The core of the personal finance philosophy I offer here at The Simple Dollar is really simple.
Spend less than you earn, make that gap as big as you can, and bank the difference.
That’s pretty much my entire personal finance philosophy in a nutshell, but it naturally leads to lots of other ideas and strategies. For example, let’s zoom in on the idea of minimizing one’s spending, because that’s inherently part of that equation. If you’re trying to make the gap between your spending and your earnings as big as you can, then by default you have to be seeking to minimize your spending, right?
So, here’s my spending philosophy:
Be super cheap on everything that doesn’t matter to you while spending responsibly on the things that do matter to you.
Let me give you a concrete example or three.
As long as my clothes are clean and not dingy, the type of laundry soap I use doesn’t matter to me, so I prefer to use a homemade recipe. It consists of equal amounts of washing soda, borax, and soap flakes, stored in a plastic container with a tablespoon measurer. It costs a small fraction of what store-bought laundry soaps do and does a good job for cleaning.
As long as a meal is nutritious and tasty, it doesn’t have to be fancy, so I usually aim to prepare meals for an average of $1 per person per meal (we have a family of five, so that still adds up). We have a rotation of simple meals that our family likes that get in well below $1, but we occasionally mix things up with a fancier unusual meal.
On the other hand, something I deeply care about is reading. I love reading challenging nonfiction and epic fantasy and science fiction series and I’m at least somewhat picky on what I read. That’s something that is deeply important to me, so I’m willing to spend money to make it happen. When I’m in the midst of a series, I want to read the next one in the series as soon as I’m done with the last one; when I’m engrossed in a topic, I usually read several books on that topic and I want to read the next highly regarded book on that topic. For me, the library is a valuable resource in making that happen, but sometimes I will buy a book if I can’t get it from the library in a reasonable timeframe.
These three examples make the idea clear. If something isn’t important to me, I strive to spend as little as possible on it. On the other hand, if something is actually important to me, I’m willing to spend money on it in a sensible way.
Here’s the problem: how do I clearly know what matters to me and what doesn’t?
At first glance, you might think this is a silly question. Isn’t it self-evident what really matters to a person and what doesn’t?
You might think so, but that’s not actually true for a number of reasons.
First, we’re often swayed to care about things for a short while because of the influences around us. Our friends might sway us to care about something for a little while that we really don’t care about. Marketers are extremely skilled at this, using things like product placement and social media influencers to drive desire for their product. On top of that, there’s pure impulsiveness, where we see something we might enjoy in the moment and jump for it, even though it’s not something that really matches what we want from life.
Second, we often convince ourselves we need some rather high level of quality on things we don’t really care about or don’t care about enough to have their needs met. For example, this is why people will buy $30-50 bottles of shampoo and conditioner; sure, they want nice soft shiny hair, but that can be achieved without some $40 bottle of fluid with some designer name on the front. Your hair might deserve good treatment, but good treatment doesn’t have to come in a $40 bottle.
Third, we often incorrectly estimate how often we’ll use an item. If an item really matters to you, you’re probably using it every day or at least several times a week. If you’ve never used an item before, you really have no sense of how often you’ll use it, so it’s kind of silly to buy the premium version right off the bat, yet people do this all the time. We’ll overinflate in our own minds how often we’ll use something or do something.
Similarly, we often underestimate how often we “splurge” on “treats.” I had a reader who was completely convinced that she “splurged” on a coffee and a muffin once a month at most, but when she reviewed her credit card receipts, it was a twice weekly thing. That’s not a splurge, that’s a routine.
This brings us to my last point: we often get stuck in routines, often based on the path of least resistance. We do something once, it seems to achieve whatever goal we have, so we stick with it. Often, that first solution isn’t really very optimized, but it works. This is why we end up in a routine of buying a name brand version or an expensive version of something that we don’t really care about. It’s all about the routine and the path of least resistance, and we pay for it.
All of these factors serve to convince us that something really matters and that we should pay extra for it. In truth, a lot of those things don’t really matter that much to us, and we should be paying the absolute minimum necessary for it.
The trick, then, is to really understand what things actually matter to us and let go of spending anything extra on everything else.
