My counterpoint to Forget Frugality

I saw a reference this week to an editorial by Ramit Sethi called Forget Frugality. While he has some good points, I think some of his advice is counterproductive and even contradictory. He argues that you should focus on earnings and negotiation instead of trying to actively cut costs.

I really think you have to do a combination of the three, and you should start with what you have the most control over, which is your own budget. Here’s what I have to say about his seven strategies.

  1. Automate your finances. No argument here. If you save automatically, you’re less likely to miss the money. If you pay your bills automatically, you’re less likely to miss the money, less likely to forget, and less likely to wreck your credit score.
  2. Start investing early. This, too, is worthwhile. But guess how I was able to afford to invest early? By driving a 1992 Dodge Spirit as long as I could and not having a car payment. And one of the biggest mistakes I ever made was not repairing the head gasket on it when it blew. That would have been a risk, yes, but if the car had lasted three more months, I would have been money ahead. A few years later I got smart and bought a 2002 Honda Civic that I still drive today. Do the math on what I saved by not replacing that car three times like a normal person would. That car saved me enough money to buy a house. I’d rather have that house.
  3. Improve your credit score. Of course you want a good credit score, but if this saves you a ton of money, you’re probably doing it wrong. I also think if you set out to improve your credit score, you’re doing it wrong. My score is in the 800s and I’ve never done anything to try to improve it, though I could. I’ve just paid my bills. This is more valuable as a symptom than as a money-saving strategy.
  4. Land your Dream Job. That’s nice, but the problem with that is that your dream job could turn out to be a nightmare. I took my dream job about two years ago, and it wasn’t long before it turned into the second-worst job I ever had. Part of it was the job wasn’t as advertised, and part of it was that I didn’t exactly know what I was looking for. I have something close to my dream job now, but it took a while for me to know that was what it would be. Also keep in mind I’ve been doing this a long time now. I don’t recommend this strategy for someone in their 20s. It’s hard to get a dream job in your 20s, and by the time you get out of your 20s it may not be your dream job anymore. That’s not a knock on twentysomethings. Things change, and you grow a lot in that decade.
  5. Negotiate a raise. Negotiating a raise helps–when it works. My track record on doing this is about 50%, and there have been times when I’ve had to take a pay cut. My highest-paying job ever is still in my rear view mirror, but I’m happier now because I travel a lot less now than I did then. The author argues that saving $3 a day by making your own coffee instead of buying it at a coffee shop doesn’t add up to much, but by my math, that’s $1095 a year. Pre-tax, that’s $1259.25. That’s a sure thing, when a raise isn’t.
  6. Earn money on the side. This one is legitimate, but not necessarily as easy as it sounds. Each time I’ve found an easy way to earn side money, it hasn’t been long before the market got saturated with competition. The other thing I’ve found is that you usually have to spend money to make money, and if you’re waiting for a raise that’s not going to come as fast as you want, or as fast as a personal-finance author says it will, you may never get there. When William Nickerson told people to invest in real estate, he didn’t tell them to negotiate for a raise, he told them to keep their steady job, save up for a downpayment on a duplex, buy a duplex, live in one unit and rent out the other one, then save the money they aren’t spending on housing (since the tenant’s rent covers the mortgage on the duplex) to buy another property and repeat. Nickerson died a multimillionaire.
  7. Negotiate your rent. This is another tough one that doesn’t necessarily work. In a down market it may work, but not now. I have one vacancy right now, and based on the number of people interested in it, I think if I had five vacancies I could fill them. Several prospective tenants have told me recently they’ve looked at multiple properties and they all have multiple people interested in them. If a tenant came to me and tried to get me to lower their rent by $100 a month–the amount of money they could save by making their own coffee instead of buying it at a coffee shop–I would simply say no. I have no reason to agree to a cut in rent when I have to turn away qualified potential applicants every time I do have a vacancy. I’ll repeat what I said above: Do what William Nickerson did, and save until you have enough to buy a duplex, then buy a duplex, rent out the other unit, and enjoy living rent-free. You’ll make a lot more money and one less enemy that way.
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