In professional baseball, each team’s payroll is largely associated with the size of its market or city. That means teams in larger markets can typically afford more superstar players. This leaves teams in smaller markets at a disadvantage because they’re trying to compete with less money. The result is obvious: teams in large markets usually win more than teams in small markets.
Moneyball is the true story about how the Oakland A’s, a small-market team, used a revolutionary strategy to compete with large-market teams, despite having far less money. There are a few lessons you can take from their strategy in order to revolutionize the finances in your own life.
How it All Began
It started in 2001 when the A’s lost to the New York Yankees in the postseason. Early in the film, it’s revealed that the Yankees payroll at that time was $114,457,768. Oakland’s was $39,722,689.
We quickly learn the problem doesn’t end there. Shortly after the postseason loss, three of Oakland’s superstar players left because wealthier teams offered them salaries Oakland could not afford.
With no access to more money, Oakland General Manager Billy Beane (Brad Pitt) is forced to think outside the box to build a winning team for little money. Enter Peter Brand (Jonah Hill).
The Strategy: Statistical Analysis
Peter is a young Economics graduate from Yale who does player analysis for the Cleveland Indians. He feels most teams misjudge the talent of players and mismanage teams because they’re aiming to buy players when they should be aiming to buy runs. He introduces Billy to the concept of “Moneyball,” a model of statistical analysis where teams buy undervalued players and sell overvalued players.
PETER: “Billy, you’re trying to replace Johnny Damon. The Red Sox see Johnny Damon and they see a star who’s worth $7.5M dollars a year. When I see Johnny Damon, I see an imperfect understanding of where runs come from. The guy’s got a great glove. He’s a decent leadoff hitter. He can steal bases. But is he worth $7.5M a year? No. I think it’s a good thing you got Damon off your payroll. I think it opens up all kinds of interesting possibilities.”
Billy is sold. He adds Peter to Oakland’s staff and the two of them begin to defy traditional scouting and make trades that almost get Billy fired. Though Billy and Peter are harshly criticized for Oakland losing 14 of its first 17 games, their plan paid off BIG TIME. In 2002, the A’s finish first in their division and win more games than they did the year before.
Baseball is forever changed.
So, what does it have to do with finance? A lot!
Lesson 1: Open Your Mind to New Ways of Doing Things
In the beginning of the movie, after Billy loses his top players, he asks the team owner for more money. Luckily, the owner turns him down, because if Billy had gotten the money, he wouldn’t have seen the success he did. In the same respect, most people who can’t make ends meet look for a better-paying job or ask for a raise without realizing bringing more money in doesn’t change the situation if spending habits stay the same. So, instead of looking for more money, open your mind to new ways of spending the money you have.
Here are some tips that can make living within your income easier:
Look for Creative Ways to Pinch Pennies
Billy didn’t have Johnny Damon on his roster anymore so he had to come up with a way to recreate what Damon brought to the field. That meant three less-expensive players who, when combined, resulted in Damon’s output. For you, that might be skipping Starbucks and bringing your own coffee to work.
Set Money-Saving Goals
It’s easier to stay motivated if you think about what you’re saving for. For example, a fun vacation. You don’t have to use the money you save for the vacation, but keeping that goal in mind makes it easier to say no to things like expensive cocktails or a fancy meal you’ll forget about a few hours after you eat it.
Automate Your Money
Have a portion of each paycheck automatically deposited into an account that’s separate from your main account. Keeping the money out of easy reach makes it harder to use it impulsively.
Have a Budget
Figure out how much of your earnings you have to spend on housing, food, transportation, etc. Make sure to leave room for unexpected debt. Then, see how much you have left over for leisure activities and make sure you stick to those limits. We have a budget tool that could help.
Go Shopping with a List and a Friend
Make a list of what you want and share it with your spouse or friend ahead of time. Having a list keeps you on track, and knowing someone else is aware of it makes you more accountable for your actions.
Lesson 2: Know When to Cut Your Losses
When it came to first basemen, Billy had two options: Carlos Peña or Scott Hatteberg. Peña was a better first baseman and a promising rookie. Hatteberg had never played first base and had a bum arm, but to Billy, that didn’t matter. His goal was to get runs, and Hatteberg cost less than Peña and got on base more often, so he traded Peña. It wasn’t a popular decision, but it was the right decision in relation to his goal.
So, what’s your goal? If it’s to spend less and live within your means, you may need to consider trading your expensive car for something more affordable. Sure, you love your expensive car but you might love the financial freedom a less expensive car brings more. And let’s face it, both cars get you from point A to B.
Lesson 3: Have an Emergency Fund
Billy was a risk taker. Some of his choices could have gotten him fired. If that had happened, he would have needed an emergency fund. It’s recommended that you have three to six months of living expenses set aside for emergencies. Here are 3 Tips for Setting Up an Emergency Fund.