Friday, June 17, 2005

Should a Millionaire Be a Coupon Clipper?

I sometimes hear that how carefully a person watches his expenses is a sign of whether or not he has "made it," indicating that wealthier people spend their time and energy maximizing their earnings, assets and net worth rather than concerning themselves with "petty" day-to-day expenses. Under this view, any millionaire who takes the time to clip a coupon from a local supermarket ad to save a dollar on a gallon of milk is guilty of "thinking small," since he really should be focussing on how to realize an extra one percent (over the course of a year, that's $10,000 for a millionaire!) on his investment portfolio. In other words, why waste time clipping coupons when there are more important financial decisions to make? At least, that's how the conventional argument goes.

My own view differs from the conventional view presented above, since I organize my thinking around control and predictability of outcome rather than ranking the importance of decisions by their dollar amounts. I illustrate by selecting examples from different areas of personal financial management:

A. Expense: Applying for a credit card offering a 1% to 2% cash rebate on all purchases. Potential gain: $300 per year. Certainty: 100%. Expected gain: $300;

B. Income: Cancelling vacation plans at boss's request because an important project has come up at work. Potential gain: $3,000 increased bonus. Certainty: 50%. Expected gain: $1,500;

C. Investment: Shifting funds into a more risky investment with a higher expected return. Potential gain: $30,000 in one year. Certainty: 10%. Expected gain: $3,000.

Applying conventional logic to these three examples, one ought to be inclined to pursue B and C above more diligently than A, since their expected payoffs are higher, i.e., their outcomes involve larger amounts of money.

I arrive at the opposite conclusion, however, by engaging a "control factor" in my decision-making process. In line with the old proverb about how "a bird in the hand is better than two in the bush," I focus on what I can control (the bird in my hand) rather than devote time to endeavors beyond my control (the two birds in the bush). This control factor is what makes applying for the rebate credit card (in example A) a "no brainer" decision for me (I know that I will get a $300 rebate), while making the investment decision (in example C) a less obvious one (I dislike the potential downside that is beyond my control). Outcomes that I can control with very little effort are the "low hanging fruit" of personal financial management that I believe it makes sense to harvest, before venturing off into areas with less controllable outcomes.

Based on this "control factor" rationale, I find myself clipping milk coupons. I know with very high certainty that I can save a dollar by taking a minute to grab the coupon before heading out the door to the store. Regardless of how high one's net worth is, I contend that there will typically be seemingly "petty" decisions involving only very small amounts of money that clearly make sense to pursue. Could this be why Benjamin Graham's advice was to pick stocks the way you shop for groceries, or why Warren Buffett is known for picking up pennies he finds on the floor of the elevator?


Blogger Boston Kain said...

I would argue that your expected payoffs are not correctly calculated. They only take in the possible upside, but should also include the possible downside to generate an accurate estimate.

For example, in Example C there could be a potential loss on the investment of $15,000 with a 20% certainity resulting in a $3,000 loss. Adding this to the potential $3,000 gain results in an expected gain of $0.

Therefore, choosing option A is obviously the wisest decision. The same logic could be applied to Example B assuming a dollar figure could be applied to the value of the vacation.

Overall, I agree with the point of view you are advocating and I do enjoy your blog. Thanks for putting the effort into it.

7:51 AM, June 19, 2005  
Anonymous Anonymous said...

I'd like to add that many millionaires clip coupons, save leftovers, and comparison shop for generic food vs. national brands as a way of life. Sure, they could easily afford to spend more money, but I'd estimate that for many self-made millionaires, their frugal way of life was what helped them become millionaires in the first place.

9:03 AM, June 19, 2005  
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4:56 AM, November 04, 2005  
Blogger NO DooDahs said...

People have an image of what a millionaire is, that is totally unrelated to reality.

The typical millionaire owns a transmission shop, has grease under his fingernails, drives a 7-year-old Crown Vic, and shops at Wal-Mart. Or perhaps they own 8-10 rental houses. It's not all yachts and regattas.

I would say most millionaires clip coupons and watch their expenses carefully. You cannot accumulate wealth while destroying it in ostentatious display.

8:45 PM, February 26, 2006  
Anonymous Penny stocks newsletter said...

Why is one of such great wealth so concerned with saving money clipping coupons.

11:57 AM, November 01, 2011  

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