Cost Effective How To Be More Frugal

According to Macmillan dictionary the definition of being cost effective is “ giving the most profit or advantage in exchange for the amount of money that is spent”. In other words, get the greatest possible value when you spend money.

A Business Question For You

Have you ever wondered why it always seems so chilly in a grocery store?

Sure, produce and meat is sitting out, but most of those items are kept in refrigerated display cases that keep them cool. So??? It turns out that keeping the temperature in the store low helps keep the cost of maintaining the refrigeration system in the display cases. The ambient temperature influences how hard the cooling units have to work to keep down spoilage. If they are overworked, they can fail, and the repair cost is significant.

The Answer

It’s more cost-effective to keep the whole store cool.

Cost Effective How To Be More Frugal

In a previous article, I proposed that people should run their personal finances like a business. The point I was making is when you’re employing an asset like money (or time), you need to be as cost effective as possible.

It’s hard to admit this, but I have a few friends who still think being cheap and being frugal are the same thing, and that’s not so. Going back to my grocery store illustration, frugal is keeping the temperature in the store at a level that helps maintain the equipment. Raising the temperature to save a bit of money and then needing to spend those savings—and more—on repair is cheap, and that can be expensive.

Here’s a practical example for you: I know a guy whose car broke down, and he felt he needed to replace it NOW. He had enough money in savings that he could have paid cash for something moderately priced. He didn’t want to “break the bank,” so he scanned ads for a few days and found one that sounded good at a low price. He was so anxious to have a car (at a “good” price) that he bought it without thoroughly checking it out . . . . It was junk. It ran for about a week and blew the engine. This guy was not frugal. He was being too cheap. He didn’t take the time to inspect the car, and he’s paying for that. He couldn’t lay hands on enough cash to totally pay for another car, so he had to take out a loan. His loan payments are the price he’s paying for being cheap. He didn’t get quality for the money he spent on the first car. For the second, he’s paying interest on the money he borrowed. Neither of this guy’s purchases was cost-effective.

Quality Is Value

In the story I just shared, the guy wasted money because he bought a junk car. He only considered the price, not its condition. Of course, a frugal person buys what he can afford. That’s why we have a budget and plan and save so we can get value/quality for our money. We prepare to spend, so our spending can be cost-effective.

I don’t know if that guy actually had a fund for replacing his car or even a real budget, but he at least had savings he could tap; that was not the case when he had to buy the second car. I pretty sure neither purchase gave him much satisfaction.

Where Is This Going

I’m going back to the idea that too many people think being cheap is the same thing as being frugal. “Cheap” rarely gives satisfaction because “cheap” rarely lasts. And please, don’t confuse “cheap” with “buying on sale” or other forms of getting quality/value at a reduced price. That should give us satisfaction.

People need to be satisfied. Satisfaction is derived from knowing our needs will be met, our problems resolved and not constantly worrying about money (or, perhaps this is better, the lack of money). Financial satisfaction is the result of doing the necessary research so we can make good decisions about jobs, investments, savings, etc. Acting on that information, we should be able to fund a reasonable quality of life now and prepare for the future. Cost-effective (frugal) use of funds should yield a sense of satisfaction.

Satisfaction/Enjoyment

Satisfaction allows for the enjoyment of life at the moment. Financial security is a big factor in maintaining that enjoyment. We need to know (for example) when the car breaks down or when we need to go to the doctor, that we’ll have the money (either in cash or insurance) to cover the expense of taking care of ourselves. Also, a high probability of a pleasant, financially secure future can add to our sense of satisfaction NOW.

I want to return to the idea of treating our personal finances as a business: Businesses need to manage their money. They have bills to pay, equipment and facilities to maintain, and personnel to care for if they want to provide a good products to their customers. (It’s the exchange of money for a product that is the basis for a cost-effective transaction that satisfies both the customer and the business.) To a very great extent, in our private lives, we function as both the provider and the customer. We must pay for our lifestyle (take care of bills and save). We must maintain our equipment and facilities (in other words, “our stuff”). We’re also responsible for our personnel (ourselves: our bodies, souls, psyche, spirits—the list can go on to whatever extent we want to describe what make us us.) By “taking care of business, ” we can “buy” ourselves a lifestyle we appreciate. Good money management is essential to that transaction.

As in a business, we need a long term plan for our personal finances to take care of the things that need to be maintained and paid for. The way to make good financial decisions is to live by a budget, keep a spending journal, have emergency savings, sinking funds and planning. To maximize satisfaction, as the provider and customer in our personal life, we need to make all financial transactions (decisions) —commercial and private—as cost effective as possible.

Playing Both Sides

I’ve just said that there are two viewpoints in any of your cost-effective transactions: the business (or commercial interest) and the customer (or consumer). From a business’s point of view, the conservation of resources, which includes time and money, is an important element. A business doesn’t want to spend any more than what is required to conduct business. They want . . . . No, that’s not quite right . . . . They need to maximize their profit, and so will you if you are managing your personal finances as a business.

On the other side is the importance of customer satisfaction. So, within reason, the business has to be accommodating and the customer accepting. As a frugal person, it’s your business to sell yourself on a plan for LIFE. As the customer, you have to buy into that plan and work it. (That’s the basis for a budget.)

A Final Question

Where is the happy spot, the balance? Where is the line you draw to come closest to satisfying both the needs of business and the customer’s needs in your life?

Answer

Manage your finances as a series of business transactions dealing with your present and your future. Make every transaction cost-effective.

Conclusion

To be more cost-effective is how you can be more frugal.

Is what you are doing making sense? is this really the most cost-effective way of doing this?