Dysfunctional Financial Personality #5 - The Obsessive Tightwad
19 August 2006This post is part of a series looking at the worst of the worst of people’s financial personalities. We’ve already discussed the Peacock, who feels the need to spend in order to impress. We’ve also taken a look at the Mattress Stuffer, who is compulsively afraid of risk and the stock market. Then, we looked at the Foot Dragger, who waits until the last minute to save for retirement. Finally, we saw the Emotional Spender, who can’t keep from blowing money to feel good. Today, we’re going to look at a personality you might not think is a bad one to have: The Obsessive Tightwad.
How can it possibly be a BAD thing for your finances that you’re a tightwad? I mean, you’re saving all this money! You’re making your own clothes and cutting every 5 cent coupon you come across! You’re pulling cans out of the trash for the deposit - you made a full dollar yesterday from cans other people were going to WASTE!!! You knitted your own comforter! You drive around to garage sales, planning your haggling in meticulous detail beforehand! In fact, you can’t be dysfunctional - you’re the most financially-minded person you know!
Wrong. Now, keep in mind that I’m not saying that it’s bad to be frugal. I’m not even saying that it’s always bad to be a serious tightwad - but in some cases, it is a bad idea from a financial point of view. Why? Because the Obsessive Tightwad isn’t just a normal tightwad - it’s a person who does not understand the concept of opportunity cost.
So just in case you don’t, the very basic idea is this: any time and effort you spend on one thing keeps you from spending your time and effort on something else. Even if knitting that comforter didn’t cost you any money because you pulled the string out of the trash and made the needles from two old nails, you still paid something for it: your time.
The Obsessive Tightwads reading this right now are thinking, “So? I saved money! Who cares about my time?” Well, that’s where the “opportunity” part of opportunity cost comes in. Your time is valuable because you could be spending it earning money instead of saving money. What most Obsessive Tightwads fail to understand is that many of the things they do to save money take up so much time that they would have been much better off working an hour in a part time job. If you can make $6 an hour at the local Denny’s, and you spent an hour to concoct a home-made cleaning fluid for ten cents that you could have bought for $2, you have not saved $1.90. You have lost $4.10. You spent ten cents, and you wasted a chance to make $6. If you’d worked the hour part time, and bought the Windex for $2, you’d have $4.10 more in your pocket than if you tried to be a tightwad.
Now think about it from the bigger picture. Say you spend 10 hours a week being a tightwad, losing $4.10 an hour on average under this theory. That means that after the end of a year, you would have $2,132 more in your pocket by taking the part time job - money you’ve given up to try to wring every last penny you can save out of your household budget. If your goal is to improve your finances, there’s a clear rule here: if you can’t save more than you can earn in an hour, you shouldn’t be doing whatever frugal thing you’re doing. It’s a waste of not just your time, but the money you could have made.
I’ll offer a few caveats: First, you might just enjoy trying to save money. Some people do - they don’t really want to take a part time job and would, in fact, hate the kind of jobs they can get. So it’s perfectly all right to factor your own happiness into the picture and treat your frugality like a hobby. But if your real goal is money, you need to compare what you’re doing to the job you could be doing. Second, some people can’t easily get a part time job. There’s a reason that most frugal tips are targeted towards housewives - it’s because if you’re a stay at home mother (or father), it’s very difficult to do a traditional job and parent the kids. It’s all well and good to SAY go get a part time job - but if you do, you’re locked into set hours. You might need to be able to put down what you’re doing to help out the kids - you can do that with the tightwad techniques of saving money that earn you $2 an hour, but not with many part time jobs. With that said, here’s a few things you tightwads should keep in mind to avoid wasting money:
1) Ask yourself how much you’re going to save beforehand. If it’s a few cents, you shouldn’t spend an hour doing it. If it’s a lot of money, go for it. There’s another concept called “low-hanging fruit” - it means you’re often better off if you just do the easy stuff, or “pick the low hanging fruit” from the tree. It’s a lot harder to get the stuff that’s at the top of the tree - and you get a lot less benefit from each hour you put into working. So, do the easy things that save a lot of money - but don’t try to squeeze out every last cent if you’ve got another option.
2) Try to find a realistic way you could be earning money part time. This is easier than you think - even for stay at home parents. If you have any craft skills at all, you should be figuring out whether you can make anything that can be sold on E-bay. It might be a better use of your time to take up an artsy hobby rather than try to save every last penny you can. I spent a couple of minutes browsing through E-bay and found several kinds of items you could learn to make. There’s dollhouse furniture for sale there, wood carvings, wooden toys - all kind of things, that either a man or a woman could make. I’ll even give away a golden idea for the guys out there: make wooden rubber band guns. There’s only a few on E-bay right now, and lots of people would buy them. It’s not that hard to do - so there’s your niche. Find anything people want, that you can make, and sell to others. There’s a reason all societies eventually start to barter rather than do everything themselves - the village rubber-band gun maker gets very good at it, and makes them faster and better than everyone else. It’s a waste of his time to try to sew, or cook, or fix the car - because he adds more value doing the stuff he knows very well. It’s easier, and more efficient, to pay someone else to do that. This is an economic concept called “comparative advantage” that explains why trade exists at all.
3) Look over your family budget - and remember that you can only save as much as you earn! If you’re living on $20,000 a year, you don’t have that much fat to cut out of the budget. You’re probably going to be better off working in a job than trying to save money. If you make $80,000 a year, you can probably save a lot more - and it becomes more and more worth it to be frugal as your salary goes up. Another tip: big families get more benefit out of being frugal. Here’s another economic concept: economies of scale. Do thing once, it’s pretty expensive to do. Do it multiple times, it’s less expensive per time. So if you’re going around to garage sales to buy cheap clothes, the mother of five gets a lot more benefit out of it than the mother of one. The mother of five can spend an hour saving money on five kids worth of clothes - it doesn’t take much more time for her to do it. The clothes she gets will get handed down to save even more. The mother of one doesn’t get as much benefit - the clothes are used once and then she has to sell them herself. She also can only get at most one child’s worth of savings at one sale - whereas the mother in the big family can get more.
So there you have it. Economics 101 as applied to the Tightwad. As in all things, strive for moderation. The problem is not in being a tightwad - it’s in being so obsessive about it that you’re pinching pennies when you could be earning dollars.
Discuss this on the Free the Drones Personal Finance Forums.
One Response to “Dysfunctional Financial Personality #5 - The Obsessive Tightwad”
September 11th, 2006 at 8:49 pm
[...] We’ve looked at six problem personalities so far in the series on personality problems that tend to affect your finances. We saw the Peacock, the Mattress Stuffer, the Foot Dragger, the Emotional Spender, the Obsessive Tightwad, and the Revolving Door Romantic. Today we’re looking at someone whose problems affect both them and the people who love them: The Moocher. [...]