27 Jan 2015

An Interesting Household Saving Strategy?

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I once encountered a suggestion (from a magazine, I think) that offered the following strategy to encourage household saving: Whenever buying something, only use $5 bills or higher. Then every night, empty your wallet/purse of any singles into a jar. By the end of a month, you will be shocked at how much you have saved.

Now when evaluating this proposal, the first thing I did was exaggerate it. I thought, “Why stop at a $5 bill? Why not always break $100 for every purchase?” Clearly that wouldn’t be a source of new savings–you would have to keep draining your saving account to replenish your stack of $100 bills.

So for those of you who were arguing with me in this thread, my question is: Do you agree the strategy is a good “first move” in this context? Again, it doesn’t prove that the technique with $5 bills is wrong, but it very quickly isolates the tradeoffs involved. And in particular, if you were arguing with someone who saw no downside in the $5 approach, surely the $100 example would be quite useful, right?

22 Responses to “An Interesting Household Saving Strategy?”

  1. Tel says:

    If you insist on making every purchase with a crisp $100 bill, you find there’s a strict limit on the number of times you can make a purchase each week, and that’s the trick of course.

    If you do it with a $5 threshold there will be occasional times where you only have a pocket of loose coins, so you might have made a purchase of some small thing like an ice cream that you didn’t really need, but you decide to purchase nothing at all.

    The assumption is that the $5 threshold won’t kick in too often, and probably won’t curtail any critical purchase.

    And in particular, if you were arguing with someone who saw no downside in the $5 approach, surely the $100 example would be quite useful, right?

    Seems reasonable to me. There is a presumption in there that the universe does not contain a discontinuity around the area you are looking at. That is to say, you assume the $100 bill doesn’t have some special and unique property that would make it operate differently to $5 other than just being worth more.

    For example, in Australia $5 is pink, but $100 is green, if you theorize that colour changes the way people spend, the substitute would be unreasonable. That’s a very contrived example, best I can do right now.

  2. Andrew says:

    I feel like this argument is less convincing than the “Why not $10/gallon?” argument. In the case of the gas tax, you’re trying to convince Krauthammer that he hasn’t considered the downside of his proposal, which in the case of new tax legislation is potentially substantial and difficult to reverse. But in this case you’re trying to convince someone not to try a relatively harmless saving tip and you’re saying, “Man it sure would be inconvenient if you used $100 bills instead of $5 bills.” I don’t know. I feel like I’m missing your point.

  3. AcePL says:

    Well, can’t really argue against. It’s the rule that is important. However, Tel is onto something. There will be a price tag involved, which would not exist with $5 bill. So it is worth pointing it out.

    But there is very important point to make. In case of minimum pay, fuel price, energy price etc. proponents of those methods are speaking about SEM (Somebody Else’s Money), from which they expect to be paid for their “services” as well.

    So while I agree that a principle is important, not the scale, the “matter” of the argument (savings instead of spending) is what decides. Thus I say it doesn’t apply to the case in example. Wrong department.

  4. AcePL says:

    Ugh. Hate touchpads…


    having all that in mind let’s go back to the proposition – this is, as Tel said, source of unnecessary costs sometimes.
    Also, is there a cut-off point? $100 daily is a very high level. Do we dip into savings after running out of cash? And other issues.

    But I do like the idea – if one of the rules is no dipping then one has to come out with either strategy of spending, optimize purchase queues, searching new income sources…

    This kind of reminds me Robert Kyiosaki…

  5. Transformer says:

    Assuming there is an optimal level of savings for a given individual then whichever savings technique (the $5 or the $100 one) brings them closer to that optimum will be better for them. Saying “if $5 is good then $100 must be better” will be true for some people and untrue for others.

    Assume there is an optimal minimum wage of $10 an hour: Saying if $10 an hour is good then $100 an hour is better would be incorrect

    Assume there is an optimal minimum wage of $100 an hour: Saying “if $10 an hour is good then $100 an hour is better” would be true.

    Assume there is an optimal minimum wage and its $0 an hours then saying “if $0 an hour is good then $100 an hour is better” would be especially incorrect.

  6. Z says:

    I have a better idea. Make a blood oath with your neighbor that should either of you not save atleast 25% of your income in a given year, the other guy gets to shoot you and take all your property. People would start saving real quick.

  7. Major.Freedom says:

    I feel kind of bad for Murphy because of so many people not seeing his fundamental point about the existence of costs associated with minimum wage laws.

    Now if you ask most wage floor advocates point blank, they will display an understanding that there are costs, that costs to wage floors exist, but you’ll likely hear an additional caveat in the form of “social benefits exceeds social costs”.

    This of course refers to some individuals incurring (short run) net costs, and other individuals receiving (short run) net benefits.

    The advocates are making a moral presumption concerning egoism and altruism. They are presuming that altruism trumps egoism.

