Wednesday, June 15, 2011

Keep the Big Picture in Mind When Minimizing Costs

Many of us work hard to keep our expenses to a minimum. The problem comes when we focus too closely on one type of cost, such as taxes, without considering the big picture.

The Blunt Bean Counter has some great examples of people making big mistakes when trying to reduce their taxes. In one case, an investor managed to avoid probate costs only to get hit with capital gains taxes which were 15 times bigger.

Another example comes from our obsession with gasoline prices. It’s a good idea to look for lower gas prices, but some people take this too far. Saving 4 cents per litre on a 50-litre fill-up saves only $2. If you have to drive across town for the lower price and burn 2 litres of gas, you’re actually behind even before valuing your time and wear and tear on your car.

Saving money often becomes an emotional goal rather than a rational goal. If you’re satisfying your emotional need for certain types of savings but are actually losing money in the big-picture view, your finances may be headed south.

5 comments:

  1. The Blunt Bean CounterJune 15, 2011 at 7:49 AM

    Thanks for the mention Michael. I also find people are myopic on certain costs like gas in your example or taxes in mine, but are clueless about other costs that they pay no attention to and by the end of the year, those costs are significant (I will not site specifics, since I have a blog on those I will post at some point).

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  2. @Mark: I have an example for you: pizza delivery guys who have to supply their own vehicle. There is no way that the money most of them make covers the cost of running the vehicle and provides a decent income.

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  3. I find myself spending inordinate amounts of time comparison shopping on price, even when the price difference is inconsequential. The price differences were more pertinent when I was younger, but old habits die hard.

    I'm debating whether it's worth saving a dollar on gas to drive five extra minutes. I think for me, it makes sense, not due to the savings, which are debatable at best, but because I have lots of time. Also, I don't drive very much, and kind of enjoy it when I do.

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  4. @Gene: Your analysis of the value of traveling to save money on gas definitely takes into account the big picture.

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  5. Driving across town to save pennies on gas, toilet paper, or a handful of groceries never made any sense to me.

    Another part of this equation, you must also factor in how much your time is worth - running around so much. I run around enough :)

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