Don’t Overdo It

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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