By Dr. James M. Dahle, WCI Founder
Spending intentionally is the key to a successful spending plan, AKA a budget. Be generally frugal and selectively extravagant. Figure out what you really value, and spend your money on that, guilt-free. This is called intentional spending.
Steps to Intentional Spending
Here are some tips to help you do this.
#1 Figure Out Where Your Money Is Going
The first thing anyone should do when they are interested in figuring out their finances is to find out where they stand. This includes calculating your income (easily found on your Form 1040) and net worth (everything you own minus everything you owe). Adding up your debts might require pouring a stiff drink first! Most importantly, you've got to figure out which way you're going on the down hill financial escalator of life. Are you going up (earning more than you're spending), or are you going backwards down the escalator as you're failing to walk faster (earning) than the escalator is moving (spending)? The escalator never stops completely (you will always need to spend something), but you can both slow it down and walk faster.
So go find your credit card and bank statements from the last three months. Add up and categorize all of your expenses. Maybe you'll miss a few that you paid cash for. No big deal, just put them in a category like “ATM withdrawals/cash.” Believe it or not, this is the start of a budget. Now, take a look. Is your money going toward those things you value most? If you're like most people who do this for the first time, there are a few categories where you are spending a lot of money on stuff you really don't care all that much about.
#2 Consider Anti-Budgeting
Some people hate budgets. They use an “anti-budget” or a “backwards budget.” This is simply a way of saying they are paying themselves first. That is to say, they first pull out some thing like 20% of their income to save for the future, and then they spend the rest until its gone without worrying about exactly what it gets spent on. While this is an effective recipe to eventually reach financial independence, it really doesn't do much to ensure your money is actually going toward what you care about most.
#3 Spending Is Work Too
What a lot of people don't realize is that there are five financial activities in your life and they all require work to do well. You are likely better at some of them than others. They include:
Each is important and each can bring happiness. However, all of them can be hard to do well. Don't expect intentional spending to be easy. Everyone thinks the hard part is having the discipline to not spend money you don't have. That's not the case for many of us. We're natural savers. Some times we don't buy something because we don't want to take the time to shop for it. I tend to shop like a man who needs to find a deer to feed his family tonight. I go out in the forest (Wal-mart, the mall, or Amazon) and shoot the first deer I see, throw it over my shoulder and haul it home. While that reduces the amount of time I have to spend shopping, it also means I usually don't get the best deal. I save money simply by not going into “the forest” very often, not because I'm actually good at spending.
#4 Avoid Buyer's Remorse
Shopping in a hurry is a recipe for buyer's remorse. I once bought a set of goggles and a facemask to go play Airsoft with my son. Despite knowing better (from experience playing paintball), I didn't take the time to get a mask/helmet that also covered the top of my head. Guess who came home with several painful welts on his scalp? Buy nice or buy twice indeed. Yes, my vision is protected, but spending just a little more time and money would have been very worthwhile. The same thing can happen with bigger ticket items like vacations, cars, outdoor equipment, furniture, and even homes.
#5 The Waiting Period
An even better way to avoid buyer's remorse is to institute a waiting period, at least for items above a certain price. Maybe that's a week or a month or even longer. If you still want it a week later, you can go get it. But you might be surprised at the percentage of items you actually still want a week later.
#6 Beware Future Expenses
Variable spending is spending that you can reduce should something happen to your income. Fixed expenses are not. As a general rule, you want to maximize the ratio of variable to fixed expenses in your life. When you purchase things with ongoing costs, you are doing just the opposite. Weigh very, very carefully any expenses that involves future expenses.
- Subscription services (Netflix might not break you, but NetJets will)
- Toys and tools that require significant maintenance or insurance (boats and planes are at the top of this list)
- Skis (the equipment can sit in the garage for years, but you might pay $200 every day you use them)
- Storage costs (the larger the item, the more housing costs you will have to store it)
- Timeshares (not only do you have to pay an annual fee, but you now feel obligated to go to the same place over and over to get your money's worth out of it)
I'm not saying you can't buy anything with ongoing costs, but take the entire cost into account when purchasing.
#7 Maximize Happiness from Each Purchase
Delaying and planning for a major expense can also help you maximize the enjoyment from it. Consider a well-planned vacation. You can enjoy it before going, you can enjoy it while there, and you can enjoy it for years afterward while looking at photos and talking about it. The happiness literature is pretty clear that the way to maximize happiness from spending is to spend on shared experiences with people you care about. Do more of that and less retail therapy and collecting.
#8 Forget the Latte Factor
David Back in The Automatic Millionaire was famous for talking about just how much can be spent on a fancy daily coffee. It's true that a ridiculous can be spent when it is done at frequent intervals. There are two very good counterpoints to the latte factor argument however. The first is that it's usually the “big rocks” that sink a budget: i.e., housing and transportation. Get those under control and you can visit Starbucks every day. Second, frequent small purchases may actually bring more happiness than one great big purchase. You may very well get more enjoyment out of buying a new video game every month and driving a beater than getting that brand new truck.
Spending is an important part of any financial plan. Done well, it can bring you great happiness. Done poorly, it can make you miserable. Spend intentionally and live without regret.
What do you think? Do you spend intentionally? Do you overspend? Does your budget stress you out? Do you need a break? Leave a comment. I want to hear your intentional spending stories!