Get Sorted: Why frugality is overrated

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We save here and scrimp there, but are we really getting ahead?

"Eat your dinner - there are children starving in Ethiopia."

Around the table as a kid, every now and then we would hear about malnourished overseas children, especially when we were getting urged to tuck in.

We would glance at each other, knowing full well that, if we didn't eat those Brussels sprouts, there was no way they would ever be packed up in a chilly bin and shipped to those needy children anyway. Our eating or not didn't have anything to do with Ethiopia or anywhere else.

The thing is, these days we can focus all we want on frugality, but we may not really be getting ahead financially. The two are as separate as those Brussels sprouts were from Ethiopia.

By now, skipping coffees to save money has become a cliché in personal finance. You can scrimp and save, but do those extra dollars ever get put to good use? Or do they just get absorbed back into the black hole of everyday spending?

Now, it's quite satisfying when you get to the end of the grocery shopping and the receipt tells you in bold letters how much you've saved. Good job!

But we know that our brains also tend to use those savings as an excuse to buy more. We trimmed here, so now we can splurge there. (This can work the same way when we buy earth-friendly products too, unfortunately; we did our part there, so we can ease up a bit somewhere else...)

This is one of the ways that "loss leaders" work (those teaser rates used in advertising). We get pulled in to get the good deal, and then we end up coming out with much more than we ever intended.

This sort of thing happens with the big money choices we make too, like where we live or what we drive. When we came into a great deal one time and were able to save tons on rent over a year, I ended up justifying all sorts of new expenses because I wasn't paying so much!

All of this confirms why "paying yourself first" each time money comes in works so well. To really gauge if you're getting ahead, your finances need to be growing. Try this net worth calculator and see if you are trending up... or just treading water.

Get Sorted is written by Sorted's resident blogger, Tom Hartmann. Check out the guides and calculators at Sorted — brought to you by the Commission for Financial Capability — at sorted.org.nz.