How To Think About Frugality Like An Economist And Save Money

by Hank Coleman

Frugality and using toilet paper like an economistIs being frugal worth your time and effort? Can the law of supply and demand work in your favor to earn additional savings on your everyday purchases? Did you know that you actually hurting the US economy by saving your pennies and being too frugal?

You may be surprised to find out how you can save money when you approach think about frugality like an economist. Here are a few lessons from your economics class and how you can apply them to your frugal life.

Toilet Paper Is Worth More Today Than Tomorrow

If you won the lottery, would you want the lump sum payment today or would you want to spread your winnings out over 20 or 30 years? Thanks to our friend, inflation, you would be better off financially by taking the lump sum payment up front today. A dollar today is always worth more than a dollar in the future because of the effect of the time value of money and inflation.

These same economic theories can be applied to frugality and saving money on everyday purchases as well. When you stockpile toilet paper by the case after finding a good deal at the grocery store or discount warehouse chain, you are not only incrementally saving money on each item’s cost by buying in bulk. You are also saving money by not paying higher cost of the products later due to inflation as well.

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Delaying the cost of inflation in the products you purchase is the equivalent of receiving savings at that same rate. For example, if inflation is 3% annually, you can receive that same 3% in savings off the future purchase price of the goods that you would have purchased by buying in bulk and delaying those future purchases.

Averaging Down Your Toilet Paper Purchases

Have you ever thought about how much each roll of toilet paper costs you? It is easier to see now that most stores put the per item cost right on the shelf label. But, what happens when a product goes on sale after you have already made the purchase?

You can save money on your total costs by using dollar cost averaging to continue making your purchases and earning a lower total cost as you buy more. These are all definitely things of the many of the ultra frugal think about when they make their purchases.

Like a stock investor, another good technique to use is averaging down your purchases when an item’s price is reduced after you have already bought it. If you buy a case of toilet paper for $20 one week and then the price drops to $16 the next week while the store is having a sale, you can dramatically reduce your overall purchases by continuing to purchase more toilet paper at the new lower price, offsetting the more expensive case you bought, and reducing your total cost for toilet paper in the process.

Your Frugality Hurts The Economy

Saving money and frugality can hurt the economy and actually hinder its growth. The Paradox of Thrift is a theory developed by the famous economist, John Maynard Keynes, which hypothesized that saving money instead of spending it doesn’t actually help the economy grow. Saving money may help you personally feel more secure financially, but it is the spending of our paychecks that increase the demand for consumer products, spur the subsequent building of new factories, and puts people to work in new jobs. The Paradox of Thrift may just point out a flaw in the benefits of frugality.

Supply And Demand Drives Frugality Too

The law of supply and demand drives most market prices for goods and services. Most consumers are well aware of its affect in most cases. The same law of supply and demand is at work in your frugal purchases too. If you want to get the most savings from being frugal, using supply and demand to your advantage can be a great ally in your pursuit of cheap goods.

If you have the storage capability, you can find great savings by buying items when demand is low. You should look for things that are out of season when demand is typically low and prices are lowered to reduce inventory.

For example, holiday shopping is best done right after the holiday ends. Look for cheap Christmas decorations or Halloween candy right after the holiday. You can stock up on winter clothes when the weather starts to turn warmer. And, the list of potential off season savings goes on and on.

Final Thoughts – Pulling It All Together

Like most financial topics, frugality has ties that are directly related to economics. You can make the most of your money by thinking about frugality like an economist. The laws and theories of economics intertwine with our lives whether we realize it or not. Understanding how they link to one another and using them to your advantage can lead to additional frugality savings.

Are you using economics to boost your savings? Did I leave out a couple of lessons from ECON101 class? I’d love to hear your thoughts in the comment section.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 593 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 3 comments… read them below or add one }

Adam

I really loved the article! I try to buy clothes when the demand is low and businesses are trying to sell off their inventory. However, thinking about things like toilet paper, certain foods, etc. like a stock investor might is an interesting idea and something I can’t wait to try!

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Money Beagle

Saving definitely hurts the economy if done too much. This is true because we’re a consumer based economy. I think there has to be a balance. Some savings will allow household wealth to slowly grow, which perpetuates the ability to spend down the line. You don’t want too much spending because this will be the certain precursor to a crash, but you don’t want too little, because then nobody’s spending and everything shuts down (and the saving stops anyways). Trying to keep this in balance is something that has kept thousands of economists and such employed over the years.

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Marion Rose

Savings is the fuel of Economy. Saved Funds are part of total money quantity. So there is no difference if you save your money or you spend it for the country’s economy, only for your economic state makes a difference. If you save it or spend it overseas is another issue. And I am an economist from Europe.

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