If every dollar you spent was a vote for the kind of life you wanted to live, what kind of life would you be voting for right now?
If you always thought your life would be different if you just knew the right kinds of people and had the right connections, but find yourself blowing your paycheck at the same bar with your buddies every Friday night, what kind of life are you voting for?
If you always wanted to start a successful business but have never picked up so much as a book about business, what kind of life are you voting for?
If there’s some dream vacation you’ve always wanted to take but always find that at the end of the month your paycheck is gone and there are a few more things on your shelf that you thought you would use when you bought them but never did, what kind of life are you voting for?
We don’t normally think about money in these terms, but it’s abundantly clear that how you spend your money directly affects the life that you end up with. It behooves you to spend your money in a way that leads to the life that you want.
What This is Not
This post is not about keeping a budget and saving money by depriving yourself of your daily $3 lattes.
This post is also not about blaming yourself for the way you have spent your money and feeling like you should do better.
Depriving yourself of the things that you love and blaming yourself for your spending habits causes you to resent not being able to have the things that you want and sets you up for a negative relationship with money. This is the exact opposite of what you want.
When I first moved to New York I was trying to pinch pennies and cut back my spending to the bare minimum in order to save up money. It got so ridiculous to the point that I stopped working out and didn’t even go out much because I was trying to minimize my food bill and I knew if I expended all that extra energy I would have to eat more to make up for it.
After a month or two I was feeling very angry and frustrated at how much my life sucked. I was completely focused on the things that I couldn’t have like going out to a nice restaurant or to play on Broadway.
The suffering was unnecessary. It was within my means to do a few fun things here and there, within reason, and still save money. Don’t try to out-frugal yourself.
Money should be a tool that you use to make your life better and be spent in a way that is aligned with your values and aspirations. In fact, I encourage you to spend more money on the things that will make a positive difference in your life.
This, of course, is not the same thing as spending recklessly. As personal finance author Ramit Sethi says, “Spend extravagantly on the things that you love, and cut costs mercilessly on the things that you don’t.”
Compound Interest
The quotes may be apocryphal, but Benjamin Franklin is reported to have said, “Compound interest is the eighth wonder of the world.” And Albert Einstein echoes, “Compound interest is the world’s greatest discovery.”
So what is compound interest?
The idea is simple, over time interest builds not only on the original investment but also on the accumulated interest. To illustrate with money. If you put $1,000 into an account with 10% interest at the beginning of the year every year for 10 years, at the end of 10 years you would have $17,531.17. However, you only put in $10,000 so you have netted yourself an additional $7,531.17 for no additional effort.
Directing small bits of money here and there towards the things you care about over time has the same effect.
For example, if you wanted to start a business first you might spend $10 on a book about online marketing. Then you spend $400 to have a designer make you a simple web page. Then you spend a couple $100 here and there on AdWords campaigns learning how to advertise effectively. If you strike on a profitable product or service eventually you may be spending hundreds of thousands of dollars each month on marketing that makes you millions in return.
You don’t even have to be chasing a grandiose goal to apply the concept of compound interest. If you just want to lose a few pounds and feel more energetic, pony up the extra money for quality meats, fruits, and vegetables and don’t try to save money by buying cereal and cheap junk food. Over time the changes in your diet will add up to big changes in your health.
Mindfully Spending Money for a Better Life
Cultivate an awareness of what you are spending money on, and more importantly what you are not spending money on so that you are putting money to it’s highest and best use.
Of course, you will inevitably make mistakes along the way.
I recently caught myself red-handed in the act of not spending my money in a way that aligns with my values. I had been having an ongoing allergic reaction to something for some time and was debating whether or not to go to the doctor. Even though I pride myself on taking care of my health, not wanting to spend the $50 co-pay was holding me back.
This is ridiculous for me because I would drop $100 on a new dress shirt without blinking an eye. Clearly if I am willing to spend $100 on a shirt just to look good, then it shouldn’t even be a question of putting up $50 for a co-pay at the doctor’s office to take care of my health.
Realizing my faulty thinking, I immediately booked an appointment with an allergist and had some testing done. It turned out I was allergic to dust, so I bought dust proof casings for my mattress and pillow on my doctor’s recommendation. The reduction of skin irritation and stuffy nose far outweigh the benefits I could have got from buying another couple of shirts.
To kick start your new spending habits, do this exercise now.
- List your top three goals. It can be anything from losing a few pounds to starting a business. No goal is too big or too small.
- Pick the one that you are most interested in working on right now.
- Brainstorm ways that you could spend money that would bring you closer to your goal. For example if you want to start exercising you could sign up for a gym membership.
- Pick the option that appeals to you most from step 3 and spend the money on it.
{ 2 comments… read them below or add one }
Good post. For more on mindful spending, check out Man vs Debt at manvsdebt.com . Baker is completely transparent about his finances and how the changes he has made have effected his family and life. Also, Adaptu.com has a ton of resources and discussion on all sorts of money topics.
You make great points. I have been putting off going for my annual eye exam due to the costs, but just the other day I had a bit of an online shopping spree. And I certainly do not want to be blind in the future. I do, however, never resent spending money on entering races, even though triathlons can be upwards of $70, which is quite expensive. But you get so much out of them. And I always give to NPR and have my favorite charities, since I always want to remain socially responsible. I think everyone is a work in progress somewhat, but what I like about your post is that it pushes you to really seriously think about where they’re spending their money. There’s a lot of power in a dollar.