On Being Cheap

I read an article on Yahoo! news recently that ruffled my feathers a bit.  It was supposedly a litmus test on whether or not you're "too cheap."  One if its pieces of advice was to caution readers that buying items on sale was frugal, but buying everything on sale was just plain cheap.

Exactly, Yahoo! news writer.  The only way you and I differ is that you see that as a bad thing.

To me, any item that is priced lower to comparable products is cheap.  As a consumer, my goal is to purchase ONLY those items that are cheap.  In other words, as much as possible, I want to be paying lower than market value. This is true whether we're talking groceries or automobiles or real estate.

For that matter, it's as true for me now when I'm broke as it will be when I'm wealthy.  Financial guru Robert Kiyosaki regularly admonishes, "Remember, you make your money when you buy a home, not when you sell."  Or, more commonly we hear, "buy low, sell high."  Buy low and make money for appreciating assets; buy low to lose less for depreciating assets.

Yes, I aspire to be cheap.  That's how I bought my car for about 30% lower than blue book value with only a week to shop.  It's why my husband and I built our computer from parts.  It's why I clip coupons and subscribe to my local grocery stores' weekly ads.  And you know what?  I'm not going to stop being cheap just because I have more money.

Living cheaply doesn't have to mean taking a vow of poverty.  To throw some credibility back to Yahoo!, I loved their more recent article about a man who was living a life of relative luxury on $30,000 a year.  This is a guy who learned not to look down his nose at the word "cheap."

However, while I applaud that he got the first part right (cutting his spending to buy the same products for less) he falls into the typical American trap by using his powers for good when he could be using them for great.  The best example is what he did with his housing.  Let's take a look:

Income: 30,000
Housing: got a great deal, mortgage payments are under $500 for a $200,000 home  (good deal!)

Now, let's take a look at today's current housing market.  He got a HUD home.  These are undoubtedly great deals, and there are a lot of other possibilities in almost every market.  But he opted for one that was $80,000 and required some work.  What if he'd looked for a home that was worth $100,000 and got it for $50k?  These are not unheard-of price breaks, and many homes like this can be found in beautiful, safe areas.  A $50,000 mortgage might only cost around $300 a month.  That's $200 in savings, every single month, off the $80,000 mortgage.  Not a world-changing difference, but $2400 a year, or 8% of his annual income.

My point is that too many of us know how to be cheap, but instead of using that knowledge to make our current quality of life less expensive, we're using it to buy more than we could otherwise.  This isn't inherently evil--it's just not a million-dollar strategy.

In the above scenario, what if Mr. 30,000 were to invest that $200/month into his Roth IRA?  Even assuming a pretty modest rate of return (8.5% annually) he'd have amassed $352,251.31 in tax-free money after 30 years.  That's a third of his million right there!

Let's go a step further: he mentions in his article that he spent $150/month on a car payment.  What if he'd bought something more affordable that allowed him to pay cash?  Now he can invest $350/month.  What's the payoff there?  A staggering $616,439.79!  That's like an annual salary of $20,000 for 30 years, at the price of $350/month.  Honestly, can you afford not to be cheap?

The guides I'm writing on spending are designed to help you cut back on common expenses, but it's up to you what you'll do with your savings.  Sure, you can use them to buy that flat-screen t.v. you always wanted...or you can use them to invest in your own future.

So, how badly do you want to be a millionaire?