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Focus on Financial Tasks with the Biggest Payoffs

Posted: 05 Dec 2016 02:05 AM PST

Here's an interesting article from the NY Times titled How to Pinch Pennies in the Right Places. But to me the piece is more about allocating time properly to tasks that have the biggest payoff.

The article highlights how people often are lured into spending time and effort to get a big percentage off a purchase but may then ignore a better opportunity with a lower perceived "deal" that's actually much more valuable.

Some thoughts that highlight the points:

Consider this situation: You’re shopping for headphones. An electronics store has the model you want for $50, a reasonable price. But a sales clerk says: “You know our other branch has this item on sale for $40.” Going to that store will take 30 minutes, and you can’t buy the headphones for that price online. Do you go to the other branch? Before you answer, consider a slightly modified version of the same situation: Instead of headphones, you are buying speakers. You go to the same store and find the model you want for $400. Again, the price seems reasonable but the sales clerk says it’s on sale at the other branch for $385. What do you do now? Research by Daniel Kahneman and Amos Tversky, the psychologists whose work helped spawn behavioral economics, suggests that people are more likely to make the trip for the $40 headphones than for the $385 speakers.

At first glance, this makes sense. By taking the trouble to go to the other store, you can save 20 percent on the headphones and only 3.75 percent on the speakers. The bigger percentage in savings is more appealing.

Though intuitive, this way of looking at the choices is mistaken. In each case it will take 30 minutes to save some money. But with the headphones, you save $10; with the speakers, you save $15. It’s as if you had two identical job offers, but one paid $20 an hour and the other $30. Yet you consistently chose the lower-paying job.

So you actually save more with the lower percentage off, but that's not how most consumers think.

Now this is bad enough when we're talking $5 here and there, but consider this trade-off:

This kind of foolish frugality is common. Consider how easy it is to fritter away time surfing the web for, say, a great deal on a $50 pair of jeans. Yet many of us spend no time at all on our investments. The result is that we barely glance at the fees charged by mutual funds: Without thinking much about it, we will choose a fund that charges an extra 0.25 percentage point rather than spend the time to find a cheaper one. That’s reasonable on the face of it. What’s a quarter of a percent? But that seemingly tiny percentage difference can easily amount to thousands of dollars of lost money. We brag to our friends about how much we saved on the jeans — “30 percent off!” — never mentioning (or even registering) the money we threw away on our investments.

This is where it's a real killer. Imagine what 0.25 percent over hundreds of thousands of dollars and a few decades is worth. And yet we spend our time saving on the jeans. Ugh.

The book The Millionaire Next Door: The Surprising Secrets of America's Wealthy (review) includes the ability to differentiate between perceived and real value as a key to growing wealth. Their #2 point (of seven) on how to become wealthy is as follows:

They allocate their time, energy, and money efficiently, in ways conducive to building wealth.

These people spend time and effort where they can gain big (careers, businesses, investments, etc.) and where they can save big (homes, cars, etc.). Sure, they'll take 30% off jeans too, but they won't do it at the expense of the big-ticket moves that really drive wealth.

How about you? Are you focusing your time and energy in the right financial areas?


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