I’m a big fan of the Happy Philosopher. His style is unique and I find his articles to be thought-provoking. I would like to highlight a recent post titled “Stacking Functions“. He describes ways to improve efficiencies in various aspects of Personal Finance but considers a building block approach. This is by no means an extension to his post, it is simply the introduction of a concept that fits very nicely with topics around Financial Independence.

The Law of Diminishing Returns

The law of diminishing returns is a concept that we constantly apply in process engineering and optimization. The theory is simple, a process is comprised of various elements or steps that one must follow to deliver an outcome.

As engineers, our role is to make decisions that positively affect time, cost, and resources in order to deliver solutions to given problems. When such decisions start to decrease the rate of output (plateau) or even worse, start to negatively affect performance, then you’ve reached a point of diminishing returns. The figure below illustrates this concept in more detail.

Personal Finance

Identifying points of diminishing returns can be a challenge. We often believe in big-time horizons and in using a set it and forget it approach. This could not be farther from the truth.

For those of us seeking Financial Independence, the reality is different. We’re constantly thinking about ways to optimize our finances in hopes of accelerating our path to Financial Freedom. As a result, there’s risk in hitting points of diminishing returns.

Let me share a couple of examples that come to mind.

Automation

We leverage automation in most aspects of our lives; however, set it and forget it doesn’t always work. You still need to keep an eye on your expenses to make sure things are under control.

Automation with a lack of ownership is irresponsible

Examples that come to mind include:

• Payment of credit cards without checking charges (especially fees).
• Membership renewals for services you no longer use (gym, fancy massage place).
• Contribution to retirement accounts without looking at investment options, expenses, and associated fees.
• Payment of high-interest debt instead of refinancing (student loans, mortgage).

Time

Time is the most precious gift we have. It constitutes the underlying reason behind our desire to reach Financial Independence. But think about how much time you spend on the following:

• On your phone, tablet, or PC visiting Personal Capital, Mint or Excel.
• Thinking about finances 24/7 instead of enjoying other things in life.
• Trying to maximize what already might be optimal.
• Investing in individual stocks and monitoring performance every single day.
• On social media following other Personal Finance bloggers instead of playing with your kids (this one is for me).

In this case, the law of diminishing returns boils down to …

Devoting too much time to your finances even when things are ok.

Credit Card Rewards

I can’t remember the last time we used our debit cards. The reason is simple: travel rewards.

We recognize this can be a risky business; however, our strategy is centered around discipline applying for credit cards we intend to use for our monthly expenses.

The lesson here is simple:

Don’t be a fool to play the travel rewards game if you lack discipline. The risk is too high.

Cutting Cable

Many of you enjoy the savings with cutting cable; however, when you start adding streaming services you could quickly move back where you started.

If you consider high-speed internet @~$80-$90/month plus many of the following services:

• Prime Video,
• Hulu,
• HBO GO,
• Showtime Anytime,
• SlingTV,
• Netflix,
• Starz,
• Being Sport

At @ ~$10/month each, you could easily be close to $200/month.

If you cut cable and are paying more than $150/month,  you’re missing the point

Full Picture

Great deals and the excitement that comes with beating down the house brings a feeling of pride that can be hard to match. However, when you find yourself driving 5 more miles to save $0.02 on gas,  you may have a problem.

I remember the time we purchase a piece of furniture and ended up driving 20 miles to save on ~$10 on taxes. This was plain dumb.

Here’s the bottom line:

When making decisions consider the full picture

• If you’re considering switching jobs, look at base salary and the rest of the benefits.
• If you’re upgrading your cell phone and provider (this is me right now!) don’t just look at the price tag, what about data, text and most important coverage for your area?
• If you’re buying a house, don’t just focus on the purchase price, what about the layout? school district? quality of neighborhood?
• If you want to hire a financial advisor, what is the fee structure? track record? investment philosophy? customer support?

Metrics in Blog Posting

When I started this blog I had a goal of writing one post per week. I remember asking my wife to hold me accountable; however, things have been challenging. Writing high-quality articles that are of value to my readers just takes time.

After reflecting on my goals, I decided to focus on quality over quantity. In my opinion, being a blogger requires having the willingness to share something interesting, unique, and genuine with the intent of having a positive impact on people’s lives.

It should be spontaneous, fun, and should definitely not feel like work. If it does, then what is the point.

Being Miserable

The Mad Fientist is one of my favorite bloggers in the Personal Finance community. He recently posted an article about his story. On it, he walks readers about his journey to achieve Financial Independence. Let me share an excerpt from that article.

“So by this point in my story, I had sorted out my investments, minimized my taxes, reduced my expenses, and started building up additional sources of income. I was on the fast-track to FI but there was one big problem…I was miserable. My obsession with reaching financial independence as quickly as possible caused my healthy frugality to morph into harmful deprivation. I was aware that I wasn’t happy but I figured it wasn’t a big deal because I would be happy eventually once I reached FI. What I didn’t realize though is that this seemingly-harmless unhappiness was actually turning into depression.”

I don’t know if Brandon reached a point of diminishing returns but if you read between the lines that may have been the case. He made all the right moves to accelerate his path to Financial Independence but in the end, he was quite unhappy.

As we started our journey to FI, improving efficiencies became our number one goal. My wife has been supportive but I think my overexcitement got to her when she pointed I was speaking about finances 24/7 not only with her but everybody else.

My lack of emotional intelligence backfired leading to uncomfortable conversations with relatives and friends. Reaching this point of diminishing returns was something I needed to experience to make the necessary corrections.

Final Thoughts

• The law of diminishing returns is real so avoid getting yourself in the area of sub-optimized performance.
• Keep the value vs effort plot in the back of your mind and think about the full picture.
• I’ve experienced the law of diminishing returns but the nice thing is you can make adjustments to get back on track.
• There are more examples of suboptimal performance. My intent was not to highlight all of them but to create awareness for your consideration.
• Slowing my pace has been a plus. I’m passionate about Financial Independence but I’m working on keeping a more balanced approach to make sure my faith, family, and happiness remain priority #1.