The Big or Little Difference

by Kevin on December 17, 2008

What decisions make the largest impact on your finances: huge, costly decisions … or smaller, every day expenses?

bigorlittle

In a perfect world you would be able to easily control your spending in both of these areas. Yet most of us simply can’t do that. It’s a lot of work to constantly stay on top of your spending. If you needed to focus on one area — big purchases or small purchases — where is your effort best spent?

Big Purchase Decisions

The large purchase decisions of life like buying a house, buying a car, or moving cities can have a huge impact on your finances. Since they are less frequent in nature (you hopefully aren’t buying a car every 4 months) you should be able to spend more time thinking about the purchase decision. The more effort you spend thinking and researching the decision the more likely it is you are to find a better deal or a way to shave some costs off of the purchase.

Let me illustrate this point with a quick example:

You and your spouse decide to purchase a new home. This is one of those “very few per lifetime” events, so you really need to do your research. You want a quality home in a quality neighborhood at a cheap price.

You are spending well into the six figures with this decision. Saving even 5% on the cost of the home is going to save you a ton of money.

You find two similar homes in similar areas: one is $250,000 and the other is $280,000. The difference is $30,000. That’s $30k you can save right now. Today.

Actually, the savings hits you in two ways: a smaller necessary down payment and the difference in payments over 30 years.

$30,000 in savings is huge. Absolutely huge. One decision, one big savings.

The same could be said of buying a car. If you can purchase a used car for $5,000 less that is very, very similar to the new model… that’s a one time, one decision, big savings of $5,000.

Little Everyday Purchase Decisions

The big decisions can save you big dollars, but you don’t make them very often. Could the small choices we make add up to enough to trump those infrequent big decisions?

Let me use the above example as we calculate the math. One home purchase decision could save you $30,000. That’s $1,000 per year over 30 years. If you divide $1,000 over 52 weeks the result is $19.23 per week. In essence if you could save $20 per week for 30 years you would save the same amount as if you purchased a home for $30,000 less.

Now I will be the first to admit this has its challenges:

  • It requires a lot of discipline to consistently cut $20 from your spending every week.
  • There are other savings  and costs involved with purchasing a house for $30,000 less. I’m not factoring in mortgage interest deductions, the time value of money, size of home (utility costs), property taxes, etc.

Which is the better method?

The obvious answer is both methods should be used. If you can’t manage that it depends on your lifestyle. Do you plan to ever own a home? Can you save a large amount of money by choosing a less expensive house? Do you have a lot of little expenses that you could easily cut if you put your mind to it?

Cutting back on little decisions is most likely better for you in the long run if you can keep it up. Cut out the daily Starbucks coffee and Panera bagel. Consolidate your trips to save on gas. Cook at home more often and cut back on eating out. Changing the little decisions is more along the lines of making a lifestyle change. You have more opportunities to save, more opportunities to slip up.

The big decisions are easier to tackle because they don’t come up as often. Buy the used car, buy the smaller home, wait to purchase the flat panel television. The opportunities to save are fewer, so if you slip up you miss a big chance to save serious dollars immediately.

We try to do both methods. We aren’t perfect, but living a more frugal lifestyle has definitely helped us as we reach toward higher financial goals. What about you?

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