A lot of the personal finance world will tell you to never spend money. Ever.
Read a few money articles, and you may soon start believing that there’s no quicker path to complete financial destruction than buying a $4 morning coffee.
Nonsense.
For us mere mortals, swearing off all spending forever is likely to be about as successful as the latest crash diet fad. After a week of drinking smoothies for breakfast, lunch, and dinner, is it any surprise the first thing you’re craving is a heaping mountain of food?
In the same way, taking this extremist view on spending only ensures feelings of shame and guilt, even for necessary purchases or things that may actually improve your life. This is not on anyone’s recipe for a healthy relationship with money.
Short of living off the grid, spending is at times necessary, and can even help you remain sane while living a non-hermit lifestyle.
Wait, what?? A frugal personal finance blogger who won’t execute me for spending a little bit of money??
Yes, spending money on what makes you happy is perfectly okay, but there’s an extremely important catch.
Don’t waste money on things that aren’t important to you. There is a big difference, and here is where most people get it completely wrong.
What makes you happy is not decided by your friends, your neighbors, or the commercials on TV.
Just because the car industry spends billions of dollars every year trying to convince you that parting with $30,000 of your hard earned money will make you feel good, doesn’t make it true. Just because your friends enjoy spending lavishly on clothes, doesn’t mean that’s for you. Maybe you enjoy travel more. Maybe you enjoy something else entirely.
Thankfully, I have devised a system for evaluating your spending which eliminates all waste, and ensures your discretionary income goes only to buying what is most important to you.
Step 1. Putting Your Spending into Perspective
Imagine you make $50,000 per year. You find a bottle, and inside that bottle is a genie. He proposes you a deal.
You can have that new $25,000 car you’ve always wanted, but there’s a catch. You are indebted to him for 6 months. For 6 months straight, you are under his watchful eye between 9 AM and 5 PM. You do exactly as he says, working on exactly what he wants. No arguing allowed, he sets the rules and you carry out his tasks. He’s a generous genie though. He allows you a 30 minute break for lunch, and he allows you two days of leisure each week.
At the end of those six months, the only thing you get is your new car. Would you trade a half of year of freedom for that one nice car?
I wouldn’t.
Everyone, every day, is granted options from this hypothetical genie. And day after day, we fail.
The question you have to ask yourself before every purchase is:
“How long would I have to work to buy that?”
Money, at its core, is a unit of exchange for time.
- When a plumber fixes a toilet, he’s selling his time to diagnose and fix a problem.
- When a craftsman sells a table, they are selling the time and expertise that allowed him to create a desirable piece of furniture.
- When an office worker receives her paycheck, she and the company are placing a value on the hours of her life devoted to the business’s strategic goals.
Reaching financial independence grants you unlimited freedom with your time. Burying yourself in debt imprisons you to spend time earning wages to pay off your dues.
The key lies in trading your time for those few special things in the world which are truly important to you.
And to do that, we must determine an item’s true cost.
Step 2. “How Much Does That Really Cost?”
When you buy any item, how much are you really paying? Our good friend Uncle Sam has a say in that, and he’s awfully skilled at quietly pushing prices up without us realizing.
Yes, I’m talking about taxes.
Everything in this country is purchased with after tax dollars. Assuming you’re in the 25% income tax bracket and a law abiding citizen who contributes to Social Security and Medicare, you are paying somewhere around 27% of your salary to taxes.
That’s nearly a third of your working hours before you ever see a penny.
Your $30 steak dinner? You have to earn $41 dollars to pay for it, because the tax man collected $11 before you ever got a cent.
Don’t forget about regular old sales tax either. My city has a nearly 10% meal tax (what’s yours?) which pushes the final cost of that dinner to about $45 dollars. If I drove to the restaurant, I can expect to pay taxes on the gas as well.
And what about the hidden costs of employment? Is your $25 an hour salary really $25? Or do you have to:
- Buy expensive suits and clothes for your job?
- Drive 10 miles to work every day and have the gas bill to prove it?
- Perhaps your groggy mornings force you to grasp every last minute of sleep, leaving no time during the frantic a.m. for packing a lunch but plenty of holes in your wallet from eating out?
Remember our hypothetical genie? He really was generous, because he didn’t yet calculate the effects of purchasing with after tax dollars, sales tax, or work related expenses. Had he done so, he’d have seen that the car listed as $25,000 actually costs well in excess of $36,000, and 6 months is a deal compared to the nearly 9 months of salary it will really cost you.
Rest assured, slowly but surely through the veil of hidden costs, the true sticker price of everything you see can be nearly doubled.
Step 3. Re-Thinking the No Thought Purchase
With this in mind, it’s time to bust out the seriously scrutinizing magnifying glass on where we are spending our money.
