How to Stop Spending Money Poorly

“How to Stop Spending Money Poorly” is a guest post by the Lean Life Coach, who writes at Eliminate the Muda! [mooda] about how to improve life and personal finance through the application of proven business management techniques that originated with great Americans such as Henry Ford and Benjamin Franklin

An article about Forex this is not. It is about a different perspective on the value of a dollar. Think of it as a mind hack on money management. Use these concepts to remain focused on getting the most out of every dollar earned and every dollar spent.

Open up your wallet and pull out any duplicate bills – ones, fives or tens – and take a close look at them. Two dollar bills may each buy a dollar’s worth of candy at a convenience store. They may look the same, but depending on where they came from they may not be the same. As I see it, when it comes to money in your pocket, not all dollars are created equal.

Now, before you begin picking apart my view on monetary assets, I will clearly state that this view goes beyond pure mathematics. My view places focus on the net value to you, as a person, that this money represents.

Let’s say this Saturday your Grandmother takes a moment to realize and admire all the good deeds you have done lately. Furthermore she decides she wants to reward you with a gift and hands you a crisp new one hundred dollar bill. She’s been investing for income for decades, so it’s no hardship on her. As long as Grandma properly accounts for this gift, this money is not taxable and is yours to keep and do with what you want. You did nothing extra to earn this money, so it is worth every penny you received. With extra free cash, most of us are likely to splurge. Easy come, easy go.

Easy dollars however are not always easy to come by. Most of our dollars are earned only after we have worked hard for them. Earned income is also subject to taxes as well as withholding. Out of one hundred you might only get to keep sixty-seven. You also have the added consideration that you expended energy to obtain these dollars. So the question: Is the money you earned worth more or less? While you earned one hundred, thanks to taxation you now have less but psychologically those dollars are worth more because you worked for them. Your blood, sweat and tears earned them, and now that you have struggled to obtain them, it is (or should be) harder to let them go.

Unfortunately we must spend too much of our hard-earned money. We have expenses, many of them fixed. Our rent is due, as is our car payment and utility bills. We also have some variable expenses such as birthday presents for our children’s friends and the occasional dinner out which we must all accept. We also have a bunch of unnecessary expenses. These are the purchases and fees that we often don’t think about but add up to considerable amounts each year.

• We buy a 20 oz. bottle of soda at the convenience store for $1.65 ($.08/oz) that would only cost $4 per 12-pack ($.03/oz) at the grocery store; a 266% premium!
• We pay a 30% premium to drive off the lot in a new car versus accepting a slightly previously-loved vehicle with low miles.
• We purchase unnecessary extended warranties on electronics that have a limited lifespan.
• We fall for bundled services that we may not need. How many of us really use call forwarding or need call waiting?

After all of our expenses are paid we are left, hopefully, with some reserves, our savings. If you are an average American, your savings are likely in the neighborhood of 5% of your earnings.

This money, your savings, I would submit is the most valuable of all dollars you touch. It is worth more than Grandma’s money and more than the money you earned at work.

So how do you stop spending money poorly?

Think about what each dollar represents. Each dollar is only a small fraction of all you earned and received. At a 5% savings rate, each dollar is representative of only one twentieth of each dollar you made. For each dollar you are able to save you must have first earned twenty.

How hard do you work for your money? Few of us find our money comes easy. Do you have (or need) a second job? Your spending habits may be the engine behind that. Ponder this for a moment; let us assume you have an annual savings goal of $10,000. Furthermore let us say that while you were on track to meet this exact goal, a slick salesman stopped by and sold you a $100 gadget that you didn’t need and subsequently never used. With buyer’s remorse you are now recommitted to recovering this lost savings. How much extra money do you need earn to recover this loss?

With a 5% savings rate this means you must earn twenty times the lost amount. Remember, out of every dollar earned 95% is already committed to pay your rent, utilities and miscellaneous expenses. Solving the question above, we learn you need to earn an additional $2,000 to have enough money left over to cover your $100 expense. How long does it take you to earn $2,000?

photo by bradipo