In the last post I talked about how I save money and earn money. This week I will talk about how I spend my money. I think that I spend my money very strangely compared to normal people, but to me it makes a lot more sense.
Most people think about investing long term, but I think about spending long term. Of the money flowing out of my accounts, I want as much as possible to go towards things that will still be benefiting me 10+ years in the future.
For example, I'll spend anything on the best computer possible because if it makes my work 5% better, that effect will ripple through my future. I spent $1000 on the best pots and pans more than fifteen years ago, and will probably never buy other ones. I'll spend money on trips with friends, because doing so strengthens bonds with the people who will be around me for my whole life. I'll pay good money for healthy food and tea because my health is important.
I will never finance anything. My personal rule is that if I can't afford to buy something cash, I can't afford it. I would like for as much of my money as possible to go to utility, and servicing debt takes money out of that pool. Monthly payments are a direct affront to freedom. If you pay cash for everything, you have the ability to throttle your monthly spending down to almost nothing. If you have monthly payments, you don't have that option. Debt makes you responsible and vulnerable to others through mechanisms beyond your control. Look at the people who were wiped out by the housing crash.
I like having nice things, but that is a very distant priority to not having to worry about being able to pay my bills.
Value is infinitely more important to me than price. That's why I never budget (though I have tracked spending for multiple months to take a reading on where money goes). Even though I could have taken a train yesterday, I took a bus because it saved me $30+. But if a great deal on a 20 day cruise came up tomorrow, I'd buy it in a second.
I don't buy into the "hourly rate" fallacy that people often use to justify spending money. An hour of my 100% focused time, scheduled ahead, is worth a ton to me, which is why I charge a lot for coaching. A random in-between hour in transit is worth a lot less. In the bus situation I could have kicked around a hotel room for an extra 30 minutes if I had taken the train. That's worthless time, so I'd rather save the money.
One of the biggest mistakes I see people make is the failure to delay gratification. If car financing people would instead buy a beater and save up money to buy a better car, they'd be much better off. This has financial benefits, but also strengthens the character through stoicism. I have a Bentley now, but for the few years before I drove a car I bought for $1600. I was just about equally happy with either. I calculated that I saved $144,000 by living in an RV for many years. In some ways it was delaying the gratification of having a place with unlimited running water, but I also enjoyed it and became happier with less.
That process of delaying gratification and becoming happier with less lets you appreciate even more the things you eventually get down the road. In a way, this increases your returns because each dollar you spend will be appreciated even more.
I try to make value decision irrespective of income, though I'm sure I subconsciously relate the two. In the past two years my lowest month of income is somewhere around 5% the highest. My spending during those months is probably only 20% different. My thought is that something is either a good value or it isn't.
To wrap up this two-post rundown on spending: save as much as possible, keep investment return/risk ratio good, invest in utility, spend money on value, never finance, live below your means. There are other systems other people use successfully, but this one works great for living a very good life with no stress.
Photo is some sort of water mill in the Azores. Getting off this cruise today, unfortunately!
I think that the way most people spend money is absolutely nuts. I see people buying things they can't really afford, or things that will have no lasting impact on their lives whatsoever, and I cringe. Be frugal, I want to yell.
On the other hand, there are people who go way out of their way to save a dollar, even When spending that dollar would really make their life better, or create some lasting memory that would impact them long after the dollar was gone. Don't be cheap, be frugal, I want to yell.
Maybe a better phrase for frugal, at least the way I think of it, is financially-efficient. And just like most mistakes I see people make, this one stems from not actually thinking about decisions and just going with the flow.
Money should only be spent if you have it, first of all. Just because everyone else has a car doesn't mean that you are somehow entitled to one, too. If you don't have money for a car, don't buy one. Never finance anything, with the possible exception of a house. Even then, I think it's usually a bad idea.
Edit: I gave up on financial goals in late 2011 after some huge financial and artistic wins... money shouldn't be taken too seriously. For the record, they were all basically on track, some were being massively exceeded, others were a bit behind schedule, but were all happening.
I set my next 10 years of financial goals on June 28th. That was exactly a month ago.
1 year - Critical Thinking [my first book] out. Blog income trickling. Some info products. Some freelancing. Something else, some X-Factor thing bringing in cash. Net monthly income positive. Health insurance. $50,000 in the bank. Expenses = income per month minimum.
3 years - 3 to 5 books out, many products out, blog income robust, some working on big exciting deals. $10,000 per month total, $5000 passive at least. First property owned. $300,000 in the bank.
5 years - 7-10 books out, many many products out, many passive income internet properties, working on big exciting things, $50,000 per month total, $40,000 passive at least. $1,000,000 in the bank.