The general consensus about saving money by borrowing Buffy DVDs (or similar things) is that we’re not really saving money–we wouldn’t have spent it if we’d had to–but that we’re increasing our standard of living for free. I think that’s a good assessment.

When I was writing about it last night, I was actually thinking about how Enron did its earnings, according to Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron (aff). Now I read it a while ago, but if I remember right, one of their accounting techniques was to count future income as actually earned.

If someone has a great idea, then they get credit and bonuses for it now–and the amount it’s projected to earn is added to the company’s earnings report.

Creative accounting.

In the same way, if I choose to count everything I don’t spend as savings then I’ve got billions of dollars saved. I have bought neither a house, nor a second house, nor a yacht, nor a corporation, nor a Tivo, nor even a car. And I’ve been saving money like this since I was a baby.

That sort of mental accounting can make us feel really good, really successful. If we’re trying to be frugal, sometimes it’s nice to look at the big picture and see all the things we might have wanted that we chose not to get into debt over. But in the same way not buying expensive lattes doesn’t actually save me $5/day (because I never did buy them daily or weekly), there aren’t actual savings.

Most importantly, I shouldn’t spend money to reward myself for not having spend $200 on the Buffy set. If I want to reward myself, it should be for any money earned in a month and put in savings at the end of the month.

At some point soon, I’m going to write about something else Micah mentioned last month–that some people have suggested Americans should get a future tax cut instead of this $800 rebate. They think that knowing they’ll pay less in taxes later may inspire people to feel richer and spend more now. Great.


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When do the savings kick in? | Mrs. Micah: Finance for a Freelance Life
January 21, 2008 at 6:00 pm

{ 11 comments… read them below or add one }

frugal zeitgeist January 20, 2008 at 10:24 pm

Another way people save the Enron way is to borrow against future income, e.g. spending beyond their means with the expectation that the next paycheck/bonus/whatever will cover it. That’s dangerous, in my opinion. My ex-husband used to do that with money we set aside for fun. He wanted to borrow against up to six months of fun money to buy some shiny whatever today instead of saving up for it. I always had a really hard time explaining why it was bad; I just knew that it was. What happens if that next paycheck or bonus never comes?

PiggyBankBlues January 21, 2008 at 12:34 am

great correlations! that movie has been on my netflix queue for months (dare i say over a year??), i’ll have to bump it up.

and yes, i’ve saved billions by not ending world hunger…

CatherineL January 21, 2008 at 4:17 am

Hi Mrs M – great post. Just goes to show there’s more we can learn from the Enron fiasco than we ever new.

Jim January 21, 2008 at 7:33 am

I came to the conclusion that it is how we think about money. And I have a differing thoughts. I can save by not spending and it is not Enron like.

mrsmicah inspired me to write about it. http://gettingaheadinlife.blogspot.com/2008/01/thought-change.html

Mrs Micah – Thank you for the brain teaser and I gave you backlinks.

ms. m&p January 21, 2008 at 11:44 am

I love this post! It’s like “a penny saved a penny earned” Enron-style. I wish that every dollar I saved really did go into my pocket, but sadly it doesn’t work that way.

m January 21, 2008 at 1:20 pm

Mrs Micah
Your post inspired a response post from me–my comment got so long I turned it into a post. Hope the link works out, link> here it is.

Hunter Nuttall January 21, 2008 at 1:43 pm

When Enron owed people money, did they count that right away, or wait until the other people actually cashed the check?

mrsmicah January 21, 2008 at 1:46 pm

I’m not sure, Hunter.

m January 21, 2008 at 1:46 pm

Okay it didn’t work, here’s my link again: http://therebutforthegraceofgodblog.blogspot.com/2008/01/in-her-recent-post-saving-enron-way-mrs.html

Your post led to three other posts so far that I know of, mine included–pretty inspiring, I’d say.

Andrew Stevens January 21, 2008 at 3:31 pm

Just to clear up a minor confusion, it was perfectly acceptable for Enron to account for the present value of future cash flows. This is standard practice and completely ethical as long as you’re giving your best estimate of what those future cash flows are actually worth. What Enron was doing was valuing their future cash flows at a rate far higher than anyone thought they were worth. Far more serious was hiding its losses by moving assets that were losing money to separate partnerships (not truly separate) and booking the money transferred as a gain, even though they were still on the hook for the losses. It hid a billion dollars in losses that way.

To a certain extent, we all have to make decisions about future cash flows. How much I save depends critically on how much I think I’ll need in the future, which means I have to make estimates about my future cash flows. (If I assume there won’t be any at all, then even saving 100% of my income now won’t be enough.) The mistake that people who are not saving yet are making is assuming their future cash flows will be worth more than they have any reason to think they’ll be worth. (These are the people who think they don’t have to save for retirement until they turn 55.)

War Gold January 24, 2008 at 12:23 pm

I’ve got to say it’s one of the few movies that totally outshines it’s literary equivelant. Smartest Guys in the Room is one of the best produced documentaries I’ve ever seen.

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