Nothing makes my way of thinking about it the one correct way, but I think of money spent as three different things: Assets, Experiences, and Indulgences. I do this because it helps me create rules and guidelines for how to spend my money so that I can do well in the long term without having to micromanage finances.
Assets are things that should be worth something significant in the future. Maybe more, maybe slightly less, but nothing consumable or with huge expected depreciation. Examples would be certain high-end watches, art, gold bars, or real estate. Even my motorcycle would count, only because I waited to get a really good price on a used one, and it's still worth the same as when I bought it. I also count anything that will directly affect my productivity. I just sold my last laptop for a $900 loss, but I made a lot more than that with it over the two years I owned it.
Experiences are obvious things like travel and visits to museums, but I'd also count dinner with some good smart friends. My defining line is that an experience is something that has some reasonable potential to impact me long-term. I don't expect that every time, just as I don't expect every asset to increase in value.
And everything else is an indulgence. I choose this word intentionally because it has a negative connotation in my mind. I don't think that any of us can or should go without indulgences, but as the lowest ROI spending, a bias against them can be helpful.
I will let myself buy pretty much any assets, especially if I think that they will appreciate. So I bought a relatively expensive painting by an artist I really like who I thought was undervalued. I also bought a fancier motorcycle than was absolutely necessary, but I knew I'd be able to sell it anytime for what I paid. But I'm really reluctant to spend $50 on a moderately fancy meal, because to me that's an indulgence.
I'm also pretty liberal on experiences. I try to compare experiences to other experiences and get the best value on them (i.e., I won't just spend $2000 on a trip when I know I could take an equally valuable trip for $500), but experiences have created such pivotal change in my life that I often give them the benefit of the doubt.
I do buy indulgences as well. Not many, but I bought some motorized shades for my place in Vegas. Hard to argue that's anything but an indulgence.
These things are all subjective. If you're a chef, maybe a $200 meal is an experience to you that has a good chance of becoming valuable. Or if you don't make money using your laptop, losing $900 on it like I did would qualify as an indulgence.
The point, really, is to know what is what. My budget for assets is very large, my budget for experiences is medium, and for indulgences it's very small. If I see those proportions going out of whack, I sit down and think about why that is, and adjust if necessary. Whether you use my categories or your own, it's useful to think of spending in categories and have an idea of how you want that allocation to look. It's an easy way to spend intelligently without a budget.
Photo is a cool corner in Messina, Sicily.
Big like for this thought process. Funny enough, we all went to House of Prime Rib (at 10pm) for a $50 holiday dinner on Monday. You were missed and I'm sure you would have found value in every minute of it – it was an experience to remember. Looking forward to seeing you in Cambodia very soon!
I always think of things in ROI in life. My goal right now is just stacking millions, so everything I think of is about this.
Will buying a $1200 standup desk give me ROI? yes.
Will going out on friday night and drinking give me ROI? No.
Will talking to a cute girl at whole foods and going on a date give me ROI? yes. I'll be happier and work better.
etc... Basically the same line of thought.
Very simple and helpful categories, thank you. How would you categorize neccesary spendings such as rent, groceries etc.?
He would call those indulgences. Rent can be eliminated by buying a house (because you are exchanging the mortgage payments for equity in the property). See http://tynan.com/vegas, for example.
While we do need food to survive, from a health perspective, you could live off of $100/month of groceries with no problem. Notice that he doesn't say he eliminates "indulgence" spending, just that he thinks real hard about it. This self-examination beforehand helps later at the supermarket when faced with expensive, tempting options. Saying no to the question "mmm, should I buy that filet mignon tonight?" while standing hungry infront of the meat case is a lot easier to say no to if you've previously spent time thinking about the cool assets or experiences you could be spending that money on otherwise.
One expense in the past that I would have put as an "Asset", is a college education.. The cost of the degree, student loans with interest, may not pay off so well if you don't get a high paying job. So, I would say that college has fallen into the "Experience" category. For those lazy students that Mom and Dad forced to go to college and the kid went to only party, it falls in the "Indulgence" sector.
I would agree that sending young children to private school (or a higher rated public school) is an asset when they are in Pre-School-12th grade. They will be around faster paced learners, better teachers, and compete with students that try harder.
I may have to add an asterisk to the saying that buying things can't make you happy. I bought a motorcycle, and I'll be damned if it hasn't made me one percent happier than I used to be. Then again, we all know that spending money on experiences can make you happy. A motorcycle isn't just a vehicle to move you from place to place-- it's an experience every time you ride it.
My brother has loved motorcycles for as long as I can remember. So has my uncle. But despite "the disease" obviously mixed up in my blood, I never really thought twice about riding a motorcycle. It was sort of like stamp collecting to me-- something other people do, and obviously derive some sort of pleasure from, but I hadn't given it more than a passing thought.
Last December, for some reason or another, I thought that it would be novel for all of my vehicle registrations, inspections, licenses, etc. to be legal and up to date. I drove my RV back to Texas to renew the registration and get inspected, made sure the insurance was current, and paid off old tickets. The only remaining infraction I was guilty of was driving my folding scooter without a motorcycle license, which is required in California.
In this post I'm going to go into more detail of what I am trying to achieve.
I want to see the world by motorcycle, documenting and reporting what I find every step of the way. I hesitate to plan out too much, because I risk seeing only what I think I will find or what I want to see. As I don't have much experience riding motorcycles, I think it would be wise to limit myself to the United States until such time as I feel confident enough in my riding abilities that they become second nature. This prospect is perfectly fine with me, as I really haven't seen much of my home country. I can't imagine that I would run out of places to see or people to meet even if I contained myself in the US for five or ten years. With skills built and confidence gained, I would then like to explore Canada on my way to reaching Alaska. With that accomplished I would go south to Mexico, through Central America, with that leg of the journey culminating on the lowest point of South America. Europe, Asia, and Africa seem to be the obvious choice after that, but I will cross that sea when I come to it.
I imagine I will be camping for much of the trip. It will keep costs down and allow me to spend time in places with great natural beauty. I have yet to try it, but Couchsurfing seems to be a great program that serves the dual purpose of putting a roof over your head and introducing you to friendly locals. My only worry about it at this point is how far in advance you would need to notify the hosts, as the unplanned nature of this venture would limit my ability to do that to only a day or so. Nevertheless, I intend to use it as much as possible. Hostels and other cheap lodgings will probably be used sparingly, but I'm sure there will be times when I will feel like shelling out the money for a bed.
To record and share this journey I intend to write about all of my experiences, take extensive photographs, and experiment with video and sound recording where appropriate. I find this a point of great excitement because although I've had some interest in all of these fields for most of my life, I have never found a project to make me dedicate the majority of my time to them.