- $8 lunches: Are those extra 10 minutes of sleep really worth the $12+ true dollars this lunch is going to cost me? Are those extra 10 minutes of sleep really worth working nearly a half hour in a cubicle? Or would it be a better use of my time to hit the hay a little earlier the night before and take one small step towards financial freedom?
- $20 event parking: Working for nearly two hours just so I can shuffle my lazy self right into the event? No thanks. I’d rather plan ahead and park a little farther down the street. Not only does this grant the opportunity to carry out the world’s most currently underrated activity (walking) but it also allows exploring the beautiful city or neighborhood first hand.
- Trinkets, gadgets, souvenirs: Throwing down a couple bucks on a cute, modestly priced whatever in the gift shop seems like a quick and painless process. It’s a fast transaction and you didn’t even notice the $25 dent in your wallet. Now consider the time spent at work, on calls, and dealing with difficult customers that earned you the nearly $34, which finally whittled down to the $25 in your pocket today. Is it still worth it? Lord help if you that gadget happens to be a $1,000 MacBook…
I recently went on a much needed vacation. I scored a deal on airline tickets, which was the one mammoth expense I imagined making up the bulk of the trip’s cost. Yet when I reviewed my spending from the trip, I was shocked to see my airfare cost paled in comparison to the no-thought purchases throughout the vacation.
Snacks for the car ride, a quick beer at an interesting spot, last minute sunblock, lunch at the airport… it was this sort of no-thought spending that ended up costing the most. The airfare and vacation were unquestionably worth it. The mindless spending? I can’t say the same.
This exercise can be applied for nearly every item that scrolls across your mind’s never ending conveyor belt of impulse purchase ideas. When the buying decision is framed in the quantifiable days, months, and years of life an item truly costs, the money wizard thinks twice.
Money’s Most Powerful Feature
What we’re really getting at is something much deeper, and it’s one of the most important aspects of frugality: the power to buy time.
No, not a gold plated pocket watch…
We’ve seen from the effect of taxes that saving is more powerful than spending.
Because every dollar spent is representative of an even larger number of dollars exchanged for your precious, limited time on earth, any lack of spending implies the exact opposite. Refusing to buy leaves a commodity far more precious than any piece of man-made metal or plastic. Not spending your money immediately and instantly buys you time.
By opting out of excessive consumerism, you no longer trade your hard worked time for material goods. Instead, that time and effort is retained. It’s not gifted away to a restaurateur or a car manufacturer, but it’s held by you, ready to be cashed for freedom.
To spend is to fight the current of taxes. To save is to take a bridge over that river, grab a life raft, and begin rowing with the currents of compound interest and tax advantages.
The next time you are faced the burning desire of purchase, run a quick calculation to see just how much time you are trading for the want.
If you still feel like trading your hard earned time and money for whatever-it-is you’re dying to have, then you just may have found one of the rare purchases worthy of passing through the money wizard filter.
But if you wouldn’t take the deal with the genie, then it’s not worth buying.
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I don’t believe in spending no money as well. I live your analogy to only drinking smoothies and still wanting food. That is why I don’t believe in spending fasts. If you concentrate on making sure you are spending money on things that bring joy and add something to your life, you will be fine.
Exactly Thias, it’s all about finding what really, truly adds joy and what’s just a waste. The rest will work itself out.
Lovely lofty goals….but reality has a way of biting you in the ass when a wife , child comes along or a job offer in an inclement locale is dictating a leap from frugality into adulthood.
Plenty of people older than me with families, who save even more than I do. Just because it’s not common doesn’t mean it’s not possible.
I see this idea that it is easier to save when you are single thrown around a lot, but I think it is a fallacy. If two people in a relationship have the same goals then it is actually easier to save. If both people work then that is more income, but cost barely go up. A couple now shares in the cost of rent and utilities etc. It’s cheaper to cook at home anyways and barely adds to the cost by adding another person or two. If only one spouse works and the other handles the homemaking then that leaves more free time for each to spend together, where as one person would have to come home from work and do chores. True, that actually having a child is expensive, diapers are expensive, but after only a couple of years they are eating the same food cooked at home(and likely healthier) that the adults are eating and barely adding to the cost. Children grow quickly and DO NOT need designer clothes. My wife and I do most of our shopping at yard sales, not that we can’t go to the mall, but it is more fun finding a sweet deal.
Couldn’t agree more Jeremy. My savings increased quite a bit when I moved in with the girlfriend.
I agree about the kids too, although I don’t have any yet. I take you might?
