“Penny wise, pound foolish” is an old British saying that means “Don’t be careful when it comes to spending small amounts of money, but careless when spending much larger amounts.”
Penny wise moments
Last night I had one of those “penny wise” moments. I was doing some online shopping, after finding the clothing pieces I need (well, need is a strong word here, looking at my closet full of cloth, hard to make that claim, but that’s a post for another day). Back to shopping, the total came out to be about $130. As I was checking out, there was a shipping charge of $9 and a “helpful” messages indicated that free shipping for orders $150, all I need to do is to spend $20. Well, being the “smart shopper” that I am, that sounds like a good deal. So I started to look for something else to fill up my basket. An hour later, I finally completed the order and saved myself the $9 shipping. So by spending additional one hour and additional $11 dollars getting something I didn’t need, I saved $9 dollars. Was that one hour time well spent?
Think about the last time you fill up you tank of gas, did you drive around several gas stations to find the cheapest guy. How long did that take you? 5 minutes. How much did you save? Say it was 5 cents cheaper and you have a 12 gallon tank, that’s a saving of 5×12 = 60 cents. That’s 12 cents per minute or 12×60 = $7.20 / hour, congratulations, you have made less than the minimum wage of $7.25.
I’m sure we all have a a few moments like that.
Pound foolish moments
In contrast, what about those “pound foolish” moments? After writing the 2013 Financial Review, I became very aware that I wasn’t spending time on the right financial matters. For example, I had quite a bit of money sitting on non-interest bearing saving account. With a few clicks, I could have easily moved the money into an interest bearing account. Even at 0.75% interest rate, for $100K, I could have made $750 for the year, a much better return for my time than my free shipping penny wise moment.
Likewise, when was the last time I looked at my 401k plan, and how much time did I spend on analyzing the performance and perhaps do some rebalancing, even though that decision impacted thousands and thousands of dollars. The last time I made a $10,000 stock purchase, I spend 30 minutes in making that decision vs. I spend an hour on how to spend $9.
Why don’t we behave more “pound wise”?
After talking to friends and family, I realized I’m certainly not along in these penny wise, pound foolish moments. Why do we do that? Reflecting upon my own behaviors and those of my friends, I came up with three reasons.
1. Lack of knowledge
Most people knew very little about finance and managing money. For example, 529 plan for education. life insurance, living trusts. 401k, IRA, Roth IRA etc. Many of us may not even know what it is, why we need it and how to go about it. To overcome that, we need to research and learn. This is the case for me for setting up a living trust. The procrastinator gets the better of us.
2. Lack of urgency
For many of the these major finance decisions, usually there isn’t a deadline. These are important decisions, but no urgent. Going back to the 401k example, do I really need to get it done today? The answer is it can wait , there is always tomorrow, next week, next month.
In comparison, for the small decision, there usually is a deadline. I need to get that tank of gas now. I need to buy that 3D TV for Superbowl next month. We ended up spending much more time on the smaller decision with more urgency, and defer the major but less urgent decisions time and time again.
3. Lack of short term gratification
Often with these major decisions, the impact is only seen months or years down the line or never (in the case of life insurance), there often is no short term gratification.
For example, you finally made that purchase on life insurance, in the short term, all you can see is that you are shelling extra dollars every month. How do you know that was a really good decision?
Or considering buying a rental property after months of research and work, great job, right? Not really, now you need to rent it out. That’s more to research and learn about how to find a good tenant and how to be a landlord. Or perhaps something unexpected broke in the property, you need to spend extra money to fix it up. In the short term, all you can see is the extra energy and money you are putting into the rental without seeing the return. It’s easy to question did I do the right thing?
Now comparing that with the smaller decision like buying the 3D TV, after a few hours of research, you got a good deal and saved $300. Now that definitely deserve a pat on the back, doesn’t that feel good! That’s short term gratification. The lack of short term gratification makes it more challenging to focus on the major financial decisions.
Aiming to be more “Pound Wise”
Becoming aware of this “penny wise and pound foolish” behavior help me to recognize my natural inclination and where I need to make a push to alter my behavior. My goal for the rest of the 2013 focus my limited time on the bigger financial matter and not sweat the little things — to be more “pound wise”!
Do you have a penny wise, pound foolish moment you like to share?