    No economic argument can succeed in confirming or falsifying egoism as trumping altruism, or vice versa. All judgments concerning aggregate output and employment are presuming altruism or egoism.

  8. Darien says:

    At the risk of being entirely dense — I am a bit of a dullard, after all — but I see no problem with the $5 trick as a personal savings strategy. It certainly doesn’t create “new savings” in any magical, multiplier-y sense, but does that matter? It seems to me that, if we’re evaluating a personal savings plan qua personal savings and not in some weirdo aggregate sense, the only thing that matters is whether or not you’re restricting your consumption. If you employ the $5 trick consistently, you will restrict your consumption by necessity, since you’re leaving some of your money behind.

    Now, yes, there are surely “ways to get around it,” such as by just making your extra purchases on a credit card instead, but assume for purposes of the example that you’re not doing so; there’s no borrowing and no “raiding the cookie jar.” You just spend only the money you have, and leave singles and change in a jar at home. Surely this is a viable way to save money, yes?

    • Harold says:

      I think the point is that the strategy does not say it restricts your spending, just points out that you will have a lot of change left over at the end of the week. By using the $100 test, it forces the person to confront the fact that they will only save more if they actually do restrict their spending. You have not saved anything by accumulating your change in a jar rather than leaving it in the bank.

      So, yes, I think this is reasonable way to force people to confront the realities of the situation. A minimum wage will not magically make everyone better off, like putting your change in a jar will not increase the amount of money you have.

      We must develop the argument further to defend the small minimum wage but not the large one – maybe by pointing to evidence that small increases do not increase unemployment but large ones would. Similarly, we must develop the savings argument to explain why $5 may work (because you do not buy that ice-cream perhaps), but the $100 would not (because the costs would be too high in terms of hassle, trips to the bank, and runnung out of $100 bills in your savings account).

  9. Josiah Neeley says:

    I’m with Andrew. This argument is less convincing than the original.

    Random Guy: I’d like to lose weight, so I’ve decided to stop eating between meals.

    Bob: If you think that’s such a great strategy, why don’t you just STOP EATING ALTOGETHER?!?!?!

    Random Guy: Uh, because then I would die.

    Bob: So you see, there were trade offs in your original strategy that you hadn’t considered.

    Random Guy: [Backs away slowly, avoiding eye contact]

    • Bob Murphy says:

      Josiah I realize this may sound defensive, but surely it matters that with Krauthammer and the $5/$100 examples, the *same* downside exists at the high and low level, whereas in your eating between meals example, it doesn’t. (It’s not that you “half die” if you quit eating in between meals.)

      If you guys want to keep pretending that *my entire post* against Krauthammer consisted of a single sentence, so be it.

      • Transformer says:

        Depending upon the various elasticities involved it is theoretically possible that switching a small amount of revenue from a payroll tax to a gas tax would lead to increased employment, while switching a large amount would lead to decreased employment,

        For this reason arguments of the type discussed in the recent posts seem best avoided.

      • Josiah says:


        If you’ll recall, in the prior post I pointed out a downside of a $10 gas tax increase that wouldn’t apply to a $1 increase.

        In any event, I don’t have a problem with “why not 100?” arguments in principle. I think it can be perfectly fine in the context of the minimum wage. The problem I have is not with the type of argument but with using it in these specific examples.

        Sometimes one wants to do more or less of something. Save more. Eat less. Use less gas. Whatever. One way to go about this is to make whatever it is you want to do less of more expensive or inconvenient somehow. Is there a downside to doing this? Yes, that’s the point. The tradeoffs involved are implicit in the whole idea.

        • Bob Murphy says:

          Josiah wrote:

          Sometimes one wants to do more or less of something. Save more. Eat less. Use less gas. Whatever. One way to go about this is to make whatever it is you want to do less of more expensive or inconvenient somehow. Is there a downside to doing this? Yes, that’s the point. The tradeoffs involved are implicit in the whole idea.

          Josiah, just so you know, when I think you are wrong on something, it drives me up the wall, because when you chime in on my side on something, you do so with such clarity and eloquence…

          If I’m following your paragraph above, you’re saying something like, “Bob, *given* that Krauthammer has decided it’s good for the nation to cut back on gas consumption, I have no problem with him just telling us about the benefits of it. He internally has weighed the pros and cons and made his decision. I see no reason he needs to share that with us; the decision has already been made. Now he’s just selling it.”

    • Scott D says:

      Imagine if the article that Bob read proclaimed that by spending only $5 bills, you would not only accumulate savings, but would not have to reduce your consumption at all. Or, that you might have to reduce your consumption by X amount, but would see a higher level of savings Y.

