We live in a world of extreme price variance in just about anything you purchase. A Casio watch is $20 while a Patek Phillipe could go for hundreds of thousands of dollars. A single meal can cost $2 at McDonalds or hundreds of dollars at a Michelin star restaurant. Cars cost anywhere from a few thousand dollars to hundreds of thousands of dollars.
One of the reasons a lot of people struggle financially is that there is an imbalance in how and where they spend their money. I often find that people spend too much on something where they could do with spending very little. They also spend too little where they should consider spending more. I have a spending philosophy that has been tremendously successful in my journey to financial success and I want to share it here. Understand however, that these are guidelines and there is room for small adjustments based on your situation but the general principle is solid.
The cornerstone of this philosophy is the determination of the utility of whatever you are spending on. Then assigning a dollar amount to the purchase based on this utility and then sticking to it for your purchase. Below are a few examples where I’ve often seen imbalances and how I think about my own spending on these items.
Food – Most shopping carts I see at the grocery store, have a huge spending imbalance in them. Calorie for calorie, processed foods are far cheaper due to their significantly longer shelf life compared to fresh produce creating a perception of great value.
Let’s take a moment to think about the utility of ‘food’. Whether it is groceries or a take out meal. The purpose of food is to fuel our bodies. If we put premium gas in our expensive cars, then how do we not think 100 times before we put junk food in our body, especially merely because it is cheap? In short, the utility of food is massive and you’d do yourself a favor by spending on it that way. Budget more dollars to get take out from a local restaurant that cooks with fresh ingredients and skip the cheap drive through. Your body will thank you for it. And in the long run, so will your wallet when you avoid huge medical bills as you get older. I do not remember the last time I looked at the price tag at the grocery store. When it comes to food, I don’t care about the price and always buy the best quality.
Clothes – Most people spend way too much money on clothes. It doesn’t matter if your yoga pants are from Costco or Lululemon. They serve the same purpose and often times, they are even the same clothes. Small adjustment in design here and there and a different brand. Believe me when I say that half the Kirkland branded items at Costco are made by the same factory and from the same materials as their branded counterparts and cost significantly less. Do yourself a favor and buy generic brands for anything that isn’t going to make a huge difference in your life if it isn’t a name brand. Trust me when I say that when you have a 7 figure net worth, you won’t care about what people think about your clothes because you’ll be too busy basking in the glory of the level of freedom you have and they crave. Personally, when it comes to clothes, I do make an exception when it comes to warm clothes because I am always cold. I make sure I buy good quality coats because I’ve found that you cannot beat the warmth of down and down isn’t cheap. I also have a chronic disability with my feet so I spend on quality shoes.
Cars – I’ve written plenty about cars so I won’t beat the figurative dead horse. It isn’t going to matter if you have a new car or a used car. Neither does it matter if you have a BMW, Tesla or a Honda. As long as it gets you from point A to point B safely and reliably, the car is serving its utility. End of story. Save your money rather than letting it depreciate over time. I drive a Honda and a Subaru. Both are insanely reliable and depreciate slower than most brands out there. Now that is the type of brand equity I look for.
House – You spend a significant chunk of time in your home. It is one of the most important purchases you will ever make, it is one that appreciates over time, and it isn’t something you will purchase over and over again. So if you spend a little more on your house, I won’t blame you. Don’t splurge so much that you can’t afford the mortgage but if you like something that is just beyond your reach, pull the trigger and start a side hustle to cover the gap or negotiate a raise at work. The utility of a home is huge and you shouldn’t skimp out. The most important thing when it comes to your home is no big secret. Yes – location. Buy a smaller house but pick a good school district and look at the crime rate. Over time, the home will create more wealth for you. We have always pushed the envelope a little when it came to home buying because we put a lot of emphasis on the utility of our home in our lives.
Watches and Accessories – Buy cheap or even used. Instead of wasting money on an expensive watch that will show the same time as a cheap one, save the money and invest it so you can actually have some good times in the future. Brands spend massive amounts of money positioning their products as ‘luxury’ to convince you that they are worth more. They aren’t. Diamonds are inherently worthless (other than being the hardest substance known to man and so it has industrial utility). De Beers for years controlled the supply of diamonds to attach exclusivity to it so that they could command higher prices. My girl friend insisted I not buy her an engagement ring until we pay off my student loans and settle down. By the time I bought her the ring she truly wanted, we had been married for 7 years and were debt free. It takes teamwork to make the dream work.
Travel – Do not take vacations on credit cards. Add a savings category to your budget and while you’re saving for your vacation, keep an eye out for deals. Book flights, hotels and activities as your savings builds up for those things. The anticipation of the vacation as you save for it will make the actual experience when it happens that much more enjoyable and you won’t come home to a credit card bill that will just stress you out. You will remember the vacation with fondness and cherish the memories for the rest of your life without any leftover ‘baggage’ after the holiday. We took one of our best vacations to India in 2019. We paid off our house earlier that year, saved for the vacation and then took business class flights to India and took both our parents on an all expense paid vacation where we stayed in suites at 5 star hotels. We still look at pictures from that trip with immense excitement and fondness and since we had saved for it, we didn’t come home to credit card bills.
Having said all of these things, do not skimp on quality when buying durable items. If you’re buying furniture that you will use every day, spend a few extra dollars on it. Replacing something too often will likely cost more in the long run than spending a few extra dollars on a quality item once. However, If you’re buying a patio set and live in Seattle where you will likely use it 3 months out of the year, don’t go crazy and spend a fortune. Buy something with reasonable quality that will last you many years and call it a day.
In summary, evaluate the impact of a purchase on your life. Then associate budget dollars to the impending purchase based on its utility and don’t go over that number. This strategy will pay off, not only financially, but will also allow you to live a healthier, more stress free life.
PS. There are only two categories on our budget that command double digit percentages of our take home pay. Throw a comment with your guesses on what those are. I will reveal the answer in my next post.