I’m a big believer in working towards a healthy savings rate through increasing income and eliminating wasteful spending. I consider wasteful spending as the type of expenditure that has limited value for improving life satisfaction and, as a result, counterproductive to achieving your financial goals.
While automated saving and investing can be your best friend when it comes to helping you to achieve financial independence, automated excessive spending behavior is disastrous. As humans our own beliefs about money have a huge effect on spending and saving habits. In this post I want to discuss some commonly held beliefs that can cause us to waste money.
Thinking you need to constantly upgrade your things
We seem to have a desire to constantly own increasingly “better” things and I am by no means immune from thinking this way. Perhaps it has something to do with desiring status; the representation of success; or a reward for hard work. Or maybe we’re just chasing the dopamine hit that purchasing stuff provides. In fact, there is some evidence to suggest that people will even treat the things that they have in ways that would break them when they know that an upgrade is available (Gino 2015).
Possibly the 2 worst offenders of this are frequently upgrading the family home and vehicles. Renovations and property transaction costs easily amount to tens of thousands of dollars. In addition to this, vehicles values tend to depreciate quickly so changing vehicles causes you to materialize that loss and the transaction cost; this effect is compounded when upgrading to a more premium vehicle.
Instead of constantly looking to upgrade your material possessions why not look towards upgrading yourself? Why not look to master a skill such as becoming an expert in your field of work? Or increase your fitness? Or learn to create something with your own effort and energy? Personally, I find these things much more difficult but also far more rewarding than constantly upgrading my items.
If upgrading an expensive material possession is required (because the existing one is no longer fit for purpose) try to delay the purchase using the 3-month rule, and plan it in to your budget.
Thinking that a salesperson gives advice based on your needs
Contrary to popular belief a salesperson is not actually looking after your best interests. They are incentivized to produce the highest value of sales for the company which can mean selling you things that are in excess of what you need. One example of this is mobile phones, how many people simply buy the latest flagship phone when their contract is over without considering the fact that they aren’t using all of the power or features that it has? A salesperson is always keen to convince you that you need most expensive product that your budget will allow. However, as consumers, we should pause and evaluate the real benefit that the highest priced model has over the less expensive alternatives.
There are 2 ways that I like to get around taking consumer advice from a salesperson; the first is to thoroughly understand my use case for an item or service so I can assess what value an option has to me. The second method is to always look at the mid-tier offerings. I believe that unless you’re at the top of your field where you need to squeeze every ounce of performance from your gear it’s likely that you’ll satisfy your use case with mid-tier offerings at a greatly reduced price.
Let’s take buying weight plates for my home gym as an example, if I wanted to buy the very best Olympic sized plates, I’d be looking at upwards of $10 per kg, however there are also plenty of options available for $3 to $5 per kg. The difference being that the best plates can be dropped from height and are calibrated for size and weight to something like +/- 0.05%. Now because I’m only building general strength then such a high level of accuracy is of no value, so my use case leads me to the more cost-effective option.
Thinking that spending money is a substitute for effort
Can’t save money? Pay someone for a financial plan and then fail to work on increasing your savings rate. Can’t lose weight? Pay a personal trainer for the best program and then don’t show up for the sessions. Money does not eliminate the need to exert effort, it only provides a choice of where effort is to be exerted.
For example, if you don’t want to spend the time and effort doing your own financial planning you can pay a professional to create a plan for you. However, to make it work you will still need to put in the effort to execute the plan as well as exert effort at your job to pay for the services. How much value this represents to you is ultimately your choice, however you need to realize that spending money is not a substitute for effort.
So instead of thinking that spending money is sure-fire way of achieving results start viewing money as a trade-off for your time. There are a lot of situations where paying for a service creates more value than doing it yourself however make sure that you extract the value from the transaction by putting the effort in.
Caring about appearances
It is ingrained in us to seek status, one of the ways that we do this is through ownership and display of luxury goods and status items. An accelerated journey to financial independence is an alternative lifestyle choice that results from living a life with minimal waste and a strong focus on investing. With respect to consumption this tends to mean placing more emphasis on choosing items based on their utility rather than the signal that they send to others. For example, choosing to purchase a reasonably priced vehicle rather than a luxury brand on the basis that they will both be able to get you to from A to B safely. Because ownership of luxury goods is a proxy for net worth, the choice to reduce/eliminate their consumption can negatively affect your outward appearance.
Status seeking purchasing behavior is counterproductive towards building net worth and passive income. I would also argue that it can also negatively affect our happiness and life satisfaction as it reduces our capacity to spend money in ways that truly bring us joy. Further to this, I believe that the benefits of financial freedom that come as a result of building net worth far outweigh the minimal benefit of displaying status.
So instead of automatically opting for excess try to disregard people’s judgements over what you own and make purchases based on your use case. In addition to this, realize that while in the moment it may feel good to buy status items to appear wealthy, it’s analogous to a hollow victory if you don’t have the net-worth to back it up
You don’t need huge sacrifice to save money
In summary, our attitudes towards money, and spending behavior, are products of marketing and our internal psychology. I believe such decision making is often automatic and largely in excess of our needs. As a result, I believe that having a healthy savings rate does not require sacrifice but rather a shift in mindset towards understanding what truly brings us value and choosing to prioritize spending appropriately. This means reducing wasteful spending on things of limited value, which is by no means sacrifice.
I hope that this post has shed some light on our ingrained beliefs about spending and encouraged you to review some of your own spending patterns.
Engineer your freedom
References
Gino, F, 2015, The Must-Have Effect: When an Upgrade is Available, People Tend to Break What They’d Like to Replace, Scientific American, viewed 28/9/2020, <https://www.scientificamerican.com/article/the-must-have-effect-when-an-upgrade-is-available-people-tend-to-break-what-they-d-like-to-replace/>