturally larger, but that mindset still creeps back into the picture. Granted, it has helped fund an investor’s mindset for future financial needs – but if left unchecked, it can also wring all the fun out of life for both me and my loved ones.

Your post today was a breath of fresh air for many of us afflicted with the burden of chronic thrift to excess. Kudos!

Richard Quinn
Richard Quinn
6 months ago

As I was reading, I started thinking, he’s talking about me. Not the $6.00 coffee, but some of the too frugal stuff. There were times when I skirted being too frugal, ask my wife who when she had had enough found a way to break the cycle. But in my defense our last ten years of retirement and our ability to help our kids and grandkids seems some vindication. As far as budgeting goes, I’m with you 100% those who struggle with or obsessed with budgeting would be better to focus on willpower. Save, don’t use credit card debt and then spend whatever you want that’s left.

ScubaSkier
ScubaSkier
6 months ago

I’ve made this comment before but it is appropriate again. My biggest regret is I saved too much for retirement. Financial advisors scared me into thinking I needed to save much more. I retired in 1992 and lived through the crashes of 2000, 2008, and 2020. After every crash, I thought I needed to save more and after every crash, the market came back stronger but I had another couple of frugal years before I started spending again. Now I can afford to do anything I want but physically, I no longer can ski black bump runs all day or do 4 scuba dives a day in cold water. And even though I can afford it, I still will not go to Starbucks

greglee
greglee
6 months ago
Reply to  ScubaSkier

Think about endowing a professorship.

Nicholas Clements
Nicholas Clements
6 months ago

Jonathan, you know all too well my frugality and you also know that at times that I kick myself when, for example, I buy an airline ticket for a few dollars more than it was advertised a week later when the tickets went on sale. Also, I continue to write down each purchase to ensure that I remain within my monthly budget. But for the past many years of retirement I have never spent past my annual budget. In fact I have been under budget. And so perhaps the time has come to let go of the monthly expenditure tracking!

David Powell
David Powell
6 months ago

#5 reminded me of a certain frugal godfather and his (hopefully former) habit of torturous, time-eating multi-leg flights to the PNW 😉

Steve O
Steve O
6 months ago
Reply to  David Powell

Some people never learn that time is money.

Nicholas Clements
Nicholas Clements
6 months ago
Reply to  David Powell

Who me? : )

Langston Holland
Langston Holland
6 months ago

When I found HD, I read every article on the site and I think you outdid your brother in a few cases. Hint, hint. :))

Gozo Rabat
Gozo Rabat
5 months ago

For more than forty years, I did my best to log every expenditure, almost as much an exercise in mindfulness as in finances. Now retired for about five years, I’ve slowly weaned myself of the habit.

My wife and I are lucky never to have been spendthrifts in the first place. But even accounting for that important caveat, we notice no change in our spending habits. I just have a little-more time to use less-productively.

Regards,
(($; -)}™
Gozo

SanLouisKid
SanLouisKid
6 months ago

A rich family in my hometown bought very cheap cars. Manual transmissions, no air conditioning, etc. But, they gave generously to causes they believed in. They found their “happy medium.”

Ginger Williams
Ginger Williams
6 months ago

Good post. I could have been more financially careful when I was younger, but I’m still looking forward to a comfortable retirement in a few years. Buying that leather sofa on credit wasn’t financially careful, but my friends and I enjoyed it for years. I don’t care for fancy coffees, but I’ll happily pay for the first cherries of the season or splurge on front row theatre seats when I’m in a major city. My financial lapses are balanced by three good habits. First, I’ve contributed at least 10% (and usually much more) of every paycheck to retirement account since my mid-20s. Second, I’ve maintained about the same standard of living since my mid-20s, instead of moving to larger home, although I have indulged in a weekly cleaning service for years. Third, I keep an emergency fund so I never have to go into debt; that leather sofa wasn’t an emergency and I still don’t regret paying interest for six months. I don’t budget, I just put aside retirement and emergency funds first, keep my fixed costs under control, then feel free to spend whatever’s left each month.

Thorsten
Thorsten
6 months ago

Excellent article! This part could be made into a big banner:

If we’re diligently funding retirement and other investment accounts every month, it doesn’t much matter what we do with the rest of our money—and there’s no need to track where every penny goes.

That’s exactly what we live by now (though it took us a long time to figure this out). We save a big portion of our income each year. Then with the rest, I love to be careless. I hate nothing more than clipping coupons, comparison shopping for groceries or gas, or bringing your home made sandwiches and thermos. I just want to enjoy live and not watch every penny. But still knowing that we are setting aside enough for the future.

