Last week in How Frugality Becomes Counter Productive I wrote about how increasing income was more productive than cutting expenses. But the main take away in the post turned out to be what I thought was a minor point?one that I added just before publishing: micro-frugality and macro-frugality.
Now I don?t know if I?m the first one to introduce that concept, but there?s apparently enough interest in the topic to warrant a deeper discussion.
So what are micro- and macro-frugality, and what implications do they have on our finances?
Let?s start by recapping the definition given in the original post:
“Micro-frugality. This type of frugality is searching two dozen expenses for savings in each in the hope that collectively they?ll reach the level of real money. While that may (or may not) happen, the effort itself is exhausting, and requires constant vigilance. It has us researching, analyzing, discussing and executing cuts in nearly all expenses that make up our financial lives, and the effort can easily rise to the level of a part time job”.
Micro-frugality has us cutting the ?rest of life? expenses?food, utilities, clothing, entertainment, travel, etc?the very spending habits that we often derive a sense of well being from. None of us need to be total spendthrifts in any of those areas, but micro-frugality has us looking for ways to squeeze out a few extra dollars in virtually everything we do.
It?s a process of looking for the best deals in many, most or all spending categories, and unless you were raised to handle your money in that manner, it can turn into a real job. And it?s not hard to see that this type of frugality has the potential to become a full blown obsession with money.
Many people use micro-frugality as a way of freeing up money to pay for macro-expenses, like a high priced car or an out-sized house. This is often how people end up being ?house poor?, living in an expensive home, but never having much money for anything else.
If after putting the micro-frugality ax on every expense in your budget, you still have a house payment that consumes 35% of your monthly after tax income, and a car payment that eats up another 15%–your budget will still be uncomfortably tight. The nickel and dime expenses have been cut to the bone, but the dollar sized expenses continue to drain your budget.
Again, we?ll start out with the definition given in the original post:
“Macro-frugality. This is cutting the two or three biggest expenses that have the greatest impact on your finances. If your house is costing you $2000 per month between the basic house payment, utilities and upkeep, you replace it with one that you could live in for $1200 a month. A car with a $600 payment is replaced by a used car with no payment.”
Macro-frugality takes aim at the biggest expenses. If the big expenses are under control, it?s often easier to manage everything else, often with less sense of sacrifice.
Consider the decision to own a home; most people choose to buy the most expensive one they can afford?and there are implications to doing that. Look at the expenses that tend to move in tandem with the price of a home:
- Real estate taxes
- Home owners insurance
- Homeowner?s association dues
- The type and cost of furniture you put in it
- The type and cost of the cars you park in the driveway
- And if I may, higher end homes often draw higher cost friends
Buying a home is never just about the cost of buying a home?there?s a whole battery of expenses that are set in motion. And once they are, it?s much harder to rein them in.
The same is true of a car. It?s not just the price of the car and the monthly payment. Insurance and repair costs also rise with more expensive cars. And more often than not, so do gasoline costs since higher end cars are generally less fuel efficient.
Macro expenses tend to affect a large number of micro-expenses?save money on the macros and many of the micros will take care of themselves. For this reason, greater budgetary control can be had by managing the macros more conservatively.
Which frugality type has the greater financial impact?
You might ask ?why introduce micro and macro components to frugality?why not just do both??
While we all need to live within our means, I?m of the opinion that doing both has the effect of putting you on an across the board, permanent financial diet. That might be necessary at certain times in life?unemployment certainly comes to mind?but sustaining it on a long term basis can sap the life out of you. Having control over our money isn?t just about saving and investing it, it?s also about enjoying at least some of it. That?s what makes it an either/or.
As you can easily tell from my analysis of both, my feeling is that macro-frugality is by far the better course. We control a few big expenses so we don?t have to worry so much about everything else. We?re free to concentrate on other issues in life.
A sense of prosperity is often defined by the freedom we have to spend our money as we please. Because it cuts the big expenses, macro-frugality leaves us with more money for everything else. With a lower house payment, no car payment, and no extraneous costs (boats, second homes, etc) we have more money in our budgets and in our pockets. We can choose to save it or spend it, but it?s the freedom of choice that creates the sense of prosperity.
In addition, since macro-frugality cuts down on the biggest expenses, we often have more freedom of action. For example, is it easier to start a business with a big house payment or a small one? Is it easier to make a geographic move with a big car payment or no car payment?
If you hit on a financial crisis in life, cutting the biggest expenses?macro-frugality?will have the most beneficial impact. Many people are losing their homes in the foreclosure crisis precisely because they attempted to preserve the home at the expense of everything else.
What?s your opinion? Frugality sometimes seems like the new cool in finance, but how much of it can we take? And where can we get the biggest benefit?with micro-frugality or with macro-frugality?
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