Inventory Drawdown Fallacy

I have enough money to last me the rest of my life, unless I buy something.

– Jackie Mason

The symptom: Household inventory drawdowns seem like frugality.

The example: This past year you instituted a no-shopping weekend every other week. You did not buy any groceries or household products on those weekends. Instead, you simply ate and used only what you had on hand in your house. It sure seemed like you were spending a lot less money, but as you total things up at the end of the year, you are surprised to find that you have spent about the same as the prior year.

It is interesting how many people think they are “saving money” if they do not buy groceries this weekend. But think about it. If you consume €10 worth of food each day, it does not really matter how often you shop for it. You can shop once a day, or once a week, or once a month. The result is the same. You are still consuming €10 worth of food each day. Paying €140 for groceries every other week is the same as paying €70 for groceries every week!

Let us briefly explain what we mean by a “household inventory drawdown”. Like a business, your household maintains an inventory of items on hand that you are always purchasing and consuming. Your household inventory consists of a variety of different things, including food, soap, paper, medicine, cosmetics, batteries, etc. Unlike a business, however, you directly consume your inventory rather than reselling it or assembling it into something else. Both business and household inventory levels can fluctuate significantly for many reasons. An increase in inventory levels is an inventory buildup and a reduction is an inventory drawdown.

So why do household inventory drawdowns seem like frugality? It feels like you are saving money because there is no immediate trip to the store and no immediate cash outflow. And if you had previously intended to shop that weekend, it sure seems like you are delaying gratification because you are delaying that shopping. However, assuming your food consumption stays the same, you are only delaying the purchase for a few days. More importantly, the longer you delay the purchase, the more you will need to buy to restock your inventory. Hence, you are not really reducing spending or savings money. Since you are not reducing consumption, you are merely shifting the timing of the cash outflow by a few days.

While the above analysis should be intuitive, focusing on cash flows alone can sometimes cause confusion. So if you need some mathematical underpinning to accept the above line of reasoning, then consider the following accrual concepts.

When you purchase groceries, you are exchanging money for food. The act of purchasing the food does not really change your net worth. If you bought €100 of food, you now have €100 less money but €100 more food in your kitchen. Your net worth decreases only when you consume the food (or waste it by throwing it out).

You actually incur a food expense when you eat the food. The cash flow to purchase the food could have come earlier (on an inventory buildup) or could come later (if you purchase the food on credit). Although these sorts of purchases can cause very uneven cash flows, the accrual of your food expenses is relatively constant.

Having said all that, the consumption of your groceries is surely not something you should track. It would require an enormous amount of effort to calculate the value of the food you ate each day or week. While it would indeed show that your real food expenses are probably quite steady most of the time, it would not be worth all that effort. Instead, you can simply be cognizant of the basic accrual concepts without tracking them in your budget.

The two important points to understand are:

  • Household inventory buildups are not usually an expense because they are merely an exchange of money for goods.
  • Household inventory drawdowns are usually an expense because they are the consumption of the goods.

Why is it helpful to view your finances this way?

  • An accrual view helps you understand why your grocery bills vary considerably. More often than not, increases and decreases in grocery bills have little to do with saving or not saving money. Usually the fluctuations simply reflect how much inventory you are buying. Thus, increases are not usually cause for worry and decreases are not usually cause for celebration.
  • An understanding of cash flow variations helps you avoid gimmicks like temporarily not buying groceries and toilet paper. This does not save you money, and it creates delusional thinking.
  • Avoiding gimmicks allows you to concentrate on things that really do save you money. Instead of adjusting your grocery shopping schedule, learn to buy and consume cheaper food. Instead of worrying about how often you buypaper towels, concentrate on how often you actually consume them.


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