The Refusal To Think Conceptually

An effective way to ignore someone else’s wisdom is to refuse to think conceptually. If you can get away with treating someone’s point as an isolated and overly literal statement, then it is more likely to seem weak, shallow, vapid, or ridiculous. Once having managed to dismiss the point as preposterous, one no longer has to worry about its truth value.

I thought about this while reading David Henderson’s latest blog post at EconLog. The post is all about how, if one commits to reducing costs, living frugally on the margins, and making modest but consistent investments, then over the course of a lifetime even people with very humble incomes can save enough to become millionaires. He’s right, and that’s a fact.

But Henderson argues against a man - Tim Herreira of the New York Times - who refuses to think conceptually. Here’s Herreira:
So I feel like we’re in this weird bubble where a lot of personal finance advice is centered around tiny expenses, like coffee, snacks, occasional lunches or other small indulges. I hate it! Those are usually the things that make life worth living!
Henderson quite effectively responds by showing that the daily $4 expense of a Starbucks coffee, if foregone for a year and invested instead, soon yields $25,000. But Herreira’s problem isn’t that he doesn’t understand this. Herreira’s problem is that he thinks this conversation is about coffee.

What I mean is, there are people in Herreira’s position who don’t drink coffee at all. For them, the daily indulgence they make might be something else, like a candy bar, or an expensive shampoo, or a larger-than-necessary car lease. The daily indulgence could be anything, really. It doesn’t have to be coffee. The coffee isn’t the point.

The point is that there is some expense in your life, somewhere, that you won’t miss giving up. Maybe Herreira loves his coffee so much that he’s not willing to invest that money instead. Fine. Chances are pretty good, though, that he’s spending more money than he has to on something. Wherever it is that he’s willing and able to reduce his expenses and invest the difference in his future, that’s what he should be doing. And if he does this on a consistent enough basis, then he, too, can be a millionaire one day. That, not coffee, is the real point.

Part of this, I must admit, is the fault of “financial gurus,” who are largely incapable of describing savings in terms of opportunity costs.

Here’s an example: I drink two fancy lattes absolutely every day. On one level, that’s probably even more indulgent than Tim Herreira’s daily Starbucks habit. The difference with me is that I make my lattes at home, using a $12 range top espresso maker and coffee that I buy in bulk and grind using a small electric grinder. My lattes cost me pennies, not dollars. If Herreira is correct that these small indulgences make life worth living - and when it comes to coffee, I happen to agree - then doesn’t it make sense to economize on your passion? Doesn’t it make sense to figure out how to drink as many fancy lattes as possible at the lowest possible expense? That’s what I do, and it’s really paid off. I save a ton of money while still maintaining a quite decadent daily coffee ritual.

And don’t even get me started on my daily smoked salmon omelet.

The opportunity cost of giving up your daily Starbucks habit doesn’t have to be “drinking no coffee at all.” It might instead be, “making an even better cup of coffee at home and at a fraction of the cost.” Then you can reinvest that difference and save for your future. There are dozens of expenses like this. I stopped buying scrambled eggs at restaurants, for example, because it’s a waste of money compared to making them at home. Tea at a restaurant is as much as $3. For a teabag and a cup of hot water! No thanks, I’ll just go home and have the same cup of tea - same tea bag and everything - for pennies. I’m giving up a little bit of pleasure, the pleasure of drinking a cup of tea in a restaurant. But that amount of pleasure isn’t enough to compensate me for the financial cost of frivolous expenses.

The secret here isn’t giving up things that make your life better. The secret is finding ways to make your life as good as possible without wasting money. Given that you can enjoy a better latte or the same cup of tea at home for literal pennies on the dollar, why waste the money?

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