Price is what you pay, value is what you get.Warren Buffett
Once you see it, you can’t unsee it. The way that people spend their money. In order to understand what conscious spending even is, I think that we should break things down into a few categories.
1. Assets Versus Liabilities
An Asset is something that brings money in, a Liability on the other end is something that takes money away from your pocket. This is contradictory to the definitions you learned in financial accounting. Here’s why I don’t agree that houses, cars, furniture, etc. are considered assets: Unless you rent them out, they are taking money away from you, not bringing money in. Thinking this way will get the answer wrong on your accounting test, but will get the money up in your bank account. Therefore, aim to buy assets, and to minimize the amount of liabilities you have.
Let’s cover some examples.
- Stocks (Dividend, Growth, etc.)
- Rental properties that you rent out
- Ownership in small businesses
- Cars (Car Payment)
- Houses (Mortgage)
- Credit card bill
The point is: Think of things in terms of value adding, and value reducing when it comes to your money (and all aspects of your life). I can promise you that a brand new car will not have the chance of increasing in value over the next ten years like a few shares of Amazon ($AMZN) likely will.
2. Social Media Advertisements
Most of us are advertised to and we don’t even recognize it’s happening because we have become so acclimated to it. Facebook, Twitter, Snapchat, & Instagram are all becoming very effective at subliminally advertising. Aiming to sell us the things we didn’t know that we wanted, but now have been convinced that we do. It used to be that advertisements were only on the sides of the social media platform, and then they worked themselves into posts, and now they’re generated intermittently throughout the stories we watch.
Keep in mind the more you click them, the harder they target you. So tread lightly, because believe me, all of that data is being stored and sold to advertisers whether you’re aware of it, or not. Initially when Google search started correlating with social media advertisements, people were worried about the censorship they didn’t know they agreed to. Now, Instagram & Facebook can record the audio from your phone, thus hearing you converse about products, so they market them to you. Don’t believe me? Google it, or say a product repeatedly into it your phone, and wait for the ads to start showing up.
3. Do I Need This?
Simple, but effective. Asking myself this question prior to purchasing something online has helped transition my finances and allowed me to pool more money into my investment accounts (We will discuss these in a later post). Just do me a favor, and before making a purchase, ask yourself “Why do I need this?” A majority of the time the answer to that question is simple, you don’t.
4. Purchase Awareness
This one will take a little bit of time and effort, but bear with me. Pull up your credit card statement from the past two months. Create an excel sheet that breaks things down in to two different categories, “Needed” & “Not Needed”. Plug the purchases in accordingly to show yourself how much money you waste on unneeded purchases. Once you have those numbers established, look at where a majority of your largest purchases are coming from (Your credit card company likely already has this service available to you, for free). Once you have identified what your largest unneeded purchases are, set a goal to periodically start reducing them. Start with 10%, then 20%, then 30% and so on.
Here’s what the plan should look like
- Using your credit card statement, total up the categories of where your largest spending is happening. (Your credit card company likely already has this service available to you.)
- Identify which category is the largest, and the largest that isn’t needed. (do not include rent in that category, for it is an expense you will likely always have.)
- Develop a plan to periodically reduce the spending in category.
Becoming a conscious spender isn’t rocket science and a majority of it can be broken down into four categories.
- Assets Vs. Liabilities
- Understanding how you’re advertised to
- Asking yourself “Do I need this?” prior to purchases
- Developing purchase awareness
Now, controlling the impulse to buy something is the bigger challenge that you will face. But despite what you end up doing, you should at a minimum be aware of why you are doing it and how you are being sold to. Once you see through the smoke & mirrors of advertisers and marketing companies, you start to understand what it is like to have control over your purchases. I am not preaching that you become a minimalist who only spends money on Ramen Noodles and single ply toilet paper. I’m just looking to keep more of your money in your pockets.