- What Is Spending Smart?
- When to Spend Your Money
- Why Pay Attention to Spending?
- What to Spend Discretionary Money On
This chapter is from the book
This chapter is from the book
This chapter is from the book
What to Spend Discretionary Money On
Discretionary spending is spending you have choices about. You don’t have much choice to pay the mortgage or the electric bill. But you do have choices about a significant portion of your annual spending. It’s the coffee and doughnut you buy each morning, the music you download from iTunes, the greens fees for golf, or the extra purse in that color you didn’t have.
1. Things You Care About
Fundamental to the spending smart philosophy is reducing spending on things you don’t care about so you can spend that money on things you do care about. This might seem elementary. “Isn’t that what everybody does?” you might ask.
Not really.
When is the last time you shopped for new home phone service or insurance? Do you really care which company provides your dial tone or pays your survivors, as long as they provide high-quality service? Those two examples alone could be worth hundreds of dollars a year. That’s money you could spend on something you need or want.
Think about work lunches. Many people would prefer to eat the delicious leftover meatloaf from last night’s dinner rather than go out to eat. They truly don’t care about eating out for lunch. Paying for that restaurant or cafeteria lunch would be money poorly spent. Yet, because they didn’t get around to packing that meatloaf sandwich for work, lunch money trickled out of their lives.
That waste is replicated over and over again, dollar by dollar, day after day. Soon we’re a walking, talking sieve of money leaks.
Everything has an opportunity cost. Opportunity cost is what you can’t buy because you bought something else. You can’t go on the Caribbean vacation because you refuse to bring lunch to work. It’s a trade-off. It doesn’t matter how much money you earn, there are always trade-offs and opportunity costs. I would rather trade money spent on stuff I don’t care about and, instead, spend it on stuff I need and want. I bet you would, too. A sister concept is to measure the psychological value from a purchase, or how the purchase makes you feel. That might seem like an overly touchy-feely idea. But it’s real, nonetheless.
Some people derive a psychological benefit from having a luxury wristwatch, for example. It might make them feel a sense of accomplishment or superiority. If they can afford it, people who get that extra feeling might be spending smarter buying a brand closer to Rolex than Timex. Other people get no psychological boost from the brand of their wristwatch. An expensive watch for them is money poorly spent.
2. Experiences
Did you know you could buy happiness? It’s true, if you believe a slew of recent academic research. That research has shown, time and again, that people are happier when spending money on positive life experiences, rather than on things.
The thrill of buying more stuff wears off in short order. By contrast, the longevity of a great memory improves over time. The other component to spending for happiness is including people. Solo experiences, it seems, don’t generate near as much joy.
So spend discretionary money on summer vacations and weekend getaways, concerts, board games for the family, and special dinners out (not routine ones).
Experiences appreciate, assets depreciate. Save on the latter to get more of the former.
3. Things That Rise in Value
This is a tough one, but many wealthy people swear by it. It’s wiser to spend your money on things that have a chance to go up in value, rather than things that are sure to plummet in value. In other words, try to do more investing than consuming.
The most obvious examples are two of the biggest purchases for any household: a house and a car.
Homes almost always rise in value over the long term. The recent national housing crisis, which saw home prices decline, is an anomaly. So, give the nod to spending on education or sharpening job skills that will lead to a higher salary. Invest in your own business and buy mutual funds. All of those at least have a chance at being worth more in the future than you spent on them. That makes them worthy of consideration.
Of course, you’ll have to weed out spending money on get-rich-quick schemes, from the state lottery to pyramid schemes to no-money-down real estate.
By contrast, buying a new car or truck is a lousy investment. It is certain to lose a ton of value the moment you drive away from the car lot. A new car loses about 30 percent of its value in the first year. Most consumer purchases—from new electronic gadgets to muffins in the morning to a new leather jacket—all lose value quickly.
Of course, we all must buy many things that deteriorate in value. But if you can shift some spending from consuming to investing, you’ll be wealthier for it.
Now that we’re on the same page philosophically, let’s get down to the practical advice.