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The Unfair Competitive Advantage Of The Wealthy: Being Frugal

The Unfair Competitive Advantage Of The Wealthy: Being Frugal
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After a good morning of painting

Do frugal people have an unfair competitive advantage when it comes to accumulating a prodigious amount of wealth because they were just born that way? I’m beginning to wonder based on two things that happened recently.



1) Homejoy, a three year old housecleaning startup, decided to close its doors after raising about $40 million in funding. They ultimately failed to get sold or raise more money due to poor financials and lawsuits from contractors who wanted to be employees. It’s always a sad day when a company closes because I admire entrepreneurs very much. The founders had the courage to try, which is more than can be said for many others.

I never would have used Homejoy because I always clean my own house. Doesn’t everybody? Apparently not. Or apparently most people do, otherwise Homejoy wouldn’t have gone under. I find cleaning to be both cathartic and rewarding.

2) I got in sort of an e-mail tiff with my new master tenant’s roommate because she demanded an extra set of keys. It wasn’t a nice ask, but an entitled demand as if she owned the place. She first said she needed the keys for convenience purposes when other people stayed over. Then she said she needed a key for her housekeeper. These keys aren’t easily copyable. For security purposes, they have to be sent into a factory to be specially made. Each key has a specific embedded serial #.

My initial response was to ask her to just let the housekeeper in when she’s around or clean more herself if she’s got to wait an extra day or two. She wasn’t too happy with my suggestions! She said she works a lot and it’s none of my business how much she cleans (or doesn’t). Fair enough, even though it’s 100% my business for protecting my property from liability. I did end up spending a couple hours getting her that extra key, and am waiting for her to sign the addendum to take responsibility if the key gets lost or if the cleaner gets in a deadly fight with another condo owner.

DON’T PEOPLE JUST CLEAN THEMSELVES?



From 1999 – 2012, I regularly worked 60-80 hours a week. Not once did I hire a person to clean my home. Not even in 2007 when it was raining money. I just made the time to clean my abode by myself.

So who gets a green pass for using cleaners? Busy parents, incredibly messy people, people allergic to dust mites, folks who live in mega mansions, elderly and the disabled come to mind. But for the rest of us, hiring a cleaner seems like a waste of money.

Here are some other reasons why I won’t pay for a cleaner:

1) I don’t feel comfortable having a stranger come into my house. It feels like an invasion of privacy.



2) Even if theft is rare, theft still happens. Many home robberies are perpetrated by those who’ve worked in your home. They might not rob you tomorrow. But they might rob you a year later when you least expect. My temptation to steal was greater when I earned less money as well.

3) I know how to clean. It’s easy. Most things that don’t pose physical risk, I do myself. This includes taking care of the yard, washing Rhino, and doing my laundry. Even though I can afford it, not doing these things myself feels like a waste of money. I eat out because my cooking is mediocre compared to world class chefs here in SF. Preparation also takes a long time. I paid a contractor to expand my bathroom because otherwise it would never pass inspection. I use an auto mechanic to fix my car because I worry about fixing things wrong and causing an accident.

4) I enjoy cleaning. There’s immediate satisfaction because you can see an immediate difference. It feels very zen to wipe down the hard wood floors. I love my mop and I love to vacuum. Decluttering makes me happy. Spending 30 minutes to an hour cleaning once a week is cathartic.

5) Like many of you, I like to save money!



I know I’m going to piss off some of you who do use cleaners, so let me have it in the comments section below why I’m a donkey for thinking the way I do!

DIFFERENT PRIORITIES I GUESS

I’ve always thought that most people were like me, which is why it kind of annoyed me that my new tenant was demanding an extra set of keys for her cleaners. I can understand if she was a working mother with two kids. But she’s in her early 30s, single, and really only has half an apartment to clean since she shares it with her roommate. Why couldn’t she find time to just clean 500 square feet of space herself?