How do we do that? Well, we tackle each of those factors that is keeping us spending money on things that don’t really matter. Here are four strategies for doing that, one for each of the points noted above, and one underlying strategy that can make the others easier.
Strategy #1 – Reduce Your Influencers
I tend to think of situations where I think of something as important to me when it really isn’t as a “false positive.” “False positives” lead to spending mistakes.
So, what causes “false positives”? One of the biggest sources is your influences – the things that steer your thinking, particularly in the short term. Friends. Social media. Product placements. Effective advertising. Branding. “Recommendations” from online stores. Things like that. Things that cause you to think positively about a product when you honestly don’t care about it.
Those kinds of positive thoughts are very fleeting, but they’re sometimes enough to get you to make a purchase that you wouldn’t otherwise make.
What’s the solution? Get rid of those influencers, especially in situations where you might spend money. Minimize their presence in your life.
A few good tactics:
Cut down on social media. Only follow people you actually know. Don’t follow companies and brands. Don’t follow famous people, as they often do paid product placements on social media to earn some extra cash at the expense of your attention.
Don’t shop socially and cut out “retail therapy.” Shopping will not make you feel better in any lasting way and it’ll likely end up making things worse. Don’t shop with friends or for the purposes of entertainment.
Don’t read “news” that is just fawning over a new product. All it does is create a desire in you to buy. Just skip by those articles entirely; in fact, avoid news sources that have those kinds of articles with any consistency. I’m looking straight at 24 hour cable news sites here.
Strategy #2 – Start (Over) from the Bottom
One great way to discern exactly what things matter to you and what things don’t is to start over from the bottom on all of your regular purchases. Buy everything store brand, in other words, and even make some things yourself if you wish to.
The next time you go to the store, buy store brand dish soap. Buy store brand trash bags. Buy store brand sugar. Buy store brand ketchup. Buy store brand hand soap. Buy store brand everything. When you get to the checkout, you’ll be surprised how much lower your bill is.
Take that stuff home and use it as normal. What will happen is that 95% (or so) of the stuff you buy will work just fine and you won’t even give it a second thought. Those are the things you should continue to go super cheap on going forward.
It’s the other 5% that require some additional attention. What problem is this product causing you? What needs is it not fulfilling? It’s worth your time to do some homework here to find a “bang for the buck” version of that product that meets your needs without having to buy the most expensive version. Often, you’ll wind up buying a “middle of the road” item in terms of price that matches your needs perfectly, and that’s what you should buy going forward.
When we go to the grocery store, our cart is almost always loaded up with store brand items and fresh produce. Name brand items are pretty rare. Why? The store brands meet our needs, so we go cheap on them.
Strategy #3 – Begin with the Basics
The same thing is essentially true when you’re buying a new kind of item because you’re diving into some new kind of activity for yourself. It might be something like a musical instrument or a piece of sports equipment or a tool for your kitchen or a new kind of spice.
Whatever it is, your initial purchase should be a very low end version, and ideally a used version.
Why? When you’re buying something for the first time, you have no idea whether this item is actually going to fill a meaningful role in your life. You think it will, but using it with any frequency is going to require some changes in the routine of your life and you simply can’t be sure whether that’s going to actually happen or not.
Thus, the first item you should buy of a particular type should be an inexpensive one. Your excitement for the new item will convince you to use it at first, but what really matters is what happens when that “honeymoon excitement” wears off. Are you going to stick with this new thing, or will it fade?
Most of the time, it fades, and thus you’re far better off investing as little as possible in it.
If it doesn’t fade, you can keep using the basic version of the item until you can specifically articulate on your own exactly what’s wrong with it and how it’s not meeting your needs. That might never happen, but with many interests, it eventually will happen.
That is the situation where it makes sense to carefully research and pick the right item that matches your needs, not before. At that point, you know you’ll use the item a lot and you know exactly what you need out of that item, so you can make an intelligent shopping decision.
A final point of advice: think through the features you want before shopping when you’re about to upgrade. That initial purchase isn’t a big deal – you’re just getting a low cost entry level item to figure out if it works for you. The replacement is the one you want to get right, so you should figure out the features you want and do your homework on the item before ever shopping around for it. Don’t get swayed by extra features that don’t matter to you or the smooth talk of a salesperson.
