It doesn't pay to pinch pennies

There's a big difference between being cheap and being value conscious.

Someone asked me this week why I don't have the bare minimum car insurance coverage in Alberta (and hence, spend more than is necessary). The reason? When we moved back to Alberta from BC, we found that we were able to insure both cars with full coverage in combination with our renters' insurance for almost the same total cost as insuring just one car in BC with basic coverage (and a very high deductible).

Thus, in terms of value, given that we were already saving a huge pile of money in relative terms, we opted to pay the minor incremental charge for full coverage.

I was also asked this week why I recently cancelled my cable. That's also very simple: it was a giant waste of money. I found it pointless to pay a monthly sum for a service I hardly used, which is why I now have Netflix (unlimited entertainment-on-demand and $7.99/month; easily one of the best decisions I've ever made, and one of the best services offered in Canada today). Excuse the grammar, but I don't not have cable because I want to save the cost of having it, I don't have cable because I don't use it enough to get my money's worth -- that is, my value out of it. That money is more usefully allocated elsewhere in our budget (like the Hawaiian vacation category).

Something that is odd to me, though, is that a lot of cheap people -- you know, the type who tip servers poorly and pinch pennies on miniscule expenses – tend to be extremely risk adverse.

Let's consider two people who make the same amount of money each year.

Person A (our cheap example) stiffs service staff, avoids parking meters, picks up change from the sidewalk, returns their cans and bottles to the depot, and religiously puts away $20,000 every single year into GICs and low-risk Mutual Funds, yielding 2% (we'll ignore taxes, for simplicity). After ten years, Person A has accumulated $223,374.

Person B tips well, focuses on cost reduction in the major expense categories (where the real damage is done), leaves dropped change on the ground, and gives their cans and bottles to children and the homeless. Person B actively invests in equities and fixed-income securities yielding 7% (easily higher, with effort). To achieve the same amount as Person A at the end of our ten year timeframe, Person B only has to put away $15,110 per year. This is almost 25% less than Person A's $20,000, and, provided the end goals of Persons A and B are the same, Person B's quality of life is about $5,000 a year better than Person A.

Our last trip to Hawaii in September cost less than that, and we stayed at the Mauna Lani Bay in an Ocean Front Room (rack rate $865/night USD). Of course, we only went because we scored a deal for less than $200/night (value conscious :D).

If Person A goes on vacation -- and if they did, they'd probably drive and stay at the Travelodge -- they put themselves even further behind Person B.

My point is, the world has way too many Person As. The tools are out there. Educate yourself, invest wisely, and become a Person B.

For the record, there is a Person C, who invests like Person B, but pinches pennies like Person A.

That person is called a giant asshole.