CJ
CJ
6 months ago

Hey…have we met? lol
“Excessive frugality costs time. As I’ve noted before, time is the ultimate limited resource. If we spend hours hunting for the lowest price, we waste precious time. If we track every penny we spend, that’s time that could be devoted to something more enjoyable. If we’re so miserly that we spend our days worrying about how much we spend, we’re taking our good habits—which have the potential to free us from financial concerns—and turning them into the same mental burden that afflicts those who have no savings. The bottom line: There’s a point of diminishing returns in our efforts to save money and accumulate more and, if we overdo it, there’s a grave risk we’ll miss the big picture.”

greglee
greglee
6 months ago

Concerning excessive frugality (which is a problem I have), this is mitigated if you enjoy shopping. I didn’t used to like shopping, but since now I can shop on line, it’s just a matter of putting my laptop on my lap and logging in to Amazon, I think it’s fun.

Gozo Rabat
Gozo Rabat
5 months ago
Reply to  greglee

I once read a theory that shopping, for modern humanity, serves an emotional function similar to that of actual hunting for survival. Once I began “shopping” for lower brokerage fees, higher CD rates, diverse investment options, I found that it seemed to fulfill that need. I became somewhat-educated—AKA financially literate—along the way. Like many people here, I seem to have too-much wealth set aside for my future. (We won’t know if it’s too much until it’s all [my life] over, though, as economic disruptions can take many destructive forms. I’ll let my heirs be the judges of that.)

Regards,

(($; -)}™
Gozo

medhat
medhat
6 months ago

Insightful as always. In a strange way reading this I thought an apt analogy may be to approach personal finance the way Marie Kondo approaches home organization; keep what brings you joy. If good fortune gives someone the financial options, then keep that in focus and spend on what makes you happy, versus making otherwise unnecessary price/value calculations based on societal expectations. I must admit I share your frugality Jon, but also admit that I pretty much have never felt “deprived” in any material way as an adult. My parents, both since passed, attained a fair bit of material wealth in their later years, but continued to maintain a healthy appreciation of their non-material good fortune (health, grandkids, etc.) where even otherwise minor conveniences they continued to appreciate as “luxuries”. An anecdote I remember is post-retirement they wanted a small second car for around town errands, and bought a very inexpensive compact car. You would have thought they had won the lottery when they called me to let me know the “cheap” car they bought even came with heated seats and power windows! Yup, didn’t take much. But they were smart enough to know that they had “enough”.

Ken Bertagnolli
Ken Bertagnolli
6 months ago

The question: How much would you have after four decades if you invested $6 a day and earned 4% a year?
The answer: $216,404.75 (assuming 365 days a year and no leap years)

Gozo Rabat
Gozo Rabat
5 months ago

Mr. Bertagnolli, my own key take-away to your scenario is that once you begin making such a calculations, you may be drawn to make other, similar ones. Like the “stone soup” folktale, once you find things to add into the financial “soup,” you often keep finding more.

I once started an account for such “found money,” separate from all else that I considered savings or retirement. When I retired, that 30-year account had grown well over $100K. Just before the pandemic self-isolation kicked in, we completed a large addition/sun-room to our house. We sit in isolation, yes, but surrounded by trees and birds and sun and sky—all from money that we more-or-less found behind sofa cushions or in the value of cents-off coupons for items we’d needed to buy, anyway.

Regards,

(($; -)}™
Gozo

Jonathan Clements
Jonathan Clements
6 months ago

The result you get from such calculations changes depending on whether you assume investing at the beginning of the month or the end….

Ken Bertagnolli
Ken Bertagnolli
6 months ago

Good point. The value posted above was calculated assuming the $6 was invested at the end of each day. If you invest at the start of each day, the end result would be $216,428.47. Another important assumption with these values is that interest is calculated daily.

If your investment compounds monthly, the end results are again different: $215,707.95 if you invest the money at the end of each month; $216,426.97 if you invest the money at the start of each month. Here I made the simplifying assumption that $182.5 is invested each month instead of taking into account the actual number of days per month.

I was just curious about the compound interest effect in this example. No matter how you deposit the $6, compounding returns about 2.5 times your principal after 40 years.

R Holloway
R Holloway
4 months ago

Good reminders, but old habits die hard. After a lifetime of saving and living well within my means, I just can’t bring myself to spend $35-40K on a car like most of my neighbors, though I could easily afford to. “Splurging” and “happiness” are in the eye of the beholder. Some folks passions cost a bunch, others very little. And “wasting time” is not universal. I’m retired, and I actually enjoy researching how I can save a few thousand on a new car purchase, for example. (OK, ready for “Get a life” comments). I don’t spend close to the magic 4% of savings each year (more like 1% thanks to delaying SS benefits for my wife and myself), and yet I feel I have everything I want. My parents were adults during the Great Depression, and I think a lot of their habits rubbed off on me.

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