Think Dollars, Not Percents

I was talking to my mortgage lender the other day and I was trying to decide whether or not to move our closing date back on the house we’re purchasing. For those of you who don’t know, when buying a house, the closing date can have an impact on your closing costs. Part of your closing costs go towards paying insurance and taxes from your closing date to the end of the month. So if you close at the beginning of the month, you have to pay insurance and taxes for the whole month. If you close near the end, you get to pay less.

Anyway, at that point, our closing costs were estimated to be around $57,000 which includes our down payment. I figured that if I moved our closing date back a week, I could save a couple hundred dollars. While talking through the pros and cons with our mortgage lender, he made a comment that was something along the lines of “the money you save won’t make much of a difference to your closing costs”.

I was flabbergasted (vocab word of the week). Let me explain why.

In the situation above, I did the math and estimated that if we moved our closing cost date back, we would save around $300. $300 on $57,000 of closing costs would have amounted to a 0.5% savings on my closing costs. 0.5%. That’s less than the average return for savings accounts. If I told you I saved 0.5% on milk by driving to the next town over, you’d probably (and rightfully) call me crazy.

But we’re not talking milk in this situation. We’re talking about a house. 0.5% in this situation was $300. If I told you that you could save $300 by purchasing a washer and dryer from Craigslist instead of Home Depot (true), you’re more likely to be interested.

With that one comment, my mortgage lender essentially said saving $300 was not a big deal.

People make this type of fallacy all the time. When comparing costs and savings, you should always be thinking in terms of dollars. Though knowing what percentage you save is helpful in certain situations, at the end of the day, it’s how much you have in dollars that really matters.

Consider your groceries. I previously looked at the different prices for generic and name brand items. In that article, I found that name brand peanut butter is 112% more than the generic brand! Is the name brand peanut butter 112% better than the generic peanut butter? That would be a hard statement to sell to me. On the other hand, we’re talking about peanut butter here. The generic brand is $1.16 while the name brand is $2.47. If you told me the name brand peanut butter was $1.31 better than the generic brand, I’d be more inclined to believe you. Incidentally, I still choose the generic peanut butter regardless of whether I’m looking at dollars or percents.

But just as the high percentage above can be misconstrued, a low percentage can be just as deceiving. Instead of peanut butter, think about a new car.

Okay, maybe not new since I don’t think it ever makes sense to buy a new car considering you can save thousands by buying used. So we’ll say a gently used two or three year old car (end rant).

If I told you that you could pay 5% less if you went to the next state over to purchase your car, you might look at me funny. But consider what 5% of a car’s purchase price is. On a $15,000 vehicle, that’s $750! For some people, that’s enough to cover a good portion, if not all, of their rent or mortgage. I would definitely consider making my way to the next state over to save $750. So the point I’m trying to make is simple. Always consider the actual dollar amount that you’re spending or saving irrespective of any other amounts.

Another fallacy I often hear is “that’s not worth my time”. Most of us have heard that time is money and in many instances it’s true. But the phrase is only applicable if you would actually be doing something else with your time where you’re getting paid.

Think about your entire monthly grocery bill. If you could save 5% on your monthly grocery bill, you might think it’s “not worth your time” to cut coupons or compare prices. According to the USDA, a family of 4 can expect to spend about $200 per week on groceries. A 5% savings would result in spending $10 less per week. Why should you spend your time comparing prices when you would only save $10?

Say it takes you 15 minutes longer to grocery shop to get those $10 in savings. This would only be “not worth your time” if you would use that same time doing something else productive. If you had a business that you would spend that 15 minutes on instead then you may be right that it’s not worth your time to save on groceries. But if you would go home and watch 15 more minutes of cable on TV (which you should cancel immediately for Netflix or Hulu), then your time is probably better spent being a more conscious grocery shopper. If it takes you 15 more minutes to grocery shop to save $10, that actually comes out to an hourly rate of $40/hour. That’s a salary over $80,000. Sounds well worth your time to me!

$10 may not seem like much but think about what $10 can get you. $10 can get you 180 eggs at my local Walmart. 180! If I ate 3 eggs per meal and had that three times a day, I could feed myself for 20 days! On $10!

Okay, nobody’s going to be eating eggs for 20 days straight. But that same $10 can buy you over 3.5 gallons in gas. With today’s vehicles, that’s enough gas to move you over 100 miles from Baltimore to Philadelphia!

And that $10 savings is just from 1 week. We take that out to a whole year and suddenly, at the end of the year, you have $520 more dollars than you expected.

But if you’ve read any of my other articles, you know you should be investing your money whenever possible. If we invested the $520 we saved every year and got the average 9% return from the stock market, in 30 years we would have over $70,000. All from saving 5% on your groceries.

So saving $750 on a car is a big deal. Saving $300 on closing costs is a big deal. Saving $10 on groceries is a big deal. Even though these were all small percentages, it’s important to keep the actual dollars you’re spending and saving in mind. When you retire, it won’t matter what percent you saved when buying a house or the percent of your income that you saved to get there. It’s how many dollars you have in the bank.