Ramit Sethi on ABC News - "Cheap vs. Frugal"

Are you a conscious spender, constantly thinking about how you spend your money? If so, have you ever wondered if you are frugal or just plain cheap? Or perhaps you know someone that's a penny pincher, a person you just can't stand to be around? Either way, in this economy, there's obviously nothing wrong with being careful with how you spend your cash. But all too often, people confuse frugality with being selfish, stingy, and even cheap. So to set the record straight on what it is to be frugal or cheap, we're joined now by Ramit Sethi, author of I will teach you to be R. Welcome back, Ramit. Good to see you again.

Thank you.

So before we get into what's cheap and what's frugal, let me ask you why you think people dismiss others who.

Are conscious spenders because they're not conscious spenders themselves. We love to judge other people about their money, but very rarely do we like to have anyone look at ours.

It's a little uncomfortable, isn't it, to have the spotlight turned on us? All right, so let's break it down here. What's considered cheap and what's considered frugal? And in your opinion, what's the difference?

Well, when it comes to cheap people, there's a blanket idea that they don't want to spend money on anything. Frugal people are very different. Frugality is about spending money extravagantly on the things you love, but cutting costs mercilessly on the things you don't.

So here's a question to you. If you decide that spending $2.50 on coffee every morning isn't worth it and you'd rather save that $15 each week for a movie, you're saying that that is more frugal than cheap?

Absolutely. And by the way, don't listen to these personal finance experts who always tell you that spending money on lattes is bad because it could be just the same in the opposite direction. You might say, hey, I really value a three dollar latte every morning and that's worth it to me. But by the same token, you know, you could say, hey, I want to save that money up for lunch or for going out, that's fine as well.

Bingo, that's me. I'll skip the movie and have the latte every day.

There you go.

All right, let's do a little bit more of a comparison and we have some graphics for our viewers so they can follow us. You say cheap people care about the cost of something. What do frugal people care about, then if it's not exactly the cost, they.

Care about the value of something. So cheap people will look at the sticker price on a car, for example, and just try to get the lowest sticker price. Okay, fine. That's certainly one way to go. That's the cheap way frugal people will say, I want to focus on getting the best car. Maybe it costs an extra thousand dollars, but number one, it's going to make me happier for the next 10 years. And number two, maybe it's actually a better car and it's going to be more reliable and save me more money over the long term.

I seem to be sensing a theme here that frugal people just do a little bit more research.

That's part of it, absolutely.

All right, next is cheap people's cheapness. It affects those around them. How about frugal people, though? How can they. How can they stop other people from sort of feeling that uncomfortableness around them when you see people counting their pennies?

Well, the way they do it is they come in with a plan, just as you said, they come more prepared. So frugal people's frugality affects owners. Them. Why? Because they walk into a situation saying, you know what? I know that I have X dollars to spend. I know that this is really valuable to me, and at the same time, I know that that's not that valuable to me. So it's less about them being cheap with everyone around them. It's more about the plan that they've taken the time to develop.

Interesting. So if they make a dinner plan to go out with their buddies, they're not going to say, all right, I had one glass of wine and you had two. They're making the decision before they go to just say, this is one of those nights. We're just all going to split it. They're not going to break it down in that embarrassing way.

That's a great way of looking at it. So once a reporter called me up and asked me for tips on having frugal dates. And I said, if you're getting to the date and you're trying to save money at the date itself, you've already lost the ball game. You have to plan beforehand if it's worth it, spend extravagantly, and if it's not, figure out a different way. But you shouldn't be making situation decisions on the fly.

Right. And you've got to be thinking about others to some degree, too. I mean, there's got to be a little consideration.

Let me give you a great Example, so we all have these jackass friends. They'll go to a restaurant with you, they'll order something for $7.95, they'll throw in eight bucks and say done. And of course, knowing full well that it's going to be closer to 12, 13, 14 bucks when you factor in tax and tip. Okay, so what a frugal person would do in that situation is they would walk in saying, alright, I know I have 10 bucks to spend on dinner tonight. So they might order a five dollar entree or an appetizer, they might skip the coke and have water instead. But they are affecting themselves, not making people around them feel uncomfortable.

Very good example. And then of course, if there's a lot of other cheap people in that group, suddenly they've got to put in 15 rather than 10.

We've had that happen too.

That's right. All right, you also talk about honesty. How do cheap and frugal differ in that regard?

Well, because of the fear of even one person thinking that they overspent, cheap people are often not honest about how much they actually spend. But here's the interesting thing. Frugal people are not that honest either about how much they spend. It seems that nobody really wants anyone to judge us for what we spend. So there's actually not that big of a distinction here between cheap and frugal people.

It's interesting because I think that it's so individual because like you said, frugal people are looking for value, but yet only that individual can really say or know what they value. So no one else can.

Absolutely. That's why you see people saying, you know, I can't believe she spent $200 on jeans. And that's easy to say without the context. Maybe she has a cheaper rent because she really loves expensive jeans. Fine, it's important to understand the context, but we can't do that in a snap decision.

And you also say that cheap people are sometimes unreasonable and cannot understand why they can't get something for free, right?

Yeah. Well, they try to get it for free or for close to free. Always. Frugal people, they understand that it's a dance, right? They're playing a game and hopefully they get a lower price by negotiating and all these other techniques. But they understand that they don't intrinsically deserve a special deal.

Boy, I'm really seeing now that being frugal is a lot better than being cheap. All right, last but not least, cheap people tend to think short term. What about frugal people?

Always, always long term. It's not just about the sticker price or the dollar value you're paying today. It's about how. How much value is it going to provide for you long term? And not only the product that you're buying, but how about the people around you that you're affecting? You have to think about all these things long term.

All right, and then would you say that most wealthy people are frugal in their ways or they don't have to be either frugal or cheap?

No. The way that they got wealthy was by being conscious spenders. Okay? Most of the time when we think of wealthy people, we think of these fools that I see on MTV Cribs. They have eight Bentleys. They have koi fish swimming through their bedroom. That is not the typical millionaire. In fact, there's a great book, the Millionaire Next Door. They did an interview with over a thousand millionaires. What they found was that over 50% of them had never spent over $400 on a suit, never spent over $140 on a watch. Okay? You have to remember that being frugal, being a conscious spender is not about buying the best of everything. It's not about cutting your costs on everything either. It's about saying, I love these things. I'm going to spend extravagantly on those. But I don't care as much about these things, so I'm going to cut costs mercilessly on those.

Ramit, I believe it. And I bet that those guys with the eight Bentleys might not be rich for very long. There you go, Ramit. It's always very insightful and entertaining talking with you. Thanks so much.

Thank you.