In the last post we talked about setting up an automated financial system to make managing your money simple and removing the emotion. I told you that we needed to separate the act of budgeting from cutting costs. Budgeting is planning, cutting costs is cutting costs. They are not one in the same as people tend to imagine. Of the two, I would say budgeting is vastly more important. Cutting costs is something you usually have to do, but planning your financial life is the only way you can ever reach a financial goal. You have to be intentional.
What Most People Say About Cutting Costs
This is another area of finance that conventional wisdom generally proves to be mostly impractical and/or completely off. If you go read any book or listen to any "financial guru" they will tell you something like this: Cut discretionary spending, stop eating out, brew your own coffee, cook your own food, and clean your own home. These things no doubt save money and are effective ways to cut your spending, but what happens in reality? Very few people actually implement this into their lives. Why? Because no one really wants to hear that shit. It's all great in theory until you get fed up and just double down on the spending and abandon managing your money all together. I have seen it over and over again. It is like that friend you have that is always going on a different diet. They do well for a little bit and start to see results. Then they will slip and go off the diet and gain all the weight back and more. The fact of the matter is that most people will not save money through these means above until there is a crisis. So is there any other way to save money? Well I thought you would never ask... or I would never ask... whatever let's just keep going.
Spending Less And Getting More
I was always a little confused as to why no one ever wanted to talk about money. Everyone has to deal with it and it is no doubt a big portion of our adult lives just like relationships or fitness. But why is it so avoided? One of the reasons I think it is taboo is because people have been beaten down at one time or another about spending money on something. They are afraid of being judged for what they spend or don't spend based on other people's ideas of what is right.
Let me give you a personal example. As you may know, I am a skateboarder. As a skateboarder there are some items that are very important to me in regards to how I perform. The skateboard itself, of course, and the shoes I wear. Now most people wear shoes and have to buy them at some point and everyone is a little different (or a lot different) when it comes to what they value. I buy skate shoes based on the features that I feel work best for me when skating. If I am skating pretty heavily, I can tear through shoes in a month or two. Skate shoes are not really cheap either. I can usually pay around 70 to 90 bucks for a pair. People who don't skate would think I am crazy and that I was wasting a ton of money, but for me it was necessary if I wanted to skate.
The problem with blanket cost cutting advice is that everyone is different. What would seem like wasting money to one person is viewed as completely necessary for another. I see blogs all the time posting articles about how this is wasting money and that is wasting money. While some people will agree others will squawk about it. At the core everyone is different, so blanket cost cutting tips usually don't work.
Value Based Spending
What I want to tell you about is a simple, yet very different idea on spending and saving money. It is called Value Based Spending. It is just like it sounds. Instead of looking around and trying to cut discretionary spending and getting frustrated, focus on maximizing the value in which you get for every dollar you spend. Now what is value? Value is whatever it means to you! That is what makes this idea so great! There are no rules as to what is valuable and what is not. It is all defined by the individual person. Like my example above, I place a large value on finding good skate shoes. Skateboarding is one of my passions and it helps me relieve stress and makes me happy. If I were to buy skate shoes that were cheaper and lower quality I might not skate as well. So for me the extra money spent is well worth it when compared to the alternative. I'll give you another example. I don't personally follow sports a whole lot (yes, I know it is crazy and you can shoot me later) and most shows I watch on TV are offered on streaming services such as Hulu and Netflix. So the amount of money I was paying for cable was not bringing me much value. I would rather spend that money elsewhere such as buying skate shoes. So I was able to cut out cable and save a good $100 a month. For other people cable may be highly valued and well worth the money. So I can't say "cable is a waste of money" because everyone values different things. If I were to buy skate shoes every other month for $80 then looking at both of those actions together (saving $100 per month on cable and spending on average $40 per month on shoes) I saved $60 per month while getting more of what I wanted. That is how value based spending can save you money. Here are some characteristics of this train of thought that I think make it light-years ahead of most advice:
- It is personalized - Implementing this train of thought into your financial decisions is going to look different for everyone.
- It is much more practical - I am all about giving practical advice that you can implement immediately and this is about as practical as it gets.
- It further removes emotions and cognitive biases from your financial decisions - As with my previous post you can see that human emotions are generally bad news when it comes to money. We see people all the time getting caught up in the moment and then having buyers remorse. Taking a second to ask yourself "is this purchase really valuable to me?" can mean the difference between buyers remorse and purchase satisfaction.
- Everyone can use it - No matter who you are, you can begin today to buy based on value rather than based on emotion.
This is the most effective and consistent way I have found to save money. I try to make all my purchases based on value every day. Combining this with an automated saving and budgeting system and you can really make big strides.
Emotion and Value Based Spending
Now there is a bit of a hitch in this. Let's say you really like the idea of value based spending and realize that you value EVERYTHING. This could lead you to actually spend more. So there is another piece to this that is really going to boost you into saving money. We have to learn to separate value from wants. Wants are usually based on emotion. Value is based on long term and short term goals. Let's say you have a long term goal of saving for a house down payment. When you go to make a purchase you ask yourself this simple question, "is this purchase worth more to me than saving it for a house?" If the answer is yes then you make the purchase and if the answer is no then you don't. It is that simple. This means that you need to have short and long term savings goals that you value a lot.