I asked my underemployed friend her viewpoint since she also has a cleaner. She said,

“Well, it’s just like anything else. You pay for convenience or you do it yourself. I hire my friend for $20 bucks an hour for three hours a week to help her out and get a clean apartment as well. I’m so busy taking care of my son and working that my time could be better spent instead of cleaning.”

This makes sense. If my underemployed friend who is looking for ways to save money is willing to spend $240 a month on cleaning services, maybe I’m the outlier here!

CAN BUSINESSES WIN DUE TO LAZINESS?

If you don’t do what you easily know how to do, I think that’s just laziness. If you’ve got the finances to afford discretionary spending, there’s nothing wrong with being lazy.  However, from an entrepreneurial perspective, I wonder whether you can really be successful doing a business that relies on other people’s laziness.



What happens when the economy turns south and people have to take the bus, shop for their own food, wash their own clothes, pick up their own meals, buy their own underwear, and scrub their own toilets? Holy crap!

Let’s briefly look at Homejoy’s business model. For aspiring entrepreneurs like myself, it’s important to learn from failures to avoid future mishaps.

1) They are the middlemen for cleaners and people looking for cleaners. They took a percentage of revenue for each cleaning session. Once they connect you with a low cost cleaner, why do you need Homejoy any more? Just make a side deal directly with the cleaner and save.

2) They charge ~$20 – $25/hour gross. Can you really make that much off a business where the client can simply cut Homejoy out if they like the cleaner?

3) Cleaning is a cash business. By becoming a 1099 contractor, the cleaner now has to pay taxes. Who the hell wants to do that? Anybody who has worked in the services industry knows that cash is king.

4) The product actually creates another layer of friction because you can easily find cleaners on Yelp, Craigslist or through referrals. You don’t really need “on demand” cleaners. You need a trustworthy cleaner who can commit to a long-term schedule.



5) If the economy ever turns, paying for cleaning will probably be one of the first discretionary spending items to go. I’d rather invest in high growth and defensive companies (e.g. Samuel Adams Beer co) than a company that’s highly cyclical.

6) Legal issues and high burn rate. $40 million is a lot of money to spend in three years, even with 50+ employees to pay. Clearly they were allocating money to legal costs, subsidizing clients with enticing offers, and spending money on signing up cleaners and customers.

In retrospect, all of this is easy to write, but I do wonder about the countless other businesses out there that delivery discretionary services on demand. There’s even a company called Underclub, which delivers a pair of underwear to you for $22 a month!

Uber can win because its billions in funding is used to subsidize its drivers, thereby undercutting the incumbent taxi industry, fight lawsuits, and lobby the government.

The main takeaway from Homejoy’s failure is to build a sticky service business modeled on what people don’t know how to do well themselves. I once started an advertising business before with the Yakezie Network, and within a year my clients simply replicated my business model and kept the profits for themselves! In a way, it was a blessing in disguise because it forced me to create a new, safer way of earning revenue online. Those who took my idea are now floundering because they never changed and I never shared with them my secrets again.

DISCOVERING FRUGALITY

I’d love to hear from all of you about whether or not you clean your own home and why. Are people who hire cleaners lazy or efficient? If I can spend two hours writing a post, isn’t that time much better spent than spending two hours cleaning my house? I’ve really had a default assumption in my mind that the vast portion of people clean themselves, and only the rich spend money on cleaners.



I’m of the belief that frugal habits are mostly developed based on our upbringing. My parents were always frugal, so I adopted their frugal nature. Being frugal also became a necessity when I realized I couldn’t depend on the government to implement an affordable health care system or give back my Social Security contributions in retirement.

Then again, even when I was making a healthy income when I had a full-time job, I’d often just drink water while dining out and drive a beater even though I could afford to spend more.

One of the biggest takeaways from all these finance-related surveys I’ve been conducting over the years is that most of you are super savers (25%+ savings rate). I’m trying to ascertain whether saving money and building wealth is an inherent attribute or a learned skill. If being frugal and building wealth is a genetic disposition, then perhaps those who’ve been able to accumulate outsized wealth or run a business have an unfair advantage!

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