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Written by: Corey Janoff

As a financial advisor, I have the privilege of getting an insiders looks at peoples financial decisions.  We haven’t done any official data compiling, but I can tell you from mass observation, it’s the big financial decisions that hurt or help people the most.   The little stuff is just that – little stuff.  We have all heard the old British phrase, “penny wise, pound foolish.”  The American version, “penny wise, dollar foolish” just doesn’t have the same ring to it, so we will stick with the British version today.

Far too many people want to pat themselves on the back for making frugal financial decisions when it comes to small stuff, but are oblivious to the giant blunders they make with the big choices.  Or they justify their poor financial moves on the big stuff by pointing to all the little things they saved money on.  These individuals rarely see the financial progress they say they desire. 

I will talk to people who bring a PB & J sandwich to work to save money, so they don’t have to buy a $9 sandwich for lunch.  I applaud the effort.  Saving a few dollars every day can really add up over time.  But if you’re driving a Tesla to work instead of a Honda, how much are those PB & J sandwiches really saving you?

I will meet with a young doctor who has $400,000 of student loans and going into family practice in a major city, expecting to make $140,000/year of income.  Compared to the average American, $140k/year of income is fantastic, but when it cost you a small country’s GDP to get the degree, was it really worth it?  You could have had the military pay for it.  Unless PSLF is a viable option for you, it will cost $4,000/month to have the loans paid off in about ten years.  With a take-home income of $7,000/month, you’re not exactly going to be living that “doctor lifestyle” that you aspired for when you applied to med-school. 

I know people who take vacations during off peak times to save a few hundred dollars on lodging and fly on Tuesdays, Wednesdays, or Saturdays to save a couple hundred dollars on roundtrip flights.  That’s fantastic.  You probably know all of the travel hacks.  But if you’re only saving 5% of your income for retirement because your house payment takes up 30% of your income, you’re going to have to ditch the flights and hotels altogether in retirement.  You’ll be throwing a tent in the back of a canoe and traveling wherever the current takes you. 

The people who are on a direct flight to financial independence take the opposite approach.They are pound wise, which allows them to be penny foolish.  If you get the big things right, you can afford to splurge on the small stuff.  But if you are pound foolish and get the big things wrong, it doesn’t matter how penny wise you are. 

Housing, cars, and education are the big things that people often get wrong.  Let me explain with some examples. 

Pound Foolish Housing

Spending too much on housing is probably the most common pound foolish move I see.  People’s eyes are bigger than their wallets and they end up spending more than they should on a house.  Or they buy a vacation home on top of their primary residence and justify it as an “investment.”  People often underestimate how much owning a home actually costs.  Read my post from a couple of weeks ago to learn about the true cost of home ownership. 

In the book, The Millionaire Next Door, the authors learn that most millionaires have a mortgage balance that is less than two times their annual income.  A bank will give you a mortgage equal to four or five times your income.  According to the bank, you probably can afford the larger mortgage.  But if you borrow four times your income, you won’t be able to afford much more than the mortgage.  Forget about vacations, retirement, and college savings.  You’ll be eating SpaghettiOs in a winter jacket during candle-lit dinners because you can’t even afford to heat your house.  I hope you have a well out back, because water will be too expensive. 

penny wise, pound foolish

If you want to achieve financial independence within a timely manner, you won’t borrow much more than two times your income when buying a house.  That doesn’t mean you can’t have a million dollar house.  It just means you need to save up for a larger down payment if you aren’t making at least $500,000/year. 

Not only does buying an expensive house cost a lot of money, but the ancillary costs of keeping up with the Joneses in the neighborhood will weigh on you as well.  I mean, you can’t live in a nice neighborhood and still buy all of your furniture at Ikea.  You’ll be embarrassed to have neighbors over.  If you park your beater car in the driveway and all of your neighbors have Audi’s and BMW’s, you might get calls from the neighborhood association for diminishing property values.  I’m being a tad facetious here, but it’s unfortunately true. 

As with every rule, there are some exceptions.  If you expect your income to rise substantially in the next few years, then you might have a permission slip to stretch the current budget a little bit.  But generally speaking, keep the total mortgage balance(s) at or below 2x your income and that will give you the flexibility to spend a little extra on the small stuff. 

Spend $4 on a coffee at Starbucks on the way to work.  Go out to dinner for your anniversary and order the $100 bottle of wine.  Get the organic, grass-fed steak to grill this weekend instead of the tough steak on manager’s special at the grocery store.  Buy that new pair of jeans you’ve been wanting for two months.  Saving hundreds, if not thousands of dollars per month on your housing expense by not overextending yourself will allow you to spend more freely on the little pleasures in life.  But being penny wise on the little things won’t make up for the massive mortgage you took on.

Pound Foolish Cars

love hate it when people tell me they can’t afford to save more for retirement and then I find out they are driving an $80,000 car that they financed at 4% interest over 84 months.  Your car payment is over $1,000/month and includes almost $12,000 in interest over the next 7 years. 

penny wise, pound foolish

If you’re not saving as much as you should be for retirement, sell the car immediately and pay $7,500 cash for Subaru with 100,000 miles on it.  The Subaru with 100k miles will last you another 100k miles if you do the regular maintenance.  And the maintenance will cost a lot less than the maintenance on your fancy whip.  Plus, you won’t care as much if your dog gets hair all over it and your kids stick half-eaten gummy bears between the seats. 

