Kuta Beach

Kuta Beach

Monday, 28 December 2009

Outcomes-Focused Thrift

Many people who save money save in different ways. I notice that Trent over at The Simple Dollar has a collection of tactics that he uses, for example, how to make your own laundry detergent. Even Ramit from I Will Teach You To Be Rich has what he calls the Scrooge Strategy that is essentially just a collection of tactics on how to save money, so it is really no different to the other tactics out there. What distinguishes Scrooge Strategy from others is that Ramit claims that you should focus on cutting costs on things you do not like, e.g. credit card bills, but you should spend extravagantly on things you love, e.g. if you love latte or buying wristwatches. A few days ago I spoke about a friend at work who tries to save money by never buying items at retail price. She always went for discounts (see Beware of Christmas Discounts).

All these people are inputs-focused. They focus on a collection of methods that, when implemented, is expected to save them money. I do things differently. Instead of focusing on how to save money, I initially set myself a goal of saving at least 80 per cent of my take-home pay. That is, every payday I log into my bank account and save 80 per cent of whatever came from my employer. I then try to live on what is left. If I can, that is great. I may even consider increasing the savings rate to, say, 85 per cent and seeing what happens. However, after increasing the savings rate bit-by-bit for a while, you will inevitably notice that you reach a point where you just cannot save any more. This happens when you start to pay on things using credit card and when payday comes you find that after you have paid off your credit card bill you can not longer afford to save 80 per cent of your take-home pay.

If you do not save 80 per cent in one pay period, then simply make up for it by saving more in the next pay period so that the net effect is that you save 80 per cent. To do this you create a speadsheet to track how much you undersave and then make sure that you oversave. Below is a chart that I use to track whether I am reaching my savings target. As you can see, I have undersaved by about $500, which tells me that I will need to be super frugal for a while to make up for this lack of savings. When I am in a super frugal state, I tend to question everything I buy.

An outcomes focus acknowledges that your objective is to save money and you focus on a metric that matches exactly what your objective is. This I believe is better that an inputs focus that can cause you to forget what your objective is. For example, if you focus so much on only buying discounted items, you may end up buying so many that even if each product is 50 per cent off you end up still paying heaps in total and not saving much money at all.

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