Seth Godin makes a convincing, utilitarian case for why we should leave bigger tips. I’ll paraphrase Seth’s advice here.
Let’s look at a waitress. If you eat a $30 meal, convention would suggest that you leave behind about a $5 tip. You spend $35 total, and the waitress gets $5 of that.
But, if you double your tip to $10, how does the transaction change? You’ve increased your expenses by 14% (40/35), but you’ve increased the waitress’s earnings by 100% (10/5). You take a small marginal loss in order to enable someone else’s larger marginal gain. And the next time you return to that restaurant, that waitress just might remember how you gave her an unexpected surprise. “Here’s that blogger who leaves bigger tips!”
For another example, let’s look at the ever-growing gig economy. More and more people are working for themselves, freelancing, side-hustling. If you work with one of these independent contractors, you’ll end up facing the same situation as I outlined with the waitress.
A local potter might charge you $300 for a unique set of custom tableware. Once they account for their materials and facility costs, their profit margin on that $300 might only be $150. So if you say, “Sorry, I can’t pay $300. How about $500 instead?,” you’ve just increased their profit from $150 to $350.
Again, you’re paying an extra cost, but their gain is larger than your loss. You’re making yourself a valuable (literally!) customer. It helps the artist out, and I highly doubt the quality of your tableware is going to go down as a result.
Even with purely generous intentions, you’ll probably get something back for your kindness in terms of product quality or service. Kindness has a quid pro quo effect, whether you’re trying for it or not.
Uhh…is giving away money a good personal finance tactic?
If I’ve left you confused, let me clarify: don’t put yourself in a financial bind because you start leaving $20 bills after every cup of diner coffee (speaking of…any interest in free Starbucks?). That’s not what I’m suggesting.
The idea behind this generosity is “you make a small sacrifice so someone else can get a big win,” combined with, “pay a little more up front, and potentially reap bigger rewards down the road.” It’s making the easy pass so someone else can score, combined with planting trees for 20 years from now. If can afford to, your generosity can help all parties involved in the long run.
And that’s exactly the reason why investing is such an enticing practice. When we invest, we are both the customer and the freelancer. We’re setting ourselves up for the big score. We’re planting trees that we plan on eventually shading under.
We make a sacrifice up-front. We set aside dollars for the future, but at the cost of not being able to spend those dollars right now. It’s a real cost. When you invest those dollars, you reduce their current utility to zero. In one of my earliest, rustiest posts, I called this trade-off Utility vs. Interest. You can’t use that money to buy a speaker set or sushi lunch–it’s tied up in your investment.
But, just like the contractor, our future selves reap a huge benefit from this small sacrifice.
Depending on your rate of return estimates, a 30-year index fund investment might return anything from 200% to 400%. You invest $100 now, and your future self gets $300 to $500 back. That seems like a reasonable trade. If you’re using a tax-advantaged investing method (401k, Roth IRA, HSA, 529b, etc) then the benefits are even more pronounced.
Changing Our Mindsets
The world could use a little more kindness and altruism. Just go to the Comment section on a popular news site and see for yourself. No, no, not this blog–we either have zero comments or very nice comments. But a real website–it’s filled with vitriolic trolls.
Too many times, I’ve felt the pull of digital repugnance seep into my real world. I’ve had an incorrect thought process of “people are jerks online, therefore people are jerks in real life.” But I really don’t think it works that way for 99% of the world. We’re all just trying to get by, and we’re all decent people. When you leave bigger tips, you’re proving to yourself and others that the world isn’t so bad.
Therefore, my theory continues, we’re all worthy of receiving help, and we’re all capable of giving help. Similarly, we’d all be better off by helping our future selves out.
So if you’re wondering what to do with your New Years’ bonus, consider leaving a generous tip and buying some index funds. This applies especially if you’re already fulfilled. You’ll be helping someone out, and the future will thank you.
What’s wrong with that?
Happy New Year! Thanks for reading the Best Interest!
I love the concept and completely agree, especially breakfast wait staff. 20% tip on the cheapest meal of your day is not enough.
I wonder your thoughts on how loss aversion plays into this. One might argue that in pure profit/loss terms, the customer loses less than the receiver gains. However, studies have shown it hurts more when we lose than it feels good when we gain. Maybe it’s that the joy of giving outweighs that loss aversion?
Hi Craig, thanks for that interesting idea. I’m sure you’re right. It’s completely understandable. “Losing” money so freely can feel a bit awkward.
That said, if it truly is “giving freely”—like charity—then is it a “loss?” Maybe, maybe not. When I donate to United Way, I don’t really “lose” anything. It’s my choice, I’m happy to do it, etc.
So when I overtip, am I losing something? Or does my active role in the situation negate the possibility of “loss”…
Good food for thought 🙂