We’re in a bull market for parsimony. Maybe even a parsimony bubble. Parsimony, which is a polite way to talk about penny-pinching, has never been a more valuable habit. Even with investment yields up from their recent lows, I think it is safe to predict that parsimony is well on its way to becoming a high art.
Some people avoid looking for bargains. They do this in the naive belief that only poor people look for better prices. In fact, parsimony is a habit that can be practiced at all levels of income — low, middle and high. Indeed, we have a tax system that encourages parsimony among those with the highest incomes. At today’s top federal income tax rate of 39.6 percent, a taxpayer would have to earn $165 before taxes to have $100 to spend. That’s quite an incentive when you compare it to a person who pays no taxes. That non-taxpayer “earns” only $100 by not spending $100.
Skeptics should consider the value of reducing spending as a kind of virtual investment. Here’s an example:
Suppose that instead of accepting your ever-rising cable television bill, you call your cable company and say you’re going to switch to another service provider. Lots of people do this, and you can read their comments on the Web by Googling something like “reducing your cable bill” or “reducing your Time Warner Cable bill.”
If you make the call, chances are your cable provider will make you an offer you can’t refuse: It will give you a reduced rate for a year, sometimes longer. Your provider will be hoping that cable programming will have put you into a deep, Snow White-like sleep by next year so you won’t be able to switch, but it’s a good bet that one of your neighbors does this every year.
So how much is, say, a $50-a-month bill reduction worth? One measure is how much Time Warner Cable stock (ticker: TWC) you’d have to own to enjoy the same dollar value in dividends. TWC was recently trading at about $111 a share and yielding 2.3 percent. So you’d have to own about $26,087 worth of TWC, or about 230 shares, to have the same cash benefit as a phone call might save.
Yes, you read that right: $26,087. Note that we haven’t considered taxes here. With dividends taxed at 20 percent, you’d need $750 in pre-tax dividends to net a $600 spendable benefit. That translates into nearly 290 shares of stock worth $32,600. Whether or not we’re considering taxes, this simple action has an income value that is worth more than many people have in their retirement accounts.
Basically, every $100 price reduction you achieve through careful shopping and spending can be thought of as a kind of virtual investment, a “dividend” income you achieve through mindful “un-spending.” That value has risen for years — for as long as investment yields have declined.
Twenty-five years ago, for instance, the yield on a five-year Treasury note was 8.47 percent. So you would have needed to invest $1,181 in the five-year note to have $100 of interest income. Today, at a recent yield of 1.51 percent, you’d need to invest $6,622 to enjoy the same interest income. In effect, the value of parsimony has increased more than fivefold over the last 25 years.
That’s pretty good for something we can all do in our “spare time at home.” It also leaves us with two questions.
The first is: Where can we find the “low-hanging fruit” — the places that offer the easiest opportunities for parsimony? The answer: Wherever you care to be mindful. That can be shopping for food, clothing, cellphone service, gasoline, or home and car insurance. It can be as simple as rejecting the unrelenting up-selling that comes with going to the dentist these days.
The second question is: Will parsimony still pay as interest rates rise? That’s an important question since there is some evidence that interest rates have, at long last, bottomed. The answer is that the value of parsimony fluctuates — but unlike investing in stocks or bonds, we’ll never lose money by spending our money carefully.
Questions about personal finance and investments may be sent by email to scott@scottburns.com.