Penny Wise And Pound Foolish: The Dangers Of It And How To Avoid It

Picture yourself walking into your bank and withdrawing all of your money in cash. After that you go home, walk into your bathroom and flick on the light. Next, you walk over to the toilet, lift up the squeaky seat and proceed to empty all of your cash into it before flushing. 

Flushing your money down the toilet sounds a bit silly and ridiculous, but it wouldn’t surprise me if you don’t do something similar from time to time. I know I have.

And the reason this happens is that it doesn’t feel like you are wasting money, and you certainly aren’t doing it on purpose. But a lot of people are penny-wise and pound-foolish when it comes to money.

This simply means that they are very careful with small amounts of money but then careless with larger sums. For me, it also applies to spending a lot on less important things and then skimping on things that matter a lot. Rationally it doesn’t make sense it do it, but it happens all of the time.

Pinching Pennies 6 Days A Week Doesn’t Matter If You Overspend The Last Day

Most people know the feeling when you’ve been diligently sticking to your plan to reach a goal when you phone suddenly rings and a friend wants to go see a movie which you know also means going out for dinner before or after.

Before you realize it, you’ve spent money you didn’t budget and end up taking one step forward and 2 steps backwards.

Or perhaps you’re focused on saving money so you’ve been packing your lunch for work, skipping the coffee runs, and even cancelling your cable subscription. You’ve even been working hard at the office in the hopes of getting a promotion and pay raise.

After a few months you impulsively decide to book a last minute trip to Miami with your friends to celebrate one of their birthdays. In true Miami fashion, you overspend on the hotels and since you booked last minute the flights end up costing you a lot.

When it’s all said and done, you would’ve been much better off not pinching pennies on a daily basis and then avoiding the calamitous last-minute trip that cost you a month’s rent.

Why do we make these decisions that seem like self sabotage? Is it that deep down we don’t think we deserve to have financial freedom or live without financial stress?

Unfortunately, the financial aspects might not even be the most important.

Don’t Be Pound Foolish And Skimp On The Most Important Things

When it comes to priorities, it may seem like keeping up with the Jones’s and having that shiny new car or new shoes is important. But in reality, few things are more important than your health.

Yet, when it comes to open enrollment season at work I always hear people asking what the cheapest option is. Wearing the latest and greatest clothes but opting for the worst health coverage doesn’t make a whole lot of sense in the long run.

Some of you might not be able to afford paying a copay to see the doctor when you are sick. This means that having an emergency fund is especially critical for you.

But you’d be surprised how many people don’t go to the doctor because they don’t want to pay a copay, even when they can afford it.

Those same people who can afford copays but would rather not see a doctor likely have no problem spending $30 on something else that likely won’t really affect their life (like a nice dinner).

And while the chances of having a small cough lead to a major health emergency are not super high, they also aren’t zero. And before you know it, you might end up owing thousands of dollars in medical bills, or worse…

However, not all unnecessary purchases are entirely the fault of the consumer or are even preventable with a solid amount of money set aside for an emergency.

Do Your Research Before Purchasing Protection Plans

When I was sixteen I worked at an electronics store called Circuit City selling computers. The store was one of the largest electronics retailers in the country and was the main competitor to Best Buy. With the advent of online shopping, the company wasn’t quick enough to adapt to the new retail environment and was driven out of business.

I would spend my days on the sales floor greeting customers, learning about their technology needs, and identifying the proper technologies for them. I was primarily responsible for selling desktop and laptop computers, but I helped customers with any tech questions they had.

The one thing my manager, Ryan, always stressed was the importance of offering and selling protection plans with each computer. He conveyed the fact that these plans were extremely profitable and had very high margins. He also explained how they benefited the consumer and potentially saved them a lot of money.

But the one thing I noticed after working there for several years was that very few people actually took advantage of the plan if they had one. And if their computer ran into problems soon after the purchase was made, it would likely still be under warranty.

Not All Extended Warranties and Extra Coverage Are Bad

Today, you can get extra coverage on your cell phone, computer, car rental, and virtually anything else that you purchase.

The point of this article isn’t to dissuade you from purchasing insurance. In fact, certain types of insurance are extremely important. In fact, anyone who is working in a career should probably get disability insurance, and virtually everyone who has dependents should have term life insurance.

But before purchasing any type of insurance you need to do your homework so that you know exactly what you are getting (this means asking a lot of questions) and whether you need it or not.

To give you an example of an easy mistake to make, I used to always opt for the extra coverage whenever I rented a car. It wasn’t until I was reading the benefits that my Chase credit card offered that I realized I was already getting insurance coverage whenever I used my credit card to pay for my car rental.

It’s just one example of a way I saved money by not having to opt for coverage I didn’t actually need.

Have you noticed a common theme here?

Staying Organized Is Key If You Want Financial Freedom

If you think of the most wealthy people that you personally know, they are likely pretty organized, right?

They keep their business and personal lives in an orderly fashion. You need to do the same.

Earlier, I gave the example of accepting your friends last-minute invite to get dinner and movie. Instead of being caught off guard, it’s essential to anticipate social activities so that you can budget for them accordingly.

Social relationships are extremely important. As humans, we are social creatures and most of us need or want social interaction, so for most people it’s not sensible to try to cut out social activities for the sake of saving money.

This just means you need to plan ahead and choose activities that fit within your budget. By planning ahead and choosing activities proactively, you won’t need to react to random invitations from friends who haven’t seen you in a while.

Plan Trips Well In Advance

Travel is one of life’s true pleasures so if you have the travel bug, I fully support you taking advantage and exploring the world.

Sadly, traveling can be extremely expensive. Which means you need to plan ahead and be diligent about maximizing your value in order to make it work.

There’s a million travel sites and blogs out there where you can get tips on how to travel on a budget and even travel hack (use credit card points to travel for a discount or even for free), so I won’t dive into those details, but the biggest thing is to plan as far in advance as you can.

Booking last minute will mean less seats remaining on planes, which means higher prices. It could also mean that the least expensive accommodations are sold out and you are left with the most expensive options.

Budget For The Most Important Things First

Your health is the most important thing. This means that paying for healthcare and dental care is not a waste of money if it means you’ll be more healthy. It also means that you should take the time to exercise and eat healthy.

Cutting corners when it comes to your health can have lasting consequences. One good example is your eyes and contact lenses. A lot of people who wear contact lenses opt for the cheapest lenses on the market without fully realizing that more expensive daily lenses like Acuvue Oasys or Dailies Total 1 are actually better for your eye.

These premium lenses allow more oxygen to reach your eye which means your eyes can ‘breathe’ more and get more oxygen. These lenses are more healthy for your eyes and can mean lowering the chances of getting a corneal ulcer. I recommend using Contacts Compare, a contact lens price comparison site, to find the lowest prices.

I started the site because I was sick of overpaying for contact lenses.

Watch Out For High Cost Recurring Purchases And Subscriptions. Be Dollar Wise.

Living frugally by limiting purchases or even having a no-spend month is all good and well, but it may not make much sense if you have a high overhead.

For example, a lot of people overpay for their cell phones when low cost options like Mint Mobile or Cricket Mobile are available. Here’s a review of Mint Mobile explaining how you can save thousands over time by cutting down on your phone bill.

Finally, make sure that you budget in order to give yourself a real shot at reaching your financial goals. Being penny-wise pound-foolish can lead you to make poor financial decisions. A budget is the perfect antidote. Money can’t necessarily buy happiness, but it can give you a lot of peace of mind.

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