Wednesday, September 21, 2011

Am I saving money?

I've written before about the difference between "saving money" and "spending less money".  This idea is so important that I want to write about it again.

It was a recent newspaper column that brought this idea back to mind.  A New York Times columnist, Nicholas Kristof, wrote this about a Kenyan woman who sewed her way out of poverty:  “There is growing evidence that the most powerful element of microfinance is not microlending, but microsavings, and that’s how Jamii Bora [this support group] starts:  it encourages members to save small amounts, perhaps just 50 cents a week.”

A lot of people who hear that I'm a tightwad want to know how to get stuff cheap -- but then they want to get more stuff.  Here's the problem with that approach: if you're used to getting one cute dress for $100 and you learn to buy ten cute dresses for $10, you haven't saved money.  Either way, you've spent $100.  [This example gets even more ludicrous if you use my own standards for prices, and you buy two hundred dresses for 50¢ each].

The true power of "saving" money happens when you do one of two things:  either you really do save it (put it into the bank), or you "invest" it back in your family.  Here's an example of an investment:  with some money we'd managed to set aside, I paid about $400 for a share in a CSA (community supported agriculture).  This $400 provided vegetables for our family from May through the end of September.  I can't estimate the nutritional value of the locally produced, organic vegetables.  Because the CSA replaced both our previous grocery-store-bought vegetables plus some of the meat, I am guessing we spent at least $200 less-than-usual during the next six months.  That is, six months later we had $600 ($200 + $400) set aside.  Try earning 50% return on stock-market investment in six months, and you'll see why home investments are so powerful!

We used that $600 to purchase a freezer.  The freezer, unlike the vegetables, is something we wouldn't have purchased anyway.  The freezer has allowed us to preserve a lot of food (including the inexpensive corn and hamburger that I wrote about in late August).  Already, it has allowed us to purchase and then preserve bulk-bought, nutritious, locally produced food.   I'm guessing we have "saved" about $150 on food so far, so if this continues, we can expect that the freezer will pay for itself in less than 4 years.  Once again, the Dow Jones pales in comparison.

The truth is, you need to have money to save money.  Buying in bulk or buying a freezer to store cheaply bought food is expensive, initially -- it costs less in the long run, but costs a LOT more up front.  If you keep buying cheap things you don't need, you're not saving money.  But if you set aside money you would have otherwise spent, you can use it to make strategic investments in your own household.  And that's the true value of the frugal life.

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