Strategy #4 – Carefully Examine Your Routine Spending
Another very useful strategy for moving towards being super cheap on everything that doesn’t matter to you while spending responsibly on the things that do matter to you is to carefully review your routine spending outside of the moment.
Here’s an easy way to do just that.
Sit down with your monthly credit card statements and your debit card statement. Go through each and every line item on those statements and ask yourself a simple question: “Was this expense actually worthwhile?”
If you can’t answer an immediate strong “yes” and are able to explain why, then you should strongly consider cutting out that expense going forward.
I do this strategy every few months and I almost always find a few incidental expenses that just didn’t really matter to me in the long term. Thankfully, I don’t find nearly as many as I once did, but they still pop up.
What I’m really looking for are clear patterns. I might notice that I had a bunch of little expenses when I went to visit family members, all of them forgettable. Why didn’t I just pack a bag of food to take with me and save about 75% of that expense? I might see that I spent money at a local convenience store multiple times in the month. Why was I even stopping there?
Part of the reason for seeking out these patterns is that they’ll point to an easy and obvious behavior change. The process reveals that there’s something going on that convinces me that a purchase is worthwhile when it’s really not, so I need to change around some behavior of mine a little to get away from whatever it is that’s convincing me of such an unneeded purchase.
Strategy #5 – If a Cutback Hurts, Give It Some Careful Thought
The best spending strategy I’ve ever found for me in terms of keeping my spending low while still having money for things I really care about is to “cut first and ask questions later.” If I’m in doubt at all about a purchase, I just say no to it or, if I have to buy something, I go for the cheapest option available.
If I find that I regret a purchasing decision afterwards, I spend some time thinking about why I regret it. In general, because of my “cut first and ask questions later” mindset, my regrets are due to underspending rather than overspending.
So, when I’m evaluating a purchasing decision that I’m unhappy with, it’s usually because I cut too deep. I’ll then ask myself why I’m unhappy with that decision and I make an effort to dig deep into it.
Usually, I find that if I’ve cut too hard and I regret something, it’s because that cutback did damage to something else that I value. Maybe I did something that hurt a friendship, or maybe I actually infringed on some hobby or area of life that really matters to me and it wasn’t obvious at first glance.
The truth is that 99% of the time, when I say “no” to an expense, it’s utterly forgotten quite quickly, so it’s clearly not important to me. It’s that other 1%, where I’m thinking about it and I’m bothered, that triggers additional consideration.
I usually try to use the five “why’s” when I find that I’m troubled by a spending choice. Why did it bother me? Why does that bother me? I do that three more times and then I’m usually close to a real truth. It’s hard, but when I do it, I end up usually figuring out something that’s worthwhile.
More importantly, I figure out something that’s actionable, a real principle I can follow going forward. I figure out that I deeply care about something and it’s okay to spend a little more in that area, or I realize that some expense is actually deeply tied to an area I care about.
Almost always, this leads me to a new “spending rule” to follow in my head, which is important because most spending that I do – that we all do – is the result of almost subconscious following of a bunch of rules and ideas in our heads. We don’t even think about it – we just follow an almost instinctual response to situations. Reflecting on a bad spending choice until I really understand why it is bad usually alters my spending habits in a good way, so that going forward there are fewer and fewer spending mistakes when I operate on instinct.
So, how do I clearly know what matters to me and what doesn’t?
For me, it’s about the feeling once I’m outside of the immediate situation. The trick is being able to evaluate that situation when I’m not invested in it at the moment and recognizing that such situations really don’t matter, then carrying that forward in a way that I remember.
Most of the time, this just turns into something simple, an obvious rule I can follow. Don’t stop at the convenience store. Buy store brands except for these two items. When you go out with your friends, don’t stop at a shop somewhere.
What each “rule” does is that it guides me in a very gentle way away from expenses that don’t matter in the big scheme of things, expenses that are likely snuck into my life by influencers or by momentary impulses.
These rules aren’t perfect. I’m nowhere near perfect in all situations. However, that kind of spending perfection is something worth aiming for, and the closer I get to it, the happier I am with my actual purchases, the less regret I feel later, and the better my bank account balance is.