I agree with Jeremy. If I know what I know now I would probably be writing a blog on how to become a thousandnaire or billionaire too. Please let me know when you have kids and a family like Jeremy and I.
i like your intention of opening people eyes ,but,it s pretty unrealistic what your trying to say ..youre calculating everything in time ,you`re so sure you have it, nobody knows how much time has left my friend ,so saving money with the thought of gaining time it`s a utopia anyway a lot of luck with the idea !!
The thoughtless purchases are what killed me for a period of time. When I was in college, I would spend every meal eating at one of the campus eateries (at full price) and I almost didn’t have any money in my bank account. I had to stop eating out so much.
The most painful part for me is when I add up all the mindless spending and realize how large the final number is. Then I compare the number to a large purchase I spent weeks agonizing and debating over. Maximum cringe achieved..
How do you save money when you are surviving paycheck to paycheck. Trying to move from a house to a apartment. What is the percentage to take and put in the bank from the paycheck. I want to put money away to let it grow and retire.
The best percentage to put in the bank is more than you’re spending. If you’re living paycheck to paycheck, it’s time to evaluate your lifestyle and pick out areas of saving. I’ve noticed the fixed expenses are usually the biggest contributors to a paycheck to paycheck lifestyle. So… Avoid consumer debt. Don’t ever pay credit card interest. Re-evaluate your living arrangements. Make sure you’re not spending too much on vehicles. Watch out for monthly subscriptions. Cut back on thoughtless spending.
If after all this you’re still not able to save, then it’s time to make more money. Either put in more hours or start working on ways to improve your earning potential.
I love this post. It is important to experience life, but understand what is important and what is not. I recently flew to the West Coast to attend my son’s wedding. Was it in the budget? No. But it was priceless time spent with loved ones. That’s why I am dedicated to wealth through willpower and wisdom – to adventure and experience!
Hey Cash Crone, glad you loved it! That’s even above “liked”… You’re gonna make me misty eyed now. 🙂
You’re right though. The mindful spending is what lets us break the bank for those important moments, completely stress free. Glad you were able to enjoy your son’s wedding, sounds like a priceless time.
Stumbled across your blog on Facebook and love what I’m reading! I’m a soon to be college graduate (3mo from now) with about $35K in student debts *cringe*. Any good tips you could give me to get those payed off immediately and start my path to financial freedom? Feel free to shoot me an e-mail or reply back here!
Thanks,
Riley
Hey Riley, best advice I can give is to live below your means and attack those loans with everything you’ve got. Far and away easiest way I’ve seen is to keep your overhead low. A lot of your friends will graduate and immediately rent the most expensive, trendiest apartment they can “afford”. Same goes with a car. Avoid this trap, and you’ll have so much breathing room in your budget those loans will be gone in no time.
I plan on releasing more debt focused articles in the future, including an interview with my brother. He’s lived modestly and absolutely destroyed his loans, and picked up a lot quality insights in the process. Stay tuned!
What is being said here is so true. I love that phrase “mindful spending.”
One question I always ask myself is – “is this a want or a need?”
One of my operating methods is frugality. There’s a difference between frugal and cheap. Frugal is buying the best that you can afford THAT MAKES SENSE and not paying anymore than you have to fo it. Cheap is just that… won’t have it long and not something that will nor should it be expected to last. Those last parts are so important, especially for durable goods – things you plan to and should keep for period of years. For example, a car is used to get from point a to point b. You can spend 15k or 75k, it will get you there just the same. I will choose something that has enough room and amenities to be satisfying so that I can be happy to keep the item for the long haul, it’s quality is good, taking good care of it, and be CONTENT with it for a long time. I have two vehicles, 9 and 21 years old and still very content with each…. you take care of it and it will take care of you!!!!! Oil changes every 3000 miles no matter what the specs say.
Clothes would also fit this bill…. choosing classic well made clothing, taking proper care of it , and if I want trendy, use modestly to accomplish that. I have work shoes in two colors, black and navy…. that covers all my needs. I do not have 20 pairs of shoes in twenty styles and colors.
Good points P rog. I agree, I too have a pretty minimalist work wardrobe. It covers my needs, and it’s one area I don’t feel my quality of life wouldn’t increase with more spending. Like you said, it’s all about mindful spending.
CORRECTION last paragraph –
If I want trendy, use modestly priced accessories to accomplish that
Again great article. I use an APP caled YNAB. You Need a Budget. I love that my mindless spending became very conscious by recording every expenditure.
I’ve heard good things about YNAB, but never checked it out myself. Glad it’s working for you!
I chance upon your blog while reading Business Insider. I just want you to know that you have a reader here in the Philippines.? Great tips and very realistic!
This internet thing never ceases to amaze me. Hello to the Philippines! So cool, and I think it’s safe to say you might be the #1 Money Wizard reader in your country!