Then, take the $1,000/month you are not spending on a ridiculous car payment and start investing it for retirement.  If you invest $1,000/month for the next 25 years, at a 6% annualized growth rate you will have an extra $700,000 in your retirement account.  That will give you an extra $30,000/year of income in retirement. 

Is that car really worth giving up $30,000/year of income in retirement?  You decide.  I think you probably know my answer. 

Pound Foolish Education

This one can be a bit of a touchy subject.  As a big proponent of education, it is difficult for me to tell someone they shouldn’t have pursued the degree they have.  However, I feel more comfortable saying some people shouldn’t have paid for their degree the way that they did.  This goes for their children too. 

Going back to the example at the beginning of the post about the doctor with $400,000 of student loans; I see that scenario far too often.  Yes, medical school is friggin expensive.  However, unless you are planning to go into a high income specialty, you probably should think of alternative ways to pay for school. 

And it’s not just physicians and dentists.  I could say the same thing for anybody who has to take out student loans.  Lawyers, pharmacists, physical therapists, optometrists, nurses, engineers, teachers, MBA’s, you name it.  Taking out student loans is fine.  But unless the income from the career you are pursuing will enable you to pay back those student loans within 5-10 years, you should think long and hard about it. 

I realize for most people reading this, the damage is already done.  But you can pass the lessons you learn onto those following in your footsteps.

The military is a great option for people who want an expensive degree, but can’t afford to pay for it.  Yes, you owe your soul to the government for a period of time afterwards, but entering your career debt-free will allow you to hit the ground running on your path to financial independence. 

You could go work in the middle of nowhere that will pay your student loans off for you if you stay there long enough.  I have seen some employers that will pay $20,000, $50,000, even $100,000 per year towards student loans to attract quality workers.If you have $400,000 of student loans, go work on an Indian reservation in northern Colorado for a handful of years and get your loans paid off. 

Private school is a privilege, not a right.  If you can afford to pay for your kids to go to private school while still investing 20% of your income for retirement, then go for it.  You’re earning a nice income and keeping your other financial priorities on track.  But if you are paying for your kids to go to private school instead of saving adequately for retirement, we probably need to re-evaluate the decision.  What are you paying all of those property taxes on your nice house for anyways? 

I went to private elementary school.  My dad says it was the biggest waste of money in his life.  Who knows how I would have turned out with a public education in my formative years?  I’m going to venture to guess I would be in the exact same spot today. 

If you are considering paying for your children to go to private school, I’m guessing the public school they would otherwise go to is half-decent.  You’re probably not living on welfare in an inner city housing project.  Besides, the college they go to and the career they have after that is probably equally dependent on their upbringing in your house.  You could pay for some after-school advanced learning programs if full-blown private school is too expensive.   

You could spend a ton of money on your own education and/or your kids’ education, but if it sets you back from achieving your other financial goals, how beneficial is it?

Not Saving Enough Early Enough

Albert Einstein once said, “Compound interest is the eighth wonder of the world.  Those who understand it, earn it.  Those who don’t, pay it.”  It is so true.  If you start saving early and often, your investment balance will grow to a sum vastly greater than someone who saves more, but doesn’t get started until later.

penny wise, pound foolish

If you have an “I’ll save more in the future when…” attitude, you’ll never achieve your future goals.  We can always find things to spend money on.  It takes discipline to save money for our future so we can afford to retire and send our kids to college.  The sooner you get started, the better off you’ll be. 

Start saving 20% of your gross income for retirement the day you start working.  If you do that, you will be able to retire one day at a reasonable age and live an enjoyable life in retirement.  If you consistently save 20% of your income, I don’t care what else you do with the rest of your money.  You will likely be able to maintain your lifestyle for the rest of your life. 

Think of it like running a marathon.  If you start running when the gun fires, you can run a steady pace for the full 26 miles.If you start running an hour after the gun fires, you are going to have to run twice as fast to finish at the same time.  Good luck.


Instead of being penny wise and pound foolish, let’s be pound wise and penny foolish.  If we get the big decisions right, that will enable us to screw up on the small stuff. 

Oh darn, we booked our airline tickets at the wrong time and ended up spending $100 more than we could have.We can afford it because our housing cost is low. 

Jeez, I spent $50 this week on lunches at work.  Good thing my car is completely paid for.  I can afford to spend $50 a week on lunches because I don’t have a car payment.

If you’re saving at least 20% of your gross income for retirement, go buy a nice bottle of champagne this weekend and celebrate.  You deserve it.  And don’t feel dirty about it, because you will be able to afford more champagne in retirement the way you are saving. 

Finity Group


Any examples are hypothetical and for illustrative purposes only.  Any investment involves potential loss, including total loss of principal.Consult with a financial advisor before making big financial decisions.  


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