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.
Financing things ensures that you pay more for them than you have to, whether through interest or a higher price that allows the vendor to offer free financing. If you had just saved the money and then bought the item, the opposite would have happened. You would have earned interest on the money, and thus had to spend less on the item.
If you can get ahead of that curve, you're at a real advantage. You buy a crappy car that gets you around, and then you start saving money. Maybe later you buy a slightly better one with the money you've saved. You can keep repeating that cycle, and eventually you end up with a nice car and no debt. He who finances will end up trading cars as well, keeping debt as a permanent part of his life.
But maybe you shouldn't buy a nice car anyway. The first category I see people spending too much money on is things to impress other people. If the car you have is making the difference between how people act towards you, you need to find new people to hang out with. In the end, unless you have a Ferrari or something, no one even notices.
When spending money, people think most about the price. This is completely wrong. The first consideration should be the value of the item when you're done with it. Will it be worth anything at all? A night in a fancy hotel won't. A fancy car will be worth much less. On the other hand, a used Rolex may very well be worth more. Same with some art. In the middle are things like Apple laptops, which depreciate, but not by much.
If you operate in a surplus, always paying cash for things, keeping a buffer, never going into debt, the only real cost is the difference between what you paid and what you'll sell the item for later.
You have to spend some money on things that depreciate to nothing. Food, for example, unless you're selling your sewage. If you have to buy something that depreciates, optimize for utility. With food, that means that you buy healthy inexpensive food. Unhealthy food actually depreciates beyond zero because it damages you and causes medical bills down the road.
Experiences and travel depreciate to zero, but are often worth spending money on. The key is to spend money on the things that make the expenditure worth it. Your trip to Japan will be remembered forever because of the people you spend time with, and the culture and nature you see. A fancy hotel will be forgotten.
Education, even if it's not going to lead to a income, can be worth spending money on. I paid to have a one-on-one MMA lesson from a fighter I admire. I'll probably never even fight, but it was worth the money to see the world from a different perspective and understand what fighting is about.
Experiences and education are methods of transferring financial value into personal value. You become a better person by going through them. On the other hand, that doesn't mean that every experience or educational opportunity is worth the cost. The only reason I haven't gone back to Burning Man for a full week is because I don't think it's worth the money for a week, compared to other experiences I could have. College has a lot of value, but I think it's radically overpriced. Fifty thousand a year could buy you a thousand hours of one on one training with experts at $50/hour. Instead you get bulk training, a fun social environment, and no flexibility.
The key to a good life is thinking about one's decisions, rather than going on autopilot. This extends to financial decisions. Build a surplus rather than debt; focus on the cost of things, not the price; spend on experiences and education when it's a good value.
Photo is an awesome home-chopped car that I saw at the Flying Circus air show.
My habit book is coming out next week! I think it's easily my best book yet and I'm really excited to have you read it. Just have to finish up one chapter and do the layout. Goal is to have it ready by Thursday next week. Will be available on Kindle, and I'll post here about it.
I'm in the process of changing my spending habits and I can appreciate this article. While some of what you wrote came across as "it's only valuable if I think it's valuable" - MMA lessons? Really? - I think the point of your article was "just make sure you get something valuable and lasting from your money." For some people that might be driving an amazing car every day, especially if they spend a siginificant part of their day in that car, but for others it might be 2 weeks in Australia. My ex LOVES his car and every day, throughout the day, his car brings him pleasure and adds to the quality of his life. It gives him a sense of power, control, recklessness, fun, and success that spending time with people in China conversing about their daily lives could never rival. A crappy car would detract from his quality of life and his overall happiness. That's him and what makes him happy. Me? I'm about to move into a cheap 2000 Chevy conversion van and travel the US for a couple of years but I'll have the latest and greatest Ipad when I do it. That's what makes me happy. I don't think he's wrong for enjoying his money in a way that means nothing to me; his life isn't my life and his goals aren't my goals. I guess really it's less about what other people think about our spending habits, and more about making sure when we look back on how we spent our money, which equates to our time, which equates to our lives, that we don't look back at regret and nothingness.
Most people know the price of everything and the value of nothing - and I agree with being frugal - however - sometimes, the stretch to 'do' something bonkers is the best spend ever...can't take a rolex with you....sometimes super memories are the best investment.
Hi Tynan, I just started reading your blog this week and scrolling through some of your old stuff is really interesting. I have to say that I really enjoyed this latest post. I completely agree with what you are saying here, not many people really understand the value of what they are purchasing. I personally am a money saver but I also happen to be a 20-year-old girl and I’m not going to say that I don’t like materialistic things. Being able to spend your money on yourself for a treat is something I like. I spend a lot of time either working or at school and I think I personally missed a lot. It’s nice to have certain things but I am starting to realize it’s more about the experiences. Of course there’s also college, which is way too much money (if you ask me) If it wasn’t completely necessary now to have a degree in order to get a good job I believe I would defiantly reevaluate spending the money to sit in school. Not to mention the fact that going to college doesn’t even guarantee you a job anymore your spending money on classes hoping for a job, borrowing money that you will eventually have to be paid back in 10+ years (hopefully shorter)
Recently my boyfriend and I have come up with a list of things to do on special occasions instead of spending money on a material object that we don’t really need. This year we already went to a Rangers game (my first one! It was nothing like I expected) a Broadway play (Aladdin) and a country concert (Brad Paisley) All of these things were new experiences to me and they were all better than getting some thing that will be used once and done. Experiences are what it is all about and I couldn’t agree more. I’m currently trying to change everything I do in order to have a more full life so I can look back and remember a good time. I have learned that there are better things to spend your time and money on.
