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Rabu, 21 September 2011 | 01.16 | 0 Comments

The Simple Dollar: “Financial Balance and the 80/20 Rule” plus 1 more

The Simple Dollar: “Financial Balance and the 80/20 Rule” plus 1 more

Financial Balance and the 80/20 Rule

Posted: 20 Sep 2011 01:00 PM PDT

One of the most fascinating things I’ve discovered since starting The Simple Dollar is the 80/20 rule, also known as the Pareto principle. Simply put, it means that 80% of the effects comes from 20% of the causes.

It’s perhaps easiest to explain this principle by giving you several examples of how I see it popping up again and again in my life – and how I use my understanding of it to my advantage.

80% of our total grocery bill comes from 20% of the items. This is actually true. If I take a typical grocery receipt and count only the top 20% of items in terms of cost, those items will make up close to 80% of our grocery bill.

Thus, if I want to save money on my grocery bills, I need to address those items instead of the staples. Is this expensive item really the best bang for the buck here?

You don’t save a whole lot of money by fretting over the items that cost less than a dollar. You save money by not buying (or finding a less-expensive equivalent to) the ten dollar items.

80% of my clothes-wearing is done by 20% of my clothes. I usually rotate about five pairs of pants and about eight shirts all the time until something wears out. If I actually look through my clothes, I own substantially more shirts and more pants than that.

So why buy them? Why own them? Eight shirts and five pants gives me forty outfits – and more if I combine some of the shirts together into a layered look.

Simply put, I don’t buy new clothes unless they’re on sale or at a thrift store, period. If I do pick up new clothes, they will simply wait to go into the normal clothes rotation until another item wears out.

80% of my time in my home is spent in 20% of the space. Think about it. How much time is spent in your bed? How much time is spent in your favorite chair? For most of us, that eats up the vast majority of time they’re in their living quarters.

I spend most of my time in my home either at my desk in my office, in my bed asleep, or in the family room. I spend very little time in the rest of the house.

The only reason to have a large home is so that you have room to store lots of stuff.

80% of my entertainment enjoyment comes from 20% of my collection. I tend to re-read my favorite books, re-listen to my favorite albums, and re-watch my favorite television shows and movies fairly regularly. I’d far rather watch the run of Freaks and Geeks again than a new episode of most of the things currently on television. When I’m listening to music, I’m much more likely to throw on an old Pearl Jam CD than anything new.

This realization has moved me towards trying to find free or very inexpensive ways to expose myself to new media. I use the library. I watch free samples online. I read free sample chapters of books I’m interested in.

This way, I’m not actually investing my money into something that doesn’t click deeply with me.

To put it simply, the reality of my behavior leads me to frugality. I just have to sit down, look at what I’m actually doing, and make sensible financial choices accordingly.

Frugality and the Idea of Work

Posted: 20 Sep 2011 07:00 AM PDT

This note from Phil left me thinking.

You often talk about “frugality by the hour” and mention the hourly rate for doing something frugal. Like you’ll say that you can earn $12 an hour if you make your own laundry soap.

I think that’s a really poor analogy. When I’m not at work, I don’t want to spend my free time earning more money. I want to spend it having a life. Maybe you enjoy spending your free time making laundry soap, but most people don’t.

The last time I made laundry soap, I literally made it during the commercial breaks while watching Fringe. I boiled the soapy water during a show segment, mixed things during the commercial break, and sat there watching the show while stirring the bucket full of soon-to-be laundry soap. It didn’t really eat up any devoted time at all, and it doesn’t have to for you, either.

Still, Phil brings up an interesting point that I think has more to do with perception than anything else. If you see some sort of frugal tactic broken down to how much you can save per minute or per hour of time invested in the tactic, our minds are drawn both to the reward and to the cost of the method.

Let’s take that laundry soap. If you can save $5 from making a bucket of it and that bucket takes fifteen minutes to prepare, you’re immediately balancing the $5 versus fifteen minutes of your time doing something you might not necessarily enjoy.

For some people, the $5 will be more valuable. For others, the fifteen minutes might be more valuable. It’s a judgment call.

Given that, though, I would suggest considering a few more things when making up your mind about a frugal task.

Can it be done while doing something else? A great example is what I mentioned above with the homemade laundry soap, made while watching Fringe. I would watch Fringe anyway. I just happen to be making homemade laundry soap while doing so, thus the fifteen minutes invested in the laundry soap basically disappears.

Can it be done in a group setting? One thing that I’ve seen families do together is that they’ll spend part of Saturday together working on projects, such as preparing a bunch of meals in advance or doing yard work projects. Not only does this get things done that need to get done, it also provides a great social setting. Have you ever considered spending a Saturday with friends making a bunch of freezer meals?

Can it be done as part of “family time”? For us, that usually means that we can incorporate the kids into the project. Some tasks work well for this and get the kids deeply involved, while others end up being more trouble than they’re worth. I generally find that, at least for our family, garden work goes very well with the involvement of the children, for example.

The idea behind all of this is that for us, frugality is simply a normal part of life. We don’t sit around trying to fill every hour with laborious and boring tasks that enable us to save six cents. That doesn’t benefit anyone.

Instead, we find frugal things that complement what we would already be doing in our life. The fact that it’s a great way to reduce our spending is just a kicker.

When we’re trying to decide what to do as a family, frugality is a part of that equation, but just as important is that it’s something we’ll all enjoy and that our children will get something out of that will help them grow in some fashion. Often, we can find things that do all of this, like working in the garden or making soap in the kitchen.

When we want to spend time with friends, why not spend several hours together making meals in advance or helping each other with projects? It’s a great chance to socialize and to help each other.

When we’re doing something for enjoyment, like watching a television show, is it possible to easily do something else that saves money? Sarah, for example, often crochets while we’re watching a show. I’ll do things like make laundry soap. We’re still doing fun things that we’d do normally, but we’re adding in something that will save us some nickels and dimes along the way.

Frugality isn’t our life. It’s simply something that complements life while opening up opportunities in the future.

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