      Obviously, that’s not what is going on. Rather, using set denominations presumably reduces the number of impulse buys you make (lowers consumption), and probably causes you to delay some purchases. Unless you game the system by planning your purchases carefully to maximize your $5 bills, you end up shifting some money from consumption to savings. The “surprise” you might feel at seeing how much you have saved really has more to do with realizing how much consumption you can comfortably forgo in your pursuit of savings.

      It’s kind of like how many people society can comfortably throw out of a job.

      • Scott D says:

        Wow, I phrased that last sentence badly. I meant to say that it’s similar to the idea that society can comfortably throw some small amount of people out of a job through minimum wage without anyone being able to connect cause and effect.

  10. Andrew says:

    A lot of people in this thread are making the point that this savings tip does not modify the person’s consumption patterns and only transfers money from your savings account into a jar full of singles and change. But this point only holds true for people that have savings accounts and actively manage their budgets. If, on the other hand, you are the type of person who lives paycheck to paycheck and all you have is a checking account that is constantly bouncing off the ZLB, then this savings tip may actually do some good for you. Clearly a person who knows how to save money wouldn’t get any value out of this tip.

    • Harold says:

      For those without a savings account it just transfers money from their current account or pile of cash. They will just run out of money earlier in the month/week and have to raid the jar. The point is that a jar of change is not savings. The direct result of the method is an increase in something, but not the thing we want to increase. By using $100 bills as an example it forces us to realise this. We then understand that the method can only work if it results in a change of consumption.

      The minimum wage is the same if we want to help all low skilled workers. The direct result of the minimum wage only helps those workers that are employed, not all low skilled workers. Using $100 minimum wage forces us to face up to this.

      Josiah’s weight loss example is not the same because weight loss is directly affected by eating less. Eating even less results in losing even more weight, so the answer is that if you eat even less you lose even more weight. There is no realisation as there is in the other examples, where more of the effect does not lead to more of the expected result – i.e. using even higher bills does not lead to even more savings.

      • Andrew says:

        They will just run out of money earlier in the month/week and have to raid the jar.

        You’re not allowed to raid the jar. This is a passive spending restraint for people that are bad at following a budget plan. Raiding the jar for the type of person that follows this savings tip is the same as tapping into your savings account for someone who follows a budget. You would only spend from this reserve in the event of an emergency or for a large planned purchase.

        . . . minimum wage . . .

        Sure. I have no problem with this paragraph.

        Josiah’s weight loss example is not the same . . .

        Technically, the less you eat, the closer you come to starvation. So Josiah’s example is technically highlighting a potential trade-off. If you follow Mark Sisson, you know that eating less and losing weight are not as closely correlated as many believe and that starvation diets are bad for you.

      • Darien says:

        Does there exist a savings strategy that can work if it does *not* result in a change in consumption? I’d contend there is not. In fact, I’ll go a bit farther — since saving is, by definition, underconsumption, the very concept of saving without reducing consumption is inherently nonsensical. Ergo, I don’t see that it’s viable to argue against any given strategy by saying that it only works if you reduce your consumption; the statement is equivalent to “saving money only succeeds if you save money,” which, while true, is not particularly meaningful.

        Rather, the idea behind the plan is, as Andrew says, to provide a sort of “guideline” for people who *want* to save money but are just bad at it. And in that context, it has merit; to be frank, how to budget and save money is not something we’re just born knowing. It’s something that has to be learned. I had to learn it the hard way myself, and goofy little gimmicks like this may be of help to peopke who are learning how to save.

        This is exactly why I don’t see the relevance to the Krauthammer argument; Krauthammer’s not suggesting a voluntary gimmick that would-be gas savers could adopt to help themselves save gas. He’s talking about a mandate that should be forced on people who have no interest in its alleged benefits. Similarly, if the government passed a law mandating that singles and change cannot be spent and must be saved in a jar in the kitchen, of course that wouldn’t help anybody save money — since people don’t want the alleged benefits, they’ll work around it in various ways.

  11. guest says:

    “Clearly that wouldn’t be a source of new savings–you would have to keep draining your saving account to replenish your stack of $100 bills.”

    You’re savings would accumulate outside your bank in the form of bills of denominations less than $100.

    So you’re still saving.

    (Aside: I’m not granting that FRNs are money. I’m just arguing about a theory that could apply to savings of any kind.)

  12. Innocent says:

    Or you can simply budget a certain amount of money for purchases and say ‘No’ to other purchases. Technically the strategy of $5.00 and $100.00 would work so long as you adhere strictly to the rule with no exceptions. For instance Say you only made $24,000 a year ( after taxes lol ) That is $2,000 a month. That means at most you would have 20 purchasing opportunities per month.

    But the practical application in this case is probably unlikely. You would begin to combine purchases and move to stores in which you can buy almost everything there and buy in bulk. This may give you a better cost per dollar spent, but other than that…

    I would suggest a better strategy to budget $2.50 a day for food per person and then figure out a way to do it and meet nutritional requirements. Then you can have your cake but can’t eat it.

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