Where to spend and where to save? That’s a question many people who are financially sound often ask themselves when budgeting for expenses. The common theme among a lot of frugal investors is save whenever you can but this can be an error if rationalized in terms of importance of the expenditure. Let me illustrate with a parable that you could probably relate to…
Lets say you have a choice to get your brakes fixed at the garage but are considering 2 mechanics, after research you have found that mechanic number one has a 25% track record of fixing the brakes properly and is bargain priced at $25, the other has a 100% guarantee that your brakes will be fixed however is much more expensive at $100. If you consider the consequences of using the first mechanic (a chance of brake malfunction while driving… in other words death!) I would hope you have the right mindset of choosing the more expensive option!
That’s why I cringe when people with relatively large portfolios or businesses try to save on things such as accountants, lawyers or financial advisers that could have a huge impact on their investments. There are certain things you can be frugal with for example the fast food meal you need to buy for lunch, but a service like tax preparation is not somewhere you want to penny pinch. This is where in a lot of cases you get what you pay for, and if spending an extra hundred or two can save you 10x, that’s an investment is well worth making.
The key to analysis in whether to spend the money is looking at the negative consequence(s) that discount service will render if it is not preformed properly. Ask yourself, if that agent is boasting she will take care of your sale at a discounted price, why is that? Would she pay as much attention to your listing as someone paying more? Most of the time this answer is obvious, and the rational person will pay what someone is worth to ensure the results are consistent with expectations.
In summary I would say a discount on a happy meal at McDonalds I could reasonably accept without any suspicion but a discounted professional service likely has hidden pitfalls when it comes to quality and service. I always say “Spending a dollar to make ten is good math to me any day of the week!”
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