The Law of Diminishing Returns

The Law of Diminishing Returns

A couple of weeks ago I was browsing through the content I follow but one stood out from the crowd. The title of the post was “Stacking Functions” by the Happy Philosopher (HP). As I started reading, the HP did a phenomenal job describing opportunities to improve efficiencies in various aspects of personal finance (PF); however, I would like to make the case of how Stacking Functions could greatly benefit from the Law Of Diminishing Returns (LODR).

The Law of Diminishing Returns

I’m an engineer by background and the LODR is a concept that we constantly apply in process optimization. The theory is simple, a process is comprised of various elements or steps that one must follow to deliver an outcome. As engineers, our role is to make decisions that positively affect time, cost and resources in order to deliver solutions to given problems. When such decisions start to decrease the rate of output (plateau) or even worse, start to negatively affect performance, then you’ve reached a point of diminishing returns. The figure below illustrates this concept in more detail.

The Law of Diminishing Returns

The Law of Diminishing Returns in Personal Finance

How do you know you’ve reached the point of ultimate optimization in every aspect of PF?. How do you know you’ve gone too far and are now starting to lose sight of the forest because you’re focusing on the trees? The LODR might be a tricky one for some people but I think is worth going over some examples that are relevant to illustrate this concept in the context of PF.

Automation without Attention

We’ve tried our best to leverage the value of automation in many aspects of our lives; however, is there such a thing as too much automation? The answer to this question is not an easy one and the best I can do is say … it depends.

I honestly find it difficult to believe automation could lead to negative outcomes but one thing is certain …

Automation with lack of ownership can lead to less than stellar performance.

Examples that come to mind include:

  • Automatic payment of credit cards without checking charges (especially fees).
  • Automatic membership renewals for services you no longer use (gym, fancy massage place).
  • Automatic contribution to retirement accounts without looking at investment options and associated fees.
  • Automatic contribution to retirement accounts without adjusting your asset allocation as you approach retirement.
  • Automatic payment of high-interest debt instead of refinancing (student loans, mortgage).

Time Not Well Spent

In my opinion, time is the most precious gift we all have and the one that constitutes one of the underlying reasons behind my desire for reaching FIRE (financial independence and retiring early). I remain employed full-time, so I see time as a commodity where I trade 40 hrs per week for a paycheck.

So where is the LODR in time?. In my case, I see it in many situations but it boils down to …

Devoting too much time to your finances even when things are taken care of.

Think about the following:

  • Spending too much time on your phone, tablet or PC visiting Personal Capital, Mint or Excel.
  • Spending time thinking about finances 24/7 instead of enjoying other things in life.
  • Spending time trying to maximize what already might be maximized.
  • Spending time investing in individual stocks and looking at them every single day.
  • Spending too much time on social media following other PF bloggers instead of playing with your kids (this one is for me).

Credit Card Rewards Gone South

I can’t remember the last time I used my debit card. The reason is simple … rewards.

Not only do I use credit cards to cover our needs and wants but I’ve carefully analyzed and applied for the ones that carry great benefits for our situation.

Now, when it comes to credit cards we can all agree financial discipline is key otherwise you’ll find yourself accumulating a ton of debt and being in a terrible spot from a financial standpoint.

When it comes to credit cards the LODR is obvious …

Applying for an excessive number of credit cards without having a sound plan to accumulate the rewards.

This situation often leads to rush spending (mostly on WANTS) and getting into unnecessary debt just for the sake of getting the rewards.

Cutting Cable but Spending More

Many of us enjoy the benefits of getting rid of cable; however, with the many services that have emerged as an alternative, it’s easy to fall into temptation and find yourself right where you started.

If you consider the need to have reasonably high-speed internet priced @~$80-$90/month then adding services like Amazon Prime, Hulu, HBO GO, Showtime Anytime, SlingTV, Netflix, Starz, Being Sports each priced @ ~$10/month could easily take you close to $200/month.

Don’t get me wrong I enjoy a couple of shows here and there; however, be cognizant of your decisions and be aware you might be reaching a point of diminishing returns where:

The cost of having alternative services could easily exceed the cost of cable.

Not Considering the Full Picture

We all enjoy getting stuff at a discount. Capitalizing on great deals and the excitement that comes with “supposedly” beating down the house brings a feeling of pride that can be hard to match. However, when you find yourself driving 5 more miles to get gas $0.02 cents cheaper than the one right across your neighborhood then I say we might have a problem.

Don’t get me wrong who doesn’t love cheaper gas but if you’re going to be burning a significant amount of fuel to get that extra discount then not only could that make it a wash but you might actually be losing money.

Let me share a true story.

