Thursday, August 28, 2014

Why Being Cheap Costs More

Think being tight-fisted will save you money? Think again!

The difference between frugal and cheap is all in your head.

Well, more accurately, it's in your mindset!

The best way to characterize a frugal person is as someone who seeks the best value on a needed good or service. Note that I said "the best value," not "the lowest price." Value is a different, and more nuanced, concept. Simply put, value is the relationship between price and quality.

Many people assume that the highest-quality product is the most expensive--not true! Expensive products are meant to cater to a relatively few people. The point is that such well-known brands as Mercedes, Rolex, Starbucks, Ritz-Carlton, Bose, Hollister, and Apple make nice products that are priced on the higher end of the scale for their respective industries. There are cheaper (though not necessarily poorly-made) alternatives to each of these brands. 

The ones I mentioned here deliberately price themselves at the higher end of the market, because they're selling not just a product, but an image. If your laptop is a MacBook and you drive a Mercedes and you wear a Hugo Boss suit, you're announcing to others that you have money, and appreciate fine-quality products. They market themselves as tasteful, refined, elegant. And that's what you're paying for. The high margins on their products make such an approach even sweeter for these businesses! 

But such conspicuous consumption is well-documented. What is less well-documented is how to be frugal--to get quality products without paying the premium! 

There are two approaches here: one is to go with a different brand (e.g. a Toyota instead of a Lexus), and the other is to try to find a discount on the premium product. Both are valid approaches, and I expound on both here

Modified version of royalty-free image; original found on illustrationsof.com

But to get back to the original topic of this post: cheap is different from frugal, because a cheap person is one who seeks the lowest price on a good or service. (Contrast this to the earlier definition of frugal as one who seeks the best value). 

So, if you're Froogal--sorry, I mean frugal--and you're looking to buy a product (like a computer--my recommendations are here), you may actually go with a higher-quality option that costs a little more. 

To illustrate this point: a friend of mine recently needed to replace his sneakers because there was a hole in his old pair. He went to Wal-Mart to get a pair of cheap sneakers for $15. When I asked him why he wouldn't get a better pair of sneakers, he replied that it would be a waste of money to spend $100 on a pair of shoes, when they only last 3-6 months and his feet hurt by the end of the day.

This made my point for me: the cheap shoes he's worn his whole life are neither comfortable nor durable! A quick online search soon yielded deep discounts on Nikes and Reeboks that retail for $55, on sale for only $25! So, for a $10 increase in his bottom line, my friend could have had a pair of more comfortable, durable shoes from reputable manufacturers. The sneakers I looked at were also well-recommended by customers, cementing the idea that it's worthwhile to buy good shoes.

I have personally experienced both: when I was younger, I had cheap sneakers. One time in seventh grade, my mom came home with a pair of Iverson basketball sneakers--and when I put them on, it felt like I was walking on pillows! They were also durable, lasting me several years until I outgrew them (and replaced them with a bigger version of the same shoe).

Knowing my parents, they did not spend $100 on that pair of Iversons! They got a discount (certainly a big one!) on a pair of quality shoes, and I've been sure to get nice sneakers ever since!I appreciate the quality, comfort, and durability of the more expensive shoes precisely because I've worn cheap shoes. The difference is quite extraordinary!

So, bearing that in mind, I'll explain the title of this article:
Being cheap--going with the less expensive product, no matter what--can force you to buy replacements more often. If you buy the cheap shoes for $15 every three months, or a $100 pair of shoes every three years, you'll end up spending $180 on the cheap, uncomfortable shoes over that same three-year period! This is why it's an important skill to know when to get the pricier product! Of course, it's even sweeter to get that premium product when it's on sale! :)

My advice is to get the premium product for things that affect your health, quality relationships (not just romantic relationships, but good friends and family as well), for good financial/investing advice, and for electronics or other devices that you will use regularly. In these areas, it's worth ponying up some extra money for superior quality.

It's also worthwhile to get lessons and/or quality materials for a hobby that you've enjoyed for a long time and you know you won't abandon in a couple months (e.g. guitar. Nobody wants to play a crappy guitar. Get a decent one--if you KNOW you're going to continue to play, and not get bored and stop after a month).

Here are some other excellent takes on the topic of being frugal vs. being cheap:
http://www.mrmoneymustache.com/2012/10/24/frugal-vs-cheap/
http://www.iwillteachyoutoberich.com/blog/cheap-versus-frugal/
http://money.usnews.com/money/the-frugal-shopper/2014/06/20/5-major-differences-between-cheap-and-frugal
http://www.moneycrashers.com/the-difference-between-frugal-and-cheap/

Happy saving!