Penny Wise and Pound Foolish

I am a fan of clichés, as mentioned in previous posts. They often contain kernels of truth even though they may not apply universally. But they can also be contradictory. An oft quoted cliché that I will sometimes push back on is “Look after the cents and the dollars will take care of themselves.”

Clearly this is meant to promote fiscal responsibility - don’t waste funds unnecessarily. And it is a good principle, up to a point. On many occasions I will choose the cheaper option, with the intention of saving a few cents here and there, which all adds up. But sometimes the cheaper option is NOT the cheaper option.

Car purchases can be fraught with these sorts of problems, for example purchasing a second-hand car that requires constant maintenance or seeking a cheaper option. On one occasion I witnessed someone purchase their first new car and wanted to save money by not buying the fancy pack version. After choosing the base model and adding all the ‘essential’ extras, they realised they signed up for a more expensive option. 

It is also a relatively common experience to purchase a cheap version only to have it break and need an early replacement, or not really serve the desired purpose. These are other examples of being penny wise and pound foolish. In other words, being short sighted.

Purchases, especially big purchases, require risk assessment. This means doing a cost benefit analysis but having the big picture in mind. There are times when it is appropriate to save on multiple or small purchases even if the product doesn’t quite meet expectations and the consequences are minimal, but large one-off purchases may require a different approach.

Strategic thinking is even more important for big purchases. Making large purchases can be scary and it is tempting to cut costs wherever you can, but this is when you especially need to guard against being penny wise and pound foolish. Here are three points that may be helpful when making large purchases.

• The 80% rule. It is pretty hard to get anything that is going to be perfect for every situation. I am even aware of large organisations that have purchased bespoke software that still does not meet every need, so chances are your purchase will not serve you 100% of the time. Don’t focus on the minor exceptions, focus on what will serve you best 80% of the time, and accept that you will still need the occasional workaround.

• 5 years’ time. Will the product serve your long-term need? The period may need to be adjusted depending on the product life cycle, but 5 years is a good place to start. A computer will obviously have a much shorter life cycle, but it is reasonable to expect a building to serve your purposes for much longer. This is not just about the quality of the product but just as much about what you will need in the future.

• Check the fine print. Don’t gloss over contracts, take the time to fully engage with the information. This is especially important if you are expecting to have an ongoing relationship with the supplier. Setting aside a couple of hours to scour through the documentation or engaging a lawyer to read contracts may well be time or money well spent even if the benefits are not obvious. 

Fiscal responsibility is important. There is a place for saving your pennies and we need to guard against throwing money away unnecessarily. But don’t become penny wise and pound foolish. The cheapest is not always the cheapest in the long run. Don’t trade off future benefits for the sake of some small savings now.