Saturday, January 18, 2020

Penny Wise, Pound Foolish?

What does this old saying actually mean?

There is an old saying, "Penny Wise, Pound Foolish" which has been attributed by some to Robert Burton.   What does this saying actually mean?

Of course, first off, we realize this is a British expression, as a "pound" is not a unit of measure (anymore there) but the name of their currency.  In the USA today, this expression would be translated as "Penny Wise, Dollar Foolish."   Two great nations separated by a common language.

The phrase addresses a behavior present in all of us - to make little economies here and there, while ignoring larger profligate spending.   Nagging your kids to turn off the lights to "save money" while the furnace is set at 78 degrees heating, is an example of this.   The few pennies "saved" by living in darkened rooms is far outweighed by the massive amounts of energy used to heat a house.

The problem with this saying is that it implies that small economies are pointless, which in a way they can be if you are making huge unnecessary expenses elsewhere in your life.   There is a corollary quotation, attributed to William Lowndes, "Watch the pennies and the dollars will take care of themselves" (I not sure why he would say this, again, being British, he would talk in pounds).  These two thrifty quotes would seem to be at odds.   One is saying - or implying - that small economies make no sense when you are hemorrhaging cash in other areas of your life.   The second is implying that if you make small economies, the larger issues will sort out themselves.  Both are right - and wrong.

When I started this blog a decade ago, the economy had melted down, due to a lot of the same factors we are seeing today - excessive debt, funny-money loans "bundled" into investment-grade securities, and people in general just too tapped-out to buy more stuff.   All it took was some triggering event (in that case, the price of gas spiking to over $5 a gallon) for people to freak out.  Well, that, and all the banks and investment houses were suddenly underwater overnight - as they had invested heavily in these mortgage-backed securities.   But I digress.

My personal finances were not in bad shape, although business was starting to slack off.   Clients were telling me not to pay the issue fees on allowed Patents, which is like swimming 9/10ths the way across the Atlantic and then giving up.  While I was still solvent, we had a lot of debt and it seemed the harder I worked the more I was running in place.

At first I tried Lowndes' advice - watching the pennies.  And you read my early blog entries, you can see I was trying to "hang on" to big-ticket items like boats, cars, and a vacation home, by making small savings here and there on car insurance, health insurance, selling things off on eBay, and so on and so forth.   While this helped a bit, it didn't really change my overall financial situation much - but it did put in place a lot of savings that allowed me to retire later on.  I realized that recurring expenses, like phone bills, cable bills, and other "subscription" services can add up to a lot of money, every month, and over time.   A few dollars a month savings on your utility bill might not seem like a lot, but it amounts to hundreds a year, thousands a decade, tens of thousands a lifetime.

But pretty soon, I had pretty much tapped out all the "watching the pennies" techniques.  Well, not all of them.  There were some "sacred cows" I roped-off as being non-starters.   We had the makings of a rental apartment on our vacation home property ,and we could have rented that out and more than paid the taxes on the place, which would have saved us a lot of money ($8000 a year!).    We could have rented out the entire house for graduation weekend and made a couple of grand.   We could have carved out a second apartment to rent out during the school year (when we were not around) and made more money.  But we were obsessed (like most people) of "other people" using "our stuff" which in retrospect was worth little (clean out a deceased relative's house sometime and find out for yourself what "stuff" is worth - nothing!).

But the big sacred cows were the vacation home, the boats, and the hobby cars, which I thought were not major expenses as they were "paid for".   But then I realized that a house is a never-ending series of expenses, even if "paid for" and boats and hobby cars are no different - the biggest expense being depreciation, as even the best of boats and hobby cars are worth less over time.   So we engaged the "Penny Wise, Pound Foolish" advice and sold off a lot of expensive stuff - expensive in price, but also in cost of ownership - and ended up debt-free.

And thanks to "watch the pennies and the dollars will take care of themselves" we now had a lifestyle that was fairly inexpensive to maintain - although expense creep is always a concern.   So, in retrospect, both quotes - at odds with one another - are right and wrong, but for different reasons.

We see "penny wise" in a lot of everyday life experiences.   Suzie clips coupons to "save money" but instead of buying a late-model secondhand car and financing it through the credit union (or paying cash she saved up) she serial-leases new cars every three years, with each successive lease putting her further "underwater" with the next one.  Eventually, bankruptcy (or taking the bus) will be in her future.  But she is flabbergasted as to why. After all, she clips coupons and is "frugal" with her money.

Big-ticket items like that can swamp your finances, and all the "stingy" or "frugal" living cannot outweigh them.  I noted before how recruiters from "Reality" television have contacted me for one of their shows.  What they are looking for is "Penny Wise, Pound Foolish" people who will annoy family members with trivial savings.  This plays right into the hands of marketing people, who want you to think that saving any money is just dumb, so go out and lease a new car.

What they want us to take away from these two pithy quotes is that being "penny wise" is foolish, but that if you clip enough coupons, it doesn't matter whether you blow all your money on a Camaro or a mini-mansion.   There is, however, some kind of middle-ground here.

Perhaps a better analogy is the one I made early on in this blog about Life in the Rowboat.  We all have a financial rowboat that we live on, and we can use it to row places and reach our destinations in life (create wealth).   But all of these rowboats are leaky (expenses).   So instead of just rowing, you have to spend some time bailing - earning money to drain the water from these leaks.  If you spend some time plugging these leaks (penny wise) then you have to bail a lot less later on.  But if one of those leaks is of Titanic (literally) proportions, then plugging tiny leaks isn't going to do much for you, before the whole rowboat sinks (pound foolish).

I think the analogy is apt.  Because what happens to some folks is that they end up with so many small leaks - and a few large ones - that they give up rowing entirely, and spend all their time bailing out their boat - the so-called "paycheck to paycheck" people who haven't saved a dime for retirement (the rowing the boat to a destination, again) as they are bailing as frantically as possible and still taking on water.  Eventually they will sink (bankruptcy) but it may take years of frantic bailing before this happens.

Worse yet, many of these folks, out of spite for themselves or their spouse (or both) spend what little free time they have making more holes in their boat as if they wanted it to sink even faster.  Sounds crazy, but I see people doing this all the time, particularly in divorce situations.

If you can work out a balance between rowing, bailing, and plugging leaks, life can be a dream.   It helps if you have a spouse or family and all work together toward a goal instead of rowing in opposite directions or stabbing holes in the bottom of the boat (which as children, we did, not realizing how frantically Dad was bailing.  We thought that rowboat of his was a yacht!).

I am not sure what started me on this, but I was reading online some sites which tried to address what these catchy phrases meant, but got them all wrong (IMHO).   And I realized they have great meaning, but mean nothing at the same time, if they are applied improperly or used as post-hoc justification for bad behavior.   Saying, for example - as my friend did - that "You have to lease a car when you're poor!  It's the only way you can afford one!" is a prime example of this "Penny Wise, Pound Foolish" thinking.   And sadly, this sort of thinking permeates our culture.