I'll give you a personal example. At the time of writing this I currently am driving a 1995 Ford Ranger. I really like classic cars and currently am saving up to buy a classic 1970's Corvette. I am hoping to save around 20 to 25k to buy it. That is my current savings goal. So when I go to make a discretionary purchase I ask myself "is this purchase worth more to me than saving for the Vette?". There have been many times that I have got charged up about buying something and then this puts it back in perspective for me and I put it down. It's all about priorities. I believe that if you have goals that are meaningful to you then implementing this will no doubt help you save money towards that goal over time.
Fear The Revolving Door Of Business
Every time you walk into a mall or turn on your TV or drive down the road you are being bombarded by the marketing industry. Americans are the most marketed to culture in the history of human kind. Businesses fight tooth and nail to get you to spend your hard earned money on their products. These companies don't just sit in a room and brainstorm some ideas that just sound good. No, there are heavily scientific about it. They do discrete tests and scrutinize their results. They dig deep into human psychology to trigger your emotions because they know that we almost always buy on emotion, almost is the key word there. Don't get me wrong I am not one of those people that thinks all business is bad and that these companies are evil. I am actually in awe of their sophistication. But as a consumer advocate I feel compelled to at least bring some of this to light.
One of the key business strategies is product releases. Let's take phones for example. Why would Apple come out with a new iPhone every year? Does technology really advance that much? Do they really add a ton of new features? For the most part I think people would agree that year over year the phones don't change a whole lot. Yet year after year there is a new one released that outsells the previous one. How could this be? It is just human nature. We are attracted to the new and shiny. You can be cool if you whip out your new iPhone at the club. The same goes for cars. Every year the companies release a new edition of the car with not a whole lot of change. They make the real change every four to 5 years when they actually change the design of the car. Yet people will buy (or mostly lease) the new car year after year. Why? Because they want to pull up to the valet in their "brand new" car. Deep down most people buy it because they can say it is brand new. Every logical piece of information out there will tell you that new cars don't change that much year over year and that they depreciate heavily in value during the first 4 to 5 years that your own it. But logic on average does not trump the emotional high people get when they sit in a new car.
That is all fine and dandy, but here is the problem. Let's say you buy that new car and for a couple of months you really feel on top of the world. After a while the newness will wear off and you will start to see more and more of your car on the road. But no worries because it is still the new car on the road! But a year later the next year's version comes out. No longer are you driving a brand new car. The new car smell is gone and you don't get the same looks your used to get when you pull up at the valet. The message here is that chasing an emotional high from having new and shiny material things is a fallacy. Things fade over time. After an emotionally charged purchase you will always settle back down to what you logically value. It is totally fine to indulge in your hard earned money, but understand that these are short term. Having long term goals and using value based spending is a way to continue to get long term satisfaction our of your purchases.
How To Implement VBS
The implementation is pretty simple. Here are some discrete steps you can take to implement this into your life right now:
- Set some savings goals - The first step is to set yourself some financial goals. They can be short or long term goals. A short term goal might be a trip you want to take and a long term goal might be saving for a down payment on a house. Dream big and make sure your goals are important to you. This will be the catalyst that will kick this whole thing off.
- Look at your past spending habits - Take your budget and try to categorize your spending habits in order of what you value the most. Ask yourself "is this more valuable than the one above it" over and over again until you have a clear picture of what is important.
- Implement on daily purchases - Now that you have goals and have an idea of what is important to you, it will be easy to begin using this method on a daily basis. Like I have said above it is merely an act of asking yourself a question "is this purchase more valuable to me than X" or "Could I get more value out of this money somewhere else". It works is nearly all situations.
- Avoid emotionally charged purchases - We can all get caught up in the moment sometimes and buy something that we probably shouldn't. A few times here or there is okay, but doing it consistently can really have an affect on reaching your goals. First, if you feel you are getting too caught up then it is best to just walk away. I have a rule that before I make a purchase of $300 or over I always sleep on it. Sales people will tell you "this is the last one" or "this deal will only last today because someone will buy it". These are all tactics. A good nights sleep will really help you escape the emotion and if you still want it then you can buy it.
Summing it up
What I hope you all are seeing is that this idea of value based spending is really a way you can save money while getting more of what you really value. Most people say just cut discretionary spending and quit whining. This can work in crisis situations, but most of the time it does not. Value based spending allows you to buy things that you really care about and don't buy things that you don't really care about. Since most business marketing and sales are designed to make you buy on emotion if you begin to buy based on true value you will tend to save money as a whole. Be weary of the revolving door of business and the traps for making emotional purchases. Set some savings goals and begin to weigh each purchase up to those goals. Ask yourself "is this purchase worth more than saving for X" or "is this purchase the best use of my money". Over time you will find that most likely you will cut discretionary spending that doesn't bring value to your life and it will be different from person to person. You will learn to be content with what you have knowing that you are working towards something much bigger. Instead of just using will power to cut spending, you will be using your goals. Maybe buying shots for all of your friends at the bar isn't as important as the week long vacation to Italy that you have always dreamed of. Then again maybe it is.
I really hoped you enjoyed this article and found it useful. Make sure to share it with your friends! Do you currently use this idea? Do you have an example from your own life? Let me know in the comments and don't forget to subscribe to receive more great content!