I remember my wife and I were interested in this awesome piece of furniture at a store that had branches across the city. As it turns out, one of the branches was able to sell the item tax-free. Without even thinking about it we bought the item online and had it ready to be picked up. As soon as we entered the address on Google Maps we knew we had screwed up. Long story short we drove for more than 15 miles to “save” ~ $10. Moral of the story …  not worth it!.

Here’s the bottom line:

When making any type of decision please look at the full picture to avoid getting to a point of diminishing returns.

  • If switching jobs, don’t just look at base salary, instead consider benefits such as insurance, 401(k), HSA, among many others.
  • If switching cell phone provider (this is me right now!) don’t just look at the price tag, what about data, text and most important coverage for your area?
  • If you’re buying a house, don’t just focus on the purchase price, what about the number of rooms and baths? school district? quality of neighborhood?
  • If you want to hire a financial advisor, what is the fee structure? track record? investment philosophy? customer support?

Fuzzy Metrics in Blog Posting

When I started this blog I had a goal … one post per week. I remember asking my wife to hold me accountable to my plan; however, things have been more challenging than I thought. Not only does it take time to write but more importantly to write something that you’re passionate about. To me, it just doesn’t make any sense to write 1 post per week about stuff I could care less or that I simply don’t enjoy.

Looking back, I refuse a metric to drive my content. I know I need to push myself to avoid complacency but I’m going to have to take a rain check on this one because I prefer quality over quantity.

I don’t want to give you the impression of laziness or lack of commitment but in my opinion being a blogger (just for a few months) requires having the willingness to share something interesting, unique and genuine with the intent of having a positive impact on people’s lives. It should be spontaneous, fun and not carry any negative connotation (such as pressure to post something by time X) that takes the joy out of this experience.

Being Miserable instead of Happy

The Mad Fientist is one of my favorite bloggers in the PF community. He recently posted an article about his story. On it, he walks readers about his journey to achieve FI. As you keep on reading, you’ll notice a section called “Dark Times” where he mentions the following:

“So by this point in my story, I had sorted out my investments, minimized my taxes, reduced my expenses, and started building up additional sources of income. I was on the fast-track to FI but there was one big problem…I was miserable. My obsession with reaching financial independence as quickly as possible caused my healthy frugality to morph into harmful deprivation. I was aware that I wasn’t happy but I figured it wasn’t a big deal because I would be happy eventually once I reached FI. What I didn’t realize though is that this seemingly-harmless unhappiness was actually turning into depression.”

I don’t know if the Mad Fientiest reached a point of diminishing returns (we’ll have to ask him) but one could argue that was actually the case. Even though he was making all these awesome moves around PF his situation unintentionally led to a decrease in happiness.

As I started my journey to FI, improving efficiencies became my number one objective. Excitement and passion became my drivers and the hunger for learning kept me going. This excitement got the best of me. Suddenly I found myself talking about finances 24/7 and nothing else seemed to matter anymore.

My lack of emotional intelligence backfired on me eventually leading to uncomfortable conversations with relatives and friends and forgetting about my priorities in life … faith, family, and happiness.

Reaching this point of diminishing returns was definitely something I needed to experience so I could make the very much needed corrections to get back into Zone A.

Final Thoughts

  • The LODR is a real thing so avoid getting yourself in the area of sub-optimized performance.
  • Keep the value vs effort plot in the back of your mind and think about the whole picture as your evaluate financial decisions.
  • I’ve experienced the LODR but the nice thing is you can make adjustments to get out of the zone of negative returns.
  • There are way more examples about the LODR but the intent was not to name them all but instead to create awareness so you can act on them.
  • The biggest correction I’ve made so far has been slowing down my pace. I’m still passionate about FIRE but I’m working on keeping a more balanced approach to make sure my faith, family, and happiness remain priority #1.


  1. You make a great point about looking at the big picture. I know I’m guilty of getting too focused on a particular transaction or financial decision and not looking at the ripple effect it will have. Sometimes our efforts to save some cash end up backfiring if we aren’t paying enough attention!


    1. Cato, just like you, I’m also guilty of losing sight of the forest because I’m too focused on the trees. I guess the beauty of it is that we have time working for us and we can make corrections as long as we are willing to do our part. The critical step is knowing when we’ve reached a point of diminishing returns and making adjustments to make sure we get back on track. If you think about a point of diminishing return could then become an inflection point which could have a positive impact on our lives.

  2. Great application of law of diminishing returns to personal finance. There can be too much of something. Each new unit has a different marginal utility. As such each step up in efficiency needs it’s marginal utility compared to alternatives. Or put another way, money isn’t everything so remember to live your life.

    1. Mr. FTF thanks for stopping by. FIRE definitely requires a strategy driven by ownership and accountability; however, it should not be at the expense of everything else in life. I like your comment about efficiency & marginal utility which goes back to value vs effort and looking at the slope of that curve to watch for points of diminishing returns.

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