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.
When I was in college, I bought a Rolex. In the week or so that I waited for it to come in the mail, I got really excited about the idea that I was going to have a Rolex. To me, someone who had a Rolex was a different type of person, simply because he bought a fancy watch.
The watch showed up, and it was obviously a fake. I took it to a jeweler, just in case, and he confirmed what I already knew.
But by then it was too late. In my head, I was a Rolex type of guy. So I bought another one-- a real one this time.
It's great to have money. Money can buy you many of the finest things and experiences in life. Sure, there are some things you can't get for money, but there really aren't that many.
When I was a kid, I used to dream about having a yacht. I could spend hours researching different luxury yacht models, looking at pretty photos of what I thought represented a happy life.
I guess I was spoiled by our materialistic world from an early age. Or maybe I was born that way. But now I've learned that materialistic goods don't add much happiness to our lives.
I used to think that owning a Retina Macbook Pro would make me so much happier than having my two-year-old laptop. So I worked really hard and saved up some money until I could finally afford to buy it. It's by far the most expensive thing I ever bought.