Building Greater Wealth Through Experimentation!

If you’re a regular reader of my monthly expense reports, you might start to believe that our monthly budge is super optimized and hyper-efficient.  It’s a total illusion.  The reality is, we’re NOT super optimized.

Our lifestyle is nowhere near 100% efficient or optimized for maximum savings. We do this by design.  Yes, really!  It’s on purpose!  There’s plenty of slack in our budget that can be mopped-up and reduced if necessary.

Certainly, we put in plenty of effort to minimize our expenses — We try not to waste money whenever and wherever we can.  We don’t eat out often, we shop for groceries carefully, grow some of our own food, use energy efficient light-bulbs, and drive with a very light foot on the gas pedal…and so forth.  Your typical budget optimizations.

The difference between our normal monthly budget and a super-optimized budget is that we leave room for experimentation.  That’s right, I’m wasting money almost every month to experiment!

Normally, wasting money is a bad thing.  Waste should generally be avoided if you want to reach FI.  But experimentation (aka purposeful waste) can lead to breakthroughs in optimization that I normally wouldn’t have found without experimenting.

Today’s post is an argument that wasting a little money in the name of continuous experimentation, can be a very good thing.  Under the right conditions, experimentation can lead to further lifestyle optimization, education, extra income and even time savings!

The Scientific Method

I like to think of myself as something of a tinkerer, and the world is my giant laboratory where I conduct financial experiments.  I’m constantly running financial experiments in real life to see what kind of impact they’ll have on my finances and time.

But this isn’t guesswork.  I have a process and keep hard data that I record in spreadsheets.

If you recall from high school science class, the Scientific Method is the method by which real world scientists do their work.  The scientist asks a question, forms a hypothesis, and then develops answers to that hypothesis via observation and experimentation.

This process might seem a little rigorous to the average person, but it’s the process by which our modern world has advanced.  It works for a reason.

When I design my experiments I try to stick pretty close to the tried and true Scientific Method.  Here’s an example of how I might do so for a common financial optimization problem:

Grocery Store Experiment:

Observation:  I’ve noticed that a grocery store a few miles further away appears to have certain items a little cheaper that what I currently pay at closer grocery stores.  Does it make sense for me to drive further?

Hypothesis:  By driving a little further to this cheaper grocery store I might be able to realize some monthly savings in our food budget.

Experiment:  For a entire month, I will switch my food purchases to this “cheaper” grocery store.  I will record items purchased and sales receipts into a spreadsheet for comparison.  I’ll also keep track of my monthly gas expenses to look at the impact of fuel usage as well.  I’ll compare both expenses against previous monthly expenses for these expense categories (my control numbers) and see if the longer drive is truly worth it.

And then I’ll actually test it!

For a test like this, I’ll might run the experiment for a month or several months to gather enough data.  Then, I’ll look at the impact of the experiment on my finances.  Sometimes the experiments work-out and we (The Tako Family) make a change in our monthly process.  Other times (more commonly) the experiment doesn’t work out and I end-up scrapping the experiment.

The important part here isn’t that I failed and wasted money, it’s that I’m testing something that might be an improvement.

This is where I think many families fall flat on their faces when it comes to optimizing their lifestyle.  They have intuitions and make guesses about the financial impact of certain choices in their life, and they even act on those guesses.  Rarely do people actually test and do proper comparisons against a control.

The Control

Like most of the scientific world, having good data is the key to making a good conclusion.  This goes doubly so when experimenting.

I like to record and save all my data in spreadsheets (I use LibreOffice) because they’re easy to use and manipulate.  In fact, all of the monthly financial numbers you see on this blog have spreadsheets behind them.  I have every single receipt and expense we’ve ever made recorded in a spreadsheet, going back years.

When it comes to financial experimentation, having those historic financial numbers available is extremely useful as a control.  You have to know how much you’re regularly spending in any given category in order to truly understand the impact of a financial experiment.  This past data serves as my financial “control” group, and serves as the basis for comparison when my testing is finally complete.

I can’t stress enough the importance of having good control data during a financial experiment.  In my case, I’ve published four years of monthly financials to compare against.  While it might be next to impossible for an individual people like myself to perfectly replicate an experiment like in a real laboratory, having previous years and previous monthly financial data provides a “fairly good” barometer of regular usage.

My Current Experiments

Most of the experiments I dream up aren’t exactly “big news” items.  Just small iterative changes to our lifestyle that over time begin to add-up.

Currently, I have three experiments I’m running right now:

• Over the last few months, I’ve been testing the use of options writing as an income source.  Typically I’m writing put or call options on securities I want to buy or sell, and pocketing the income when the options expire.  This experiment has been ongoing for the past four or five months, and I’ve been writing about the results in my monthly expense reports.  In July for example, I earned around $512 from writing options.
• I’m currently testing a new popcorn supplier.  Long-time readers know that we love popcorn.  It’s a healthy and low-cost snack.  We eat so much of it, we tend to buy popcorn in bulk for additional savings.  Grocery stores typically only sell it in 1lb bags.  Unfortunately my local Costco stopped stocking bulk popcorn, so I’m experimenting with a new supplier and a new brand.
• I’m testing higher-cost Cree LED light-bulbs in some of the lights in our home to see if the longevity claims hold up to the higher price.  We run these lights more than any others in our household, and put about 3,000 hours per year on the bulbs. (So far, I’m about 5 years into this experiment, and it appears the higher cost Cree bulbs do indeed hold-up quite well.)

Those are my current “running” experiments.  Most of those will last a few more months while I collect more data.  Eventually I’ll decided if a “change” is in order or not.  Some, like the Cree light-bulb experiment, could go on for a few more years while I decide if it’s actually worth paying double the price for a name-brand bulb.

Other experiments are so small they’re not even worth mentioning here.  Usually a few minutes with a calculator and a spreadsheet is all that’s needed to provide necessary answers I need in these cases.  Sometimes the financial answers become glaringly obvious when you crunch the numbers.

Prepare Your Test Tubes!

As the old saying goes, the only constant in life is change.  Life changes all the time, and rapidly.  The problem is, humans are rather ill-adapted to handle frequent change.  Habits form, and we turn into the path of least resistance over time.   That’s great for making life feel easy, but forming habits is actually really bad if you want to optimize your lifestyle.

Say for example — On a whim, you decide to pickup some Mediterranean takeout on your way home one night.  The prices and the food turn out to be really good.  So you decide to order food there again.  Order enough takeout from this place, and you’ll eventually form a habit.

The problem is, life is always changing.  Habits turn into a hindrance. One little life-optimization that works today will some day fail to be an optimal solution in the future.  What if food prices rise when the restaurant owner decides to charge more?  What if the food quality goes downhill a little too!  What should you do?

Most people would probably just pay the higher prices and stick with a habit that’s easy.

Personally, I’d rather not form financial habits in the first place.  The real path to financial optimization is to never leave anything alone.  Keep experimenting!  Push yourself to keep trying something new… even if you waste a little money experimenting!

There should be no sacred cows in the budget.  Only new experiments to test.

[Image Credit: Flickr1, Flickr2]