Wednesday, September 17, 2014

Froogal Consumption

Froogal Consumption

As promised in my previous article on Why Being Cheap Costs More, I expound here on how to shop frugally. Whereas conspicuous consumption focuses on image and flash, Froogal consumption focuses on getting the maximum value for a quality product.

Value, rather than price, is a critical concept here!

Getting a good value means more than getting some item for a low price. It means "getting the item you want for the best price"--even if that product is a premium one!

Image from: http://www.josbank.com/menswear/shop/ContentView?storeId=11001&catalogId=10050&contentKey=GENERIC_CONTENT_KEY_14

Here's an exercise--which sale is the better value: a $600 suit for $300, or a buy-one-get-one-half-off deal on a $400 suit?

Answer: It depends. The math works out to be the same either way--$300 per suit. In one version, you have only one suit--but you've spent less money. In the other version, you spend more money, but you end up with two suits.

So, if your goal was to go out and get only one suit, then the first sale is a better deal. But if your goal was to get nice outfits for work, and you have a budget of $600--then the second sale is a better deal.

Many stores tend to offer sales like the buy-one-get-one-half-off, or the even juicier buy-one-get-one-free. Such promotions make the managers look better, because they move more product off the shelves. But if all you want is one product, don't be suckered into buying two! Though the unit price of each product is cheaper than the list price, you still typically end up spending more money than you would if you didn't plan to buy more than one.

To use the suit example above: if you will only ever wear a suit to interviews, weddings, and funerals, then you only need one suit. If the suit will only be used sparingly, you probably won't need a replacement for a long time, and you probably won't fit in the suit before you need to replace it. So why buy two? Even if the alternative is to buy a single suit for $400, you're better off getting the single suit and saving $200 ($400 for one suit vs. $600 for two).
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Another example, one that will probably apply to you at some point in life, is whether to get a new car or a used car. Even if you can truly afford a new car, the value play is to get a used car that is only a couple years old (and may still be under warranty).

I'll tell you a story to illustrate this point: my dad drove an SUV for a while. Things kept going wrong with it as the odometer approached 100,000 miles. At around the same time, his work moved to a new location that's about an hour away--too far for an SUV that got less than 20 miles per gallon! So, thanks to this perfect storm, it was time to buy another car. 

He ended up with a 2007 Honda Accord that was 3 years old at the time. It had just come off of someone else's lease, and had only around 20,000 miles on the clock. The car was in great shape, inside and out! It came with heated leather seats, sunroof, alloy wheels, a six-disc CD changer with premium sound system, alarm, keyless entry, and other goodies. 

Even though we all knew it wasn't a new car, it certainly felt like one! And this Honda went from a $28,000 list price (brand-new) to selling to my dad for less than $18,000. Even the math-phobic will realize that this $10,000 discount represents a huge discount from the sticker price (about 35%, to be more precise)! 

Who wouldn't like to pay 1/3 less for such a big-ticket item?! (Especially when it's a really nice one!)

http://www.carpictures6.com/ford_btaurus_bsho.html

Now, in 2014, can YOU tell whether or not the above car is new? Unless you're a real car buff, or you know someone who owns one of these, the answer is probably "no." So is it even going to impress your friends, neighbors, or co-workers if you get a brand-new car instead of one that's a couple years old? Probably not!

[In case you're curious, it's actually a 2010 Ford Taurus SHO. (I AM a car buff, so I saved this picture to my computer a while ago. I'm not sure where I originally got it, but this picture can be found at:  http://www.carpictures6.com/ford_btaurus_bsho.html).]

Even better, cars from many manufacturers have been getting more reliable over time. So, a Ford built in 2010 will likely have fewer problems after 10 years than a Ford built in 1990 did after 10 years passed. 

The same is true of most manufacturers. Traditionally reliable manufacturers like Honda and Toyota are still making quality products, but cheaper cars like Hyundai have been quickly catching up to them in terms of quality. 

As anybody who does serious research into car buying knows, a new car will lose thousands of dollars of value within the first year. Be smart--let someone else take the depreciation hit. Especially if you can still get a car that's nice, and reliable, and save thousands in the process!

So unless you have a very, VERY convincing reason to buy a brand-new car rather than a low-mileage used one that's in excellent shape, buying used is the way to go. 

And by the way, old luxury manufacturers like BMW, Mercedes, and Cadillac are not only more expensive than their non-luxury counterparts, they are also more expensive to fix! (And they're often less reliable. Especially Jaguar. They've developed quite a reputation for being unreliable. Seriously, if you want a luxury car like a Jaguar, BMW, or Mercedes, check out Lexus or Acura instead. Or better yet, just get a fully loaded Honda or Toyota that's 2-3 years old. Don't believe me? Check out the reliability data for vehicles from these manufacturers--Consumer Reports is a good resource). 

This leads me to another important way to be frugal. You'll pay a lot less for a product that doesn't have a luxury brand's nametag on it. Buying a Honda Accord with all the options is still cheaper than buying an Acura TL. One of these is flashy and has the prestige of a luxury brand, and the other does not. Yet, they are [mechanically] the same car. The styling differs, as does the badge. But most of the important parts (engine, chassis, etc.) are the same. 

If you'd rather pay more for the flashier option, then you're free to do so. (Though if this is the case, I'm wondering why you're reading this blog!) Many people prefer this option. But they will pay more for the privilege of having other people think they're rich. 

It comes down to this: would you rather make people think you have money, or actually have money? (This is not a false dichotomy. Unless you're part of a select group of highly financially successful people, you can't afford both). I think that frugal people would greatly prefer the latter--which is why they're interested in saving money! 

     "Would you rather people think you have money, or actually have money?"

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"But I don't want someone else's problems," I can hear some people thinking. "Why buy a used car when I can afford a new one?" Because that's not how the Millionaire Mindset works. You don't become rich by spending more than you have to. And, considering how much more reliable modern cars are than older cars, it's not likely that you're buying a lemon if you only get a 3-year-old vehicle. Take it on a test drive to an independent mechanic anyway, just to be sure. It's well worth the ~$100 fee!

The takeaway is that you should be considering how to minimize unnecessary expenses, even if you don't absolutely need to. That's how wealth is accumulated. And the less of your income you spend on unnecessary things (like an extra suit that you'll never wear, or a brand-new car rather than a slightly used car in good condition), the faster your wealth will accumulate--and the more freedom you'll have to leave your current job and take a risk on a new one, or to retire early!

Most rich people (the kind who have built a successful business over time) understand this principle. That's why rich people aren't usually the ones driving the nicest cars or getting the newest phone. And if you want to join them in wealth, then you'll probably need to adopt the same mindset--by being frugal, even when you can afford more. 

[Note that this does not necessarily apply to people who achieve sudden wealth and fame, like Lady Gaga, who spent $50,000 on equipment to detect electromagnetic fields in case ghosts decide to visit her; or Gucci Mane, who has spent millions of dollars on chains. That is, necklaces. Millions. On chains. To wear around his neck!!! Meanwhile, people are starving!]

Anyway, that's a different discussion. The point is that such spending is not sustainable in the long term, unless your income will continue indefinitely (as in the rare and unusual case of Elvis). Most people who build wealth build it more slowly and deliberately, and they frown upon such extravagance, precisely because they know it's not sustainable. 


Happy saving!