5 Major Differences Between Cheap and Frugal

money going down the drain
ShutterstockBeing frugal means being resourceful with your cash.
By Stefanie O'Connell

In response to my recent post about splitting expenses with friends, one commenter wrote that there is a fine line between cheap and frugal. I happen to agree.

For example, when dining in a group, I recommend that each individual calculate tax and tip based on what they ordered, but I would never dream of leaving less than a 18 percent tip on my tab, unless service was abysmal. I skip the drink order and stick to an appetizer to save money myself, but saving money at the expense of the wait staff or my other friends by failing to account for taxes or "forgetting" to leave a tip would just be cheap. Here are five more key differences between cheap and frugal:

1. Cheap and frugal people both love to save money, but frugal people won't do so at the expense of others. My boyfriend and I were strolling around Best Buy (BBY) yesterday when he found a used version of a game he had been wanting for his PlayStation. While walking to checkout, he found that the same game could be purchased online, brand new, and for $4 less. We put the game back on the shelf and placed an online order. The savings weren't huge, but the savings, combined with the fact that it was a totally new product, and that he had Amazon (AMZN) credit waiting to be used, made the online option the clear choice, even if it meant waiting an extra day or two to play the game.

2. Frugality is about assessing the bigger picture and having the patience to cash in on the simple savings strategies. As an avid runner, I'm not willing to buy second-hand, worn-out running shoes. I buy a new pair of sneakers at least once a year because I value the health of my feet and my joints and I'm not willing to sacrifice that to save a hundred bucks a year. I will, however, gladly buy the children's version of the same shoe or wait until last season's model goes on sale to get the cheaper price.

I adopt a similar philosophy with the rest of my workout clothes. After buying cheap yoga pants from Express (EXPR) or Gap (GPS) every year and watching them fall apart after a few uses and washes, I made the switch to more expensive, but quality workout wear. Sure, I try to cash in on a sale or even try to find those items cheaper on eBay (EBAY), but I'm happy to spend more money to ensure better product quality with a longer shelf life. In the end, it's a better value.

3. Cheapness uses price as a bottom line; frugality uses value as a bottom line. TLC's reality TV show "Extreme Cheapskates" is possibly one of the best examples of cheap versus frugal I've ever seen. In one episode, a man spends several hours searching for change around his home and around town. By the end of his search, he's come up with over $7, which is admittedly impressive, but begs the question, "Is your time really worth less than $7 an hour?"

4. Cheap people are driven by saving money regardless of the cost; frugal people are driven by maximizing total value, including the value of their time. I stick to water at restaurants, I make my coffee at home, I opt for running year-round rather than paying for a gym membership and I find small savings strategies in my day-to-day life so that I can allocate my resources to bigger dreams. Those include my career in theater, retirement and travel. While I haven't bought a new article of clothing in over a year, I'm vacationing in Mexico next week.

5. Being cheap is about spending less; being frugal is about prioritizing your spending so that you can have more of the things you really care about. Those who are cheap are often afraid to spend money. They are willing to sacrifice quality, value and time in order to cash in on some short-term savings. Those who are frugal are resourceful with their spending, maximizing their dollars, so that they can fund big picture wants and dreams.

So yes, there is a fine line between cheap and frugal, and the side on which you fall can make all the difference.

Stefanie O'Connell is a New York City based actress and freelance writer. She chronicles her struggle to "live the dream" on a starving artists' budget at thebrokeandbeautifullife.com.

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5 Major Differences Between Cheap and Frugal

In investing, it's dangerous to lust after the hottest and most exciting stocks, as they're often overvalued. If a company is always in the news because of how rapidly it's growing, you're not the only one thinking of investing in it, and many others have already done so, bidding up the price. It's often better to go for boring, tried-and-true companies, such as the ones selling things we're likely to keep needing, like shampoo and electricity. Consider dividend payers, too. They may not grow as rapidly as younger, smaller, outfits, but they'll generally pay you in good times and bad. Meanwhile, it's also dangerous to lust after fancy cars and huge houses and the latest electronics, if you can't afford them.

Too much of a good thing can be a bad thing, even when it comes to money. Sure, lots of cash is good. But lots of credit cards can be bad, if they're giving you more buying power than you can afford to indulge in, and you don't have enough discipline to resist them.

Too many stocks in a portfolio can be bad, too, as you won't be able to keep up with the progress of each company, and thus might not notice when one or more of your holdings starts to become less promising. Too many cars or houses are expensive to maintain and insure. Too many pieces of clothing in a closet? You don't wear many of them, and they fall out of fashion before you can get your money's worth out of them. With many things in life, it's best to be focused.

Greed can lead us to make dumb decisions, such as jumping into an overheated stock market because we're tired of seeing other people making a lot of money on stocks. Greed can induce us to rationalize poor decisions, too. ("The market is bound to keep rising." "Let's just spend this money we inherited on travel -- we can start saving for retirement next year.")

Greed can also lead us to take high risks for unlikely high rewards -- such as when we buy lottery tickets or invest in penny stocks that are more likely to go down than up.

This sin often seems innocuous; after all, it's only making us not do things. But many times, we don't just put off an important task for a day or two -- we never get around to doing it. That kind of procrastination can be downright dangerous when it comes to personal finances.

Here are just some of the many things that we shouldn't be slothful about:

  • having a retirement plan;
  • opening and regularly funding retirement accounts,
  • researching stocks before buying them,
  • paying bills on time,
  • saving for that down payment on a home,
  • saving for Junior's college expenses, tending to our estate planning (drafting a will, durable power of attorney, living will, etc.),
  • regularly re-evaluating our portfolio to see if we need to make any changes.
Wrath can come into our financial lives when we're in relationships where both parties are not on the same page. You might be good at saving, while your spouse is "good" at spending. This can lead to one or both of you being resentful and angry. Avoid wrath: Open up the lines of communication about money early and often.

Being scammed financially can also lead to anger, and that, sadly can happen to any of us. So it's smart to get savvy about common scams and to be wary of any financial come-ons and too-good-to-be-true "opportunities. Otherwise, you're liable to end up angriest of all at yourself.
It's only natural to look at what others have and to wish for some of it. But before you start trying to keep up with the Joneses, it's worth remembering that while you might admire your neighbor's fancy new car, he may not be able to afford it either. Lots of people who seem to be doing well are actually neck-deep in credit card debt, or headed in that direction. Envy can lead you to live beyond your means, which sets you up for financial disaster.
Finally, there's pride. It's at work when we're overconfident about our investing abilities. Thinking we're investing geniuses, we might not sufficiently research a stock or investment -- or to fail to keep an eye on it after an initial bounce. Excessive pride can also lead us to buy status symbols, such as an expensive car, coat, or gigantic flat-screen TV, in order to make ourselves look good to others.
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