A friend was thinking about splurging on an event that included an 8-course dinner for $95. He wrote, “I’d like to go, but that’s more than I’ve ever paid for a single meal. Thoughts?” He said that he had justified past splurges by telling himself, “Well, I’ve spent money on more frivolous things before.” He didn’t need to see me give him The Look to know that this was not the best way to go forward. I gave him plenty of advice, and here are additional reflections.
I think about spending carefully. If I can spend on the right things, minimize spending on the wrong things, and learn as much as I can from getting it right or wrong, I’ll enjoy better quality of life than I would otherwise.
One of the techniques I use is something I picked up from Your Money or Your Life (Dominguez and Robin, 1999) – there’s an excellent blog post series on The Simple Dollar for people who want to catch up. I calculate the discretionary value of my time and use that to see if things are worth the time it takes to earn the money for them. One way to do this is by taking your income, subtracting taxes, fixed expenses, and work-related expenses, and dividing it by the number of hours you spend working or preparing to work. I like an even stricter measure. I look at the discretionary part of my bi-weekly savings allocations – that’s after taxes, savings, retirement, and other categories. I divide that by 14 days, so that I can easily get an idea of how much of a typical week, month, or year I might be committing to a purchase. This is actually a small number, because I take so much off the top for savings – less than a dollar per hour, which is why I calculate by day instead. ;) Then I can easily get a sense of how large a part of my year something will take up, and whether I think it will be worth it.
I often write down the options I’m considering and the costs, benefits, and consequences of each. For example, when I was thinking about replacing my laptop battery, I listed the options and estimated the value differences of each. I sometimes do this even for small decisions because I learn so much about my preferences and values along the way. I consider intangibles, too, and I use this technique for non-financial decisions as well. Sometimes I’m looking for a clear winner, and sometimes I’m interested in just writing my thoughts down and seeing what I’m leaning towards.
I also review my decisions to see how things turned out and if I need to tweak things further in the future. For example: clothes from Value Village, yes; compost accelerator, no; watching movie in a theatre by myself, maybe (better if I get together with friends). If something turns out to be really worth it (or really not worth it), then I learn a lot. This also helps me avoid analysis paralysis, because even if I’m not certain about a decision, I’m sure I’ll learn something from it. In fact, the more uncertain I am, the more I’ll learn – a tip I picked up from How to Measure Anything (Hubbard, 2007), which defined a measurement as whatever reduces uncertainty. Your Money or Your Life also encourages people to review their monthly budget and expenses to see which categories they want to increase or decrease depending on what contributes to their life. The practice of reviewing decisions is key to making better ones.
I sometimes nudge myself towards action using the First Circus principle, a family favourite. Not only does this tend to lead to interesting experiences, but this also takes advantage of some psychological biases. We’re more likely to regret things we didn’t do more than ones we did, and we’re also more likely to notice the presence of something (in this case, joy or disappointment) than to figure out the subtler effects of deciding not to do something.
Those are decision-making tactics. Strategy, on the other hand, involves getting a better idea of what I value, enjoy, want to become, want to support, and so on. That’s a great learning adventure, too. The more I learn about what I want in life, the easier it becomes to say no to the things I don’t want and to focus on the things that matter to me (and to the people who matter to me).
It’s all about getting better at making decisions – with money, with work, with love, with life, with everything. You’ll make tons of decisions over time, so developing your decision-making skills pays off tremendously. Money is a good way to practise: a finite resource (particularly if you think of it in terms of time) that you can choose to spend in line with your values.
How do you make spending decisions?