I would define value based spending as mindful spending which involves evaluating your goals and philosophies to avoid unnecessary expenses. As we grow older and more wise, we fall less into the traps of peer pressured spending and begin to assess the value of our purchases.
Typically, people spend money on things or experiences they believe will add value to their life. The purpose of this blog is not to convince you to spend more or less money on anything. In fact, this blog is quite the opposite. I cannot tell you what something is worth. You are the only person who can understand how much value an object can bring to your life.
Personal finance is very much a mindset. It is not “one size fits all”. It is not “yes or no”. What it is though, is a way of thinking. Personal finance is about being mindful of how you spend and make money. It is largely a mindset and that is why today, I’d like to challenge you to think about what is valuable to you.
Strategies to Help Determine Value
Let’s examine a common example: You believe it’s time to upgrade your car and begin car shopping.
1. How many working hours or days would it take you to pay this item off
Let’s say you make $3,500 per month after taxes. You are quoted $630 per month which you may believe as a percentage of your take home pay is reasonable. However, after doing the math, you realize over the course of that 6 year car loan, you will have paid $45,000 (including interest).
When you conceptualize the cost using strategy #1 you realize this car will cost you an entire years pay, 250 days of working 8-12 hours a day. Put in that context, potentially this expense no longer seems reasonable.
2. Don't compare yourself to others
This can be really challenging with modern day social media. Sometimes I feel like our lives have become far too public. I challenge you to move through life with authenticity. Embrace who you are and don’t shame yourself just because you are different.
In today’s society, Keeping up with the Joneses is a common mentality (great movie by the way). It’s human nature to want what another individual has. From the outside, it may seem like sunshine and rainbows but keep in mind you do not know their true financial picture.They may be living lavishly but in reality it’s all financed and their real assets are minimal.
3. What is less important to you
Understanding what you choose to not spend money on might be just as important as what you do spend money on. If you have trouble answering this, maybe you are spending premium on everything. Spend some quality time asking yourself what does not matter to you; this is a key principe of value based spending.
Perhaps having a brand new luxury car is very important to you but then what is less important? Identifying the categories of less importance ensures a level of frugality. You physically cannot buy luxury everything and be wealthy (unless you’re the .1% maybe).
4. Wait at least 72 hours prior to purchasing a larger item
Purchasing something immediately is called an impulse buy. We’ve all heard the terms “shopaholic” or “retail therapy” and we can thank dopamine for that. This drug is released from the brain when we experience something new, exciting, or challenging. This rush of excitements hinders us thinking logically and weighing out the options.
In a recent blog, I also wrote about the effects dopamine can play during exercise. Read that here.
If you feel as though you need a new car and have completed the other steps in this blog, wait 72 hours. Elicit self control and ignore the eager car dealer. Ever wonder why car dealers are so persistent to get you to complete the deal that day (rather than letting you leave and come back)? It’s because they know if you leave and think about the purchase, you are much less likely to go through with it.
If after waiting 72 hours you decide you still need the car, it may make sense to go forward with the purchase. If the excitement of buying it has worn off though, you definitely don’t need it.
5. Explore how much money you currently spend in each category
In a recent blog, linked here, I explain how I personally categorize my expenses. Understanding which categories you spend the most money in will assist you in determining what you value.
Will upgrading your car add significantly to the current cost of your car? If you choose to go with the luxury car expect gas/transportation costs to increase. A new car will also increase your tax and car insurance payments. Is this in line with what you value in life? Is the increase in monthly cost worth it to you and why?
If you look at my expenses, besides housing, I spend a majority of my money on groceries, go figure! I love grocery shopping and buying quality ingredients. I also really enjoy a nice night out at some of my favorite local restaurants.
6. Analyze the alternatives
Begrudgingly this step may require creating a spreadsheet but this could save you a lot of money. I’ve pulled the “I’m not a numbers person” excuse far too many times and although ignorance is bliss it could lead you to make the wrong decision.
Perhaps the alternative to buying the 2020 Acura MDX is a used (but new to you) 2018 Mazda CX5. Creating a spreadsheet of the various cost differences is the only way to know for sure how much more/less money the alternative will cost.
This exercise should definitely be completed for larger purchases such as buying a car but it can also be helpful for smaller purchases. For example, analyzing the price difference between Whole Foods and Big Y could end up saving you hundreds of dollars. You won’t know unless you see this data. Visualizing the numbers does help to conceptualize value based spending.
7. Don’t talk to people who are biased
If you are going to a friend simply for confirmation, this will not help your financial picture in any way (this is confirmation bias). If you are looking for confirmation, your subconscious mind probably knows you shouldn’t be buying the product.
I wouldn’t ask my neighbor who drives an Acura MDX if I should get an MDX. The answer would be something like “Definitely, it’s the best car and drives so smooth. I don’t know how I ever survived without this heated steering wheel.” Remember, your neighbor might not have your best financial interest in mind.
8. Talk to people with similar values
This strategy comes in handy when you have made the conscious decision to move forward with your purchase but still need to narrow down the brand or model.
Utilizing this strategy involves speaking with a like-minded individual who has your best interest in mind. Let’s say you have a friend who is frugal but also loves cars, this may be a good person to speak to as he/she can tell you which car can provide the best bang for your buck.
What I Value In Life
All this said, I would consider myself a frugal millennial who still knows how to have a good time. Besides quality food which you all know I value, I also appreciate experiencing travel with Justin. He and I have some of our best memories from vacations we took together. These memories are so emotional and provide more happiness than any object could bring. Shopping is so very enjoyable, don’t get me wrong. Marshalls has a piece of my heart but it’s all very superficial and only provides me short term happiness.
The philosophy of value based spending encourages the practice of mindfulness. Spending comes down to value and therefore nobody can or should judge your spending habits but yourself. Instead of judging each other, let’s challenge each other to think about how these purchases can add value to our lives. Don’t justify the purchases and make up excuses, but examine yourself with honesty.
Make a conscious effort to see the forest through the trees. Look at the big picture when it comes to your financial portfolio. In other words, make sure to see your values in each of your purchases.