Penny wise and pound foolish sounds like a funny saying, but it’s actually a pretty important concept when it comes to living a frugal life.

For those of you who don’t know what the phrase means, it more or less means you sweat the small costs so much that you either end up incurring a larger expense down the road or miss an opportunity make a ton of money.

Or, to use another idiom, it’s not being able to see the forest for the trees.

If this still doesn’t make sense, here are some real world examples. Let me know if you’re guilty of any of these:

Buying the cheapest product at the expense of quality. For example, your refrigerator breaks, so you run out to the store and replace it with the cheapest model at $500 for the sake of minimizing the expense.

Seems to make sense right? Not necessarily.

If you would have just done a little bit of research you would have found that the cheapest model lasts only five years on average, and that the $650 model – just slightly more expensive – last for eight years on average, and is more energy efficient.

So, instead of saving $150 up front, you actually end up losing at least $350 after five years when you end up replacing the cheaper fridge instead of having another three years with the slightly more expensive model.

Skipping out on doctor’s appointments to avoid having to pay a co-pay. As a 30 year old man, this is one of the penny wise and pound foolish things I deal with all the time. I know I should go to the doctor to get my aches and pains checked out, but I don’t feel like spending $20 to be told everything is fine.

Well, what if everything isn’t fine?

Instead of possibly getting something serious taken care of early, minimizing the expense and increasing the chance for full recovery, I risk letting something serious drag on, which could lead to much higher medical costs and maybe even worse stuff (i.e. death).

Now, I’m not advocating running to the doctor’s every time you sneeze, but, at the very least, make sure you’re getting an annual checkup!

Opening up a store credit card to save 10% on that day’s purchase, only to make minimum payments. I’ve never understood why people bought into the whole “open a card with us and save 10% on your purchase” thing. Unless you’re buying $5,000 worth of stuff – which I really hope you’re not – you’re likely only saving $10 to $25 on your purchase.

Then the problem is compounded when you pay off the new bill by making only minimum payments, which end up costing you ten times the initial savings in interest charges! So, instead of saving $25 you end up losing $225 due to incurred interest expenses ($250 in interest – $25 in initial savings).

Eat from the dollar menu at fast food restaurants because it’s slightly cheaper than a healthier home cooked meal. If you’ve made your three daily meals consist of nothing but fast food dollar menu items as a means of saving money, you’re likely setting yourself up for a lot of health related expenses down the road.

Eating nothing but junk is a great way to increase your chances of obesity, diabetes, heart disease, and various cancers, none of which are particularly inexpensive to treat.

Plus, if you actually plan out your meals around sales at the grocery store, you can make much healthier home-cooked meals for very little money. For example, you can have a bowl of whole-grain spaghetti in marinara sauce with a side-salad for probably less than $4. Sounds a lot better, healthier, and cost effective than a quarter-pounder, fries, and a soda.

You don’t contribute to a retirement account because you want the money now. While it’s certainly a good idea to have an emergency fund, and nice to have money on hand to pay your bills or splurge every once in a while, you really shouldn’t build up these funds at the sake of your retirement accounts. Or, to use another idiom (I’m action-packed full of them today), don’t rob Peter to pay Paul.

Sure, it’s nice to have an extra $100 to play with every month, but, thanks to the power of compounding interest, that $100 today could add up to thousands of dollars years down the road. And, if you fail to contribute to a taxable account, you’d be missing out on today’s tax benefits, too.

(That being said, I always recommend to my friends that they contribute to a Roth IRA first. Sure, you don’t get the tax benefit but that money grows tax free. It’s the greatest investment vehicle for your retirement accounts! I love Roths! Anyway…)

Obviously, the list of ways you can be penny wise and pound foolish is much longer than the examples above, but I think you get the point.

For me, being penny wise and pound foolish is the litmus test I use when I’m trying to figure out if I’m being frugal or if I’m being cheap. If I find I’m being cheap – which I almost was when I had a real life refrigerator emergency – I have to take a step back and realize that sometimes it’s okay to spend a little more up-front because I know in the long-run it’ll be a lot more cost effective to do so.

So, make sure in going forward, you’re being both penny wise and pound wise. That is the definition of being frugal!

Are you penny wise and pound foolish? Leave a comment below! Also, as always, please share this post using the social bookmarking buttons below – especially Facebook and Twitter!