Hi, I’m reading your Blog for two days now. Great. Keep writing, studying and sharing the ideas while reaching your goal. Good luck!
BTW I’m from Slovakia, in the middle of Europe:)
Awesome to hear, thanks! I especially enjoy hearing from the site’s international readers!
Another reader from Slovakia! (originally from Romania). Stumbled upon your blog by sheer luck, have reading through your posts and they have been very insightful and got me thinking a bit harder on what do about my money situation. I am a 30+ home “mortgage” owner thinking how to save up and pay that as first but also invest and make a cash reserve. Keep up the good work! Looking forward to new posts.
Thank you for your posts. I have an immense amount of admiration for your retirement goal. Unfortunately, I did not think about retirement in my 20s and 30s and am now in my 40s trying to pay off the many debts I accrued over the past 20 years. Sure, I have traveled and had experiences that I treasure deeply, but I also have many material things (many of which I am selling on eBay at a fraction of what I paid) that that I thought were important and did not bring me nearly as much joy as experiences such as travel or time spent with friends and family. Once I pay off all of my credit cards, I will start diverting much of my earnings into savings and try to play “catch up” as best I can. If I could do it all over again, I would make a decision to live below my means, not succumb to the pressure to have so many material “things” and focus instead on financial freedom and keeping myself healthy (as no amount of money can buy health). Kudos to all of you in your teens, 20s and 30s that have already realized this important life lesson.
Thank you for your wise words! Glad you are enjoying the posts.
I found that after I decided to cut spending, I was buying more CHEAP crap than I needed because I convinced myself that I was still saving money by shopping used or wholesale. i.e. not buying $40 name brand sweater and instead buying $60 in clearance or used clothes. Passing on weekly $50 dinners and instead buying double that in fast food, coffees and quick grab items.
You make a lot of good points and I hope to implement them. My husband makes pretty good money, but his job is strenuous outdoor labor and he’s no spring chicken anymore. We worry what we’re going to do when he can’t work anymore. We have $0 in savings. yup. zilch. Not because we’re broke, but because we spend. I rarely look at our account before purchasing. I just swipe.
My favorite part of your article was the “How much does that really cost?” Easily puts things in perspective. Thanks for sharing!
Glad you enjoyed! It really is amazing how the small purchases can silently add up to so much.
Hope you succeed! Thinking through and questioning spending seems tough at first, but it will become an automatic habit before you know it, and you wallet will thank you. 🙂
A great article on living within the means. Good advice for mindful spending. It is important for an earner to avoid debt trap. Save when you earn!
Thank you for this article. Could you walk me through your process for computing the true price of things that you talk about in Step 2 (“How Much Does That Really Cost?”) ? I’m really intrigued by this idea in particular. Thanks.
This would be an easy topic to discuss; however more than half of the current working force today has student debt. I’m lucky enough that my wife also works and pays for the house, while I pay for my school. Now granted if I did not have my student loans, I’d be able to sock away about 60-70% of my take home pay. If you truly make 80k yearly, as stated in MSN new, you obviously don’t have to pay a student loan like most of us.
What a great post! Thank you for writing
I read a book once called the Automatic Millionaire that lets you put your savings on autopilot. And there’s quotes like “The rich pay themelves first while everyone else pays themselves last.”
If you make savings automatic, then it’s okay to buy some other things as long as you are increasing your net worth and make savings a priority. Of course, life gets in the way and sometimes we must dip into savings.
What has worked for me is putting money in assets that are hard to touch. It’s so easy for me to go into my checking/savings and spend. Money parked in non-cash assets is much harder to liquidate.
Money should be used to enrich your life, and those of your dependents, and also to Give to the needy, instead of forcing yourself and your dependents to lead a miserable life with all the self-imposed stupid restrictions on what you can spend for what purpose, when, how often, and so on. If one is forced to drink a Caramel Macchiato only once a month on Friday afternoons after 4pm, and only after the head of the household sends a text approving that trip to SBUX, that head of the household needs to get a psychiatric evaluation. The other extreme is doing whatever gives you joy/happiness and getting overloaded with debt and no savings in that process, is also absolutely irresponsible.
“One of the most important aspects of frugality: the power to buy time.”
It’s funny that, all too often, folks who don’t want to make changes to their personal finances and reduce their spending retort with the idea that by saving—or especially investing—they’re not “getting” anything from it.
As if the money has disappeared out the window when it’s saved/invested.
Really, it’s a decision to buy the most valuable thing: your own time back.
Good read!
My name is Bob and I am a “Money Waster”. I even buy cheap luggage and take old clothes on trips so I can discard it at the hotels so I don’t have to carry anything home. Just so you know… there are crazy people like me out there.