I am managed to run my life as cheaply as possible. We use credit cards only to avoid carrying cash. 0 balance every month. We do buy new cars but we shop smart and pay cash. Maintain them extra well and you'll get 200K out of a car. We live right on the ocean with no house payments other then an HOA. Dave Ramsey has a series of videos on how to live debt free. I can shorten it up STOP BUYING CRAP YOU DON'T NEED!
Seems to be a slight contradiction in this piece:
"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," and "Experiences and travel depreciate to zero, but are often worth spending money on.." EXCEPT, you then go on to say: "A fancy hotel will be forgotten"
Who's to stay spending a night (or two) in a fancy hotel wouldn't create some sort of lasting memory?
From the point of a solo traveler/world nomad (you and me both), I get this. But from the perspective of a married man or woman? Or a man or woman in the throes of a romantic relationship? I'd bet the bank that a night at a fancy hotel could definitely be one to remember.
Maybe I'm just being nit-picky - missing the forest for the trees.
The rest of the piece I agree with.
I thought the same thing you did, (but I don't think Tynan meant anything by it). I instantly thought of a memorable hotel I stayed in, in Switzerland, on Lake Lucerne. The Hotel Kastanienbaum, but the memory was because the hotel itself was so unique (not just extra plush). We stayed there because it was just out of town from the city of Lucerne so it was cheaper than staying IN Lucerne.
I just went to their website for the first time (ever) and the pics of the interior rooms look nothing like when I was there in the 80's (the outside looks the same.) Staying there when I did, was much like staying at Hansel and Gretel's house. Very old German. My first and only down-filled BED (we sunk into the bed), with down filled comforters on top. Old fashioned parquet floors that squeaked with every foot step. We were trying to let my father nap, and as my mother and I 'squeaked' across her room to the door, we ended up laughing until we were crying because we were making so much noise trying to be quiet. The bath was at the end of the hall and I took a bath in a claw foot tub, with a 2 meter sq. window, WIDE open, (third floor) no screens, no bugs, and I could see a small herd of cows on a high meadow across the way, AND I could hear their cow bells. All these cowbells, gently ringing together in kind of a low, mesmerizing, mantra-like sound. --- I will never forget it. --- Again, this hotel WAS the experience, so not really the point I think Tynan was making.
The book "The Total Money Makeover" by Dave Ramsey is also a good one and agrees with Tynan on a lot of points. This is a tough pill for me precisely right now. I have made great strides though in the last 1.5 years. I have eliminated literally tons of material possessions which does clear room for more memories and experiences. That was\is my goal. You cannot take the junk with you when you die anyway is another common saying. So if you cannot take it with you (obviously) what is the point in dragging it around with you for decades... Or if you and your material possessions were in a burning house - you get out alive. Whatever material possessions were inside is just stuff, stuff you can replace. I am down to one piece of debt, I am very torn. Good post, good post.
I have always though how similar your thought patterns are to the author of another blog I follow. Mr Money Mustache has hit on all the points you covered and came to the same conclusions.
Great advice. I just watched the former Governor of Virginia and his wife get convicted on tons of felony charges yesterday. The money they got from a wealthy businessman, who testified against them, went to silly things like expensive clothes, shopping sprees, an expensive wedding for one of their daughters. It was so sad because the guy was a really nice, good person. The wife started the whole relationship with the businessman to live the rich lifestyle. Now, they are both looking at long prison sentences.
As I've mentioned before, I'm pretty frugal. I like spending money on things like the island, travel, and good food, but I also like saving money. I spend very little money frivolously, and don't have an overwhelming appetite for luxury.
I don't make much money, either. I'm content to have enough income to fund my inexpensive lifestyle, to save a little bit most months, and to retain control of almost all of my time to invest in big future projects like Sett.
Relatively frequently, though, I'll have a small windfall. Sometimes I'll have a good run in poker where I make a few thousand dollars within a couple days. My new book, Superhuman by Habit has been doing really well, too. Thanks to my readers and friends, it's been in the top 1000 books on Amazon. For a while last year my bitcoins were worth a bunch of money.
In these sorts of situations, it can be tempting to spend more money. People bargain with themselves, allowing themselves to spend some or all of unexpected sums of money they come across.
I've been thinking about people who are "good with money" lately. Certainly, being "good with money" is superior to being "bad with money" - people who are bad with money spend a lot of their life in unnecessary stress. Generally, being "bad with money" would mean not being in control of your spending, having debt unnecessarily (if you're just carrying around a lump of debt, you only need to cut your spending in the short term to get rid of it, and then you can go back to your old spending levels debt free), and otherwise not managing their finances well.
Yet, "good with money" by itself doesn't predict success all that well. Oh, to be sure, it helps a lot. But we all know people who you'd call good with money who aren't successful in general.
I've been thinking on the reason why - and I think it's because money is only one of many resources. You've also assets, both securitized assets (stocks, bonds, real estate, whatever) and assets that are more intangible and impossible to buy/sell/trade as a security - more amorphous things like prestige, credentials, and of course, skills and experience.
I also think the word "resource" isn't the best particular word, since there's a lot of things that are resource-like that aren't really resources... obviously our relationships aren't resources, but can also be invested in similar to a resource. You can go out of your way to do nice things for people who have done right by you, you can be thoughtful, you can go out of your way to travel to a place if someone you really admire is there.
Being good with money guarantees none of the above.