Pretired lesson: The Power of the Chunk

boulderToday’s lesson is about The Power of the Chunk™. The Power of the Chunk is a critical concept to understand in reaching pretirement.

The funny thing about this concept is that I have found people who are strong in math (**cough**nerds**cough) have a hard time getting it, than creative and feeler types.

The principle of The Power of the Chunk was founded long ago when I left my first (very) low-paying journalism job to travel around the U.S. with a couple friends of mine. I got rid of most of my stuff and left a few things with my Dad for safekeeping. I also used his address as my forwarding address for any lingering bills and gave him some money, probably around $400, just to make sure I didn’t leave anything unpaid.

When I returned two months later, I found my money had been spent on some new electronic toys for himself. He promised to pay me back over the coming months in installments. As the money came back to me, I did what we all do — I pissed it away on nothing! 

And, thus, The Power of the Chunk was born. $100 IS worth more than $10 over 10 months!

It’s about Psychology

Now, for the nerds, this is most definitely NOT a time-value of money discussion, although at the margins there is some inter-relationship. This is about psychology.

Think about this for a moment: If I handed you $500 in cash, I guarantee you would tuck it carefully in your pocket and would likely deposit it into the bank the same day if you could. Yet how many people blow $7 on coffee in the morning and $10 at lunch, every day for years? (I am as guilty as anyone!) Do the math (OK, nerds, do your thing) and you’ll see the $10-$20 that slips through your fingers really adds up.

My favorite example has to do with the IRS withholding. You get to set the level on that endlessly confusing W4 that no one will help you with. The employee strategy on that form comes down to three possible strategies:

  • Try to nail it so you come out about even.
  • Try to come out so you definitely get money back.
  • Try to come out under so you aren’t giving the government a free loan.

The last one is the one I hear the most often and the one I think is the dumbest. The amount of money is too small (unless you’re too highly paid to need to read this blog) to generate any significant interest (either in your bank account or theirs). I always, when I was working, aimed for over-withholding so I would definitely get money back.

Why? The Power of the Chunk.

If I had this “extra” money trickled into my paycheck, it would likely just go toward buying more crap. Or a nicer way of putting it is my lifestyle would subtly rise to meet the amount of money available.

But by keeping it away from myself all year, I would usually receive a nice tax refund — my chunk. Now, of course, I realize, many (most?) of us will simply use that savings on something else, say, a big screen TV or new computer. Maybe not optimal for someone trying to reach pretirement, but, hey you saved up for a tangible item, when 90% of the population will just swipe their credit card and pay interest on top of a stupid purchase. And a few smart ones of you will actually take that chunk, which otherwise would have been pissed away on nothing, and you’ll invest it, putting yourselves that much closer to your personal finish line.

There’s another angle to The Power of the Chunk worth thinking about:  the giving end of the chunk. What if you owed a family member $1,000 (interest free) and you’re paying them $100/month until you’re even? And let’s say you did receive a nice tax refund so you could pay them back early. Should you pay off this small loan at once or should you keep paying in installments? Now setting aside the fact that you’re also robbing your family member of the Chunk’s power, I still say it’s better to pay it back early.

That’s because at, lowering your monthly living expenses is 90% of the game. Simplify your financial life so you can focus on the next steps in your journey.

Use your chunks to remove annoying ongoing expenses.

I paid up-front to buy my own cable internet modem. Now I don’t have to pay every month to “lease” one (that scam should be illegal in my opinion).

Or maybe you’re ready to put solar panels on your roof. It might take awhile to make back your $15,000 investment, but perhaps it makes sense for your pretirement goals to drop your monthly utility costs.

Now this concept is not necessarily going to apply to larger dollar amounts, especially when interest is involved. You may need to do some thinking about how disciplined you can be with the non-Chunked funds. Very, very disciplined people can eke out some advantages by not using the Chunk’s power and leveraging their money in interesting ways. I, however, live in the real world, where an impulse buy here or there is a lot more likely than severely tight budgeting.

Make a plan for how you want to use your Chunks before they show up. Do they all go into your investment pile? Toward mortgage principle? Down payment for a house?

The Chunks can come to you from many places so you need to ready for them when they show up. We talked already about tax refunds, that’s a common one. How about bonuses from work? From selling some of your crap on Craigslist? Maybe downsizing to a cheaper car?

You never know when the next Chunk is going to come along. It’ll pay to be ready for it.

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10 Thoughts on “Pretired lesson: The Power of the Chunk

  1. Love it! So true! Exactly why I used to love getting a huge chunk back from taxes too – way before I was self-employed and had to switch to the dreaded quarterly taxes, ugh. It felt like I was giving myself a raise every year which I would then do exactly what you mentioned – pay off any loans or invest/etc. Bigger impacts are much more fun to me than little ones anyways as you get bigger jolts out of it. And as we get older (sad face), it takes more and more to get a rise out of us!

    PS: I just went from loving you, to hating you, for that box we have to click for the Seahawks! Leave my Redskins alone and let us advance into the playoffs one of these times, will ya! It takes us 10 years to get there already! 😉
    J. Money recently posted…Proof That Getting Out of Debt is VERY PossibleMy Profile

    • Pretired Nick on November 12, 2013 at 2:59 pm said:

      I know, it’s so great to have an actual chunk you can do something with instead of having it trickle away!
      Oh you follow the unfortunately named Washington, DC team, eh? Ouch. Well, we’ll just put you down as a Seahawks fan for now…

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  4. I personally prefer to NOT get a tax refund, and keep my money in my own pockets instead of the government. I don’t need the government to help me create a savings plan when that extra money that would go towards taxes goes directly out of my account into investments. It’s still gone, I can’t spend it frivolously, but I get the benefit of compound interest.
    This Life On Purpose recently posted…Flexing That Frugality Muscle: Is there such a thing as overexertion?My Profile

    • Pretired Nick on November 13, 2013 at 10:12 am said:

      Mathematically you’re SO right, however I think most people lack that discipline and it makes for a convenient way to control spending. My guess is most people who are fairly financially sophisticated follow your approach. The vast majority of people, though, are so focused on not letting the government touch “their” money that they set themselves up for problems.

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  6. I’d never really thought about this before, but you’re totally right! When I just have a few small bills floating around in my purse or jacket pocket, I definitely think of them more as a cup of coffee or dinner out tonight and less as a real part of my budget. Great post!
    Mel @ brokeGIRLrich recently posted…Five Dolla’ Make You Holla’ Holiday Series: GrandpaMy Profile

    • Pretired Nick on November 17, 2013 at 6:43 am said:

      Thanks, Mel! All too often psychology is neglected when talking about finances, but in some ways it’s the most important thing! Thanks for the comment!

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