Value Creation and Cost Savings
When considering personal finances, most people I speak with fail to consider both value creation and cost savings. Many financial disagreements in marriage focus heavily on cost savings. Phrases like “we can’t afford that,” or “live within your means,” by nature focus on the finite – resources are limited and we must look for cost savings to maintain financial wellness. The focus is on the bottom line, with emphasis on staying profitable.
On the other side of the cost savings coin is value creation. In contrast with cost savings, value creation is infinite – additional resources can be made or found to meet or exceed our needs. The focus is on the top line, with emphasis on increasing resources.
When looking at value creation and cost savings, there needs to be an appropriate balance of both.
A Little Story About Value Creation and Cost Savings
When I was getting my MBA, my business strategy class had an activity one night that illustrated this point well. The exercise was on an apparel company that was struggling financially, and there was a deficit in their budget. Our responsibility was to craft a strategy to help the company recover profitability.
Some of the other students in the class chose to focus on cost savings. Their solution was to optimize the supply chain and pursue operational efficiencies, which would save the company $X on their bottom line and return the business to a profitable state.
My solution was to focus on value creation. By leveraging existing supply chain relationships, the business could expand into a new market (handbags, for instance). The estimated increase in the top line would be $Y at relatively little overhead, since we were using the same supply chain.
However, we were both short-sighted; a wise company would do both. When considering financial wellness, you simply can’t focus on one half of the whole – you have to consider both value creation and cost savings.
Including Value Creation and Cost Savings in Personal Finances
Including both value creation and cost savings in your own personal finances – and teaching this to your kids – is easy, at least in principle. Let’s briefly look at both of these.
If you’ve pursued any form of higher or specialized education after high school, you already understand value creation. Going to university, going to trade school, and working as an electrician’s apprentice are all ways to generate additional value. By getting a better job (or starting your own company), you add to your personal top line. Your total revenue goes up, giving you more resources to pay for a home, car, etc.
Pursuing value creation shouldn’t be limited to the “getting started” stage of life. Value creation should happen constantly by improving your work ethic, adding to your education, and working to excel in whatever your space is. These activities prepare you for promotion or to transition to new and better roles to improve your overall income and add value to your top line.
The best way to focus on cost savings in your life is to establish and follow a personal budget. If I could only recommend one thing to do to improve your cost savings situation, it would be this. If I could recommend a second thing, it would be to read and follow the Total Money Makeover plan, by Dave Ramsey. The book is incredibly practical and has provided a foundation for our personal finances for many years.
Tying Them Together
A wonderful example of both value creation and cost savings is what my wife did when we decided to build a home. We have a more traditional family dynamic where I go to work and she stays home with our six amazing kids. When we decided to build a house, she began to research, study, read (many, many books), and generally learn all about homes so she could plan, design, and coordinate the entire construction of our house while homeschooling. (Have I mentioned how amazing she is?) Throughout the process, she added value to our family in the form of knowledge (which could one day be used for income, if she chooses), and prepared us for significant cost savings by not needing to pay a middle man to project manage the construction of our house.
Teaching Kids Value Creation and Cost Savings
I believe it’s good to first teach your kids about value creation, then teach about cost savings. The cost savings part becomes more real when they’ve added value first because then they have their own money/resources to practice with. Here are some tips and ideas for teaching value creation and cost savings.
- Value Creation
- Build work ethic by giving them chores early in life
- Teach kids to produce more than they consume
- Pay your kids for jobs, regardless of the amount – $.10 is as valuable here as $10 when the point is to learn to earn
- Cost Savings
- Teach kids to save some of what they earn
- Teach kids to not spend all of what they can spend – teach them to be choosy about where their money goes
- Implement frugality in your own life, and teach your kids to do the same.
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