Most financial questions centre around topics like ‘how can I earn a better salary?’ or ‘how can I invest in a better way?’. But it’s equally important to consider how to become better at spending.
The lazy advice on spending is to spend less. That can be constructive at times, but it’s only part of the puzzle. It’s also important to spend better.
Spending wisely - or with intention - means that you are conscious about your spending, and that every pound you spend is generating as much value for you as it possibly can.
To make this judgment, we need to understand what truly generates value in our own lives.
Mimetic Desire
Too often our preferences are determined by those around us - it could be our neighbours, family, friends or colleagues. Or even social media. We want things not because they ring true with our character, but because we think others will perceive us as better if we have them.
This concept is called ‘mimetic desire’ and has been made famous by René Girard and Luke Burgis. Do we really want the fast car, or do we want the reaction from others when they see it driving down the street? Do we really take value from eating at fancy restaurants, or do we spend more time namedropping them with our friends?
These are not leading questions. You may enjoy a fancy restaurant and that’s fine – it’s your life, no-one else’s. The point is to spend in areas where your spending is enjoyable for you, not where you think someone else will be jealous. Let’s go a little deeper.
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Which areas are most important to you?
Perhaps you value experiences. The feeling of the warm sea-breeze as you’re strolling down the beach. Or the thrill of skiing down a piste on a crisp sunny morning.
Perhaps it’s convenience. The ability to have more takeaways so you can spend less time cooking and more time on your hobbies.
Perhaps it’s luxury. That feeling of your clothes fitting perfectly and a nice watch.
All this is your own choice. What matters is to clearly prioritise your spending categories based on what adds value. Make a conscious effort to spend more in the areas which provide the most value, and to cut ruthlessly in the areas which don’t. Just don’t fall into the miser’s trap.
Long-term vs Short-term
Spending trade-offs go beyond simply choosing the most important categories today. They also include the value generated today vs the value generated tomorrow.
Short-term value is often clearer than long-term value. For example, we may know that it’s better to spend money on education than on expensive clothing. But the expensive clothing shows its value today – and so it’s more appealing.
After a day of shopping, we feel an immediate dopamine hit. After a day of studying, we feel exhausted. So it’s more likely we choose value today over value tomorrow, even if tomorrow’s value is far greater. Instant gratification leads to bad spending decisions.
Often this leads to ‘buyer’s remorse’ – that feeling we all know when we regret spending too much and feel we need to eat bread for a week to recover…
Nonetheless, that short-term dopamine hit is addictive, and can lead to a downward spiral of compulsive buying – a financial mess.
On some level, fixing this is simple. Stop yourself from making any purchase above a certain level, say £20, without waiting for a day. After a day’s reflection, you’ll be more likely to make smart decisions.
But the real fix is to think about where else you could have spent your money, and to select the most worthwhile use of your funds. Plan your life, then live your plan.
The Five Key Questions
Spending with intention means that you don’t have regret or remorse – every pound you spend is spent deliberately. We’re looking for spending decisions where the value gained is much greater than the money spent.
If you buy something for £10, and the value to you is less than £10, it clearly doesn’t make sense to buy it. But even if you buy something for £10 where the value to you is £15, it might be better to spend the £10 elsewhere - where you can generate £20 of value.
To help frame what truly matters, you can ask the following questions:
Question 1: If the price of an item were to double, would you still buy it?
If so, it’s clear that this item at its original price is great value.
Question 2: When you spend money, is it bringing you closer to the person you want to be in five years?
If yes, that’s great. If no, can you spend better to achieve that goal? Consider the example of a personal trainer. It might cost hundreds of pounds to hire a personal trainer, but if great fitness is a high priority for you, perhaps it makes sense.
Question 3: In twenty years, where will you look back and wish you had spent more?
Question 4: In twenty years, where will you look back and wish you had spent less?
Question 5: Can I get the same value in a different way, spending less?
Assessing these questions on a regular basis will move mountains in determining which spending categories are the most important.
Better Spending
Intentional spending is not just about ‘how can I spend less’, but rather ‘how can I spend better’.
Making clarifying statements to yourself like ‘I want this for…’ or ‘I need this for…’ will make you realise your actual motive for a purchase, helping you determine what adds true value. Often, we don’t actually stop to think about what matters to us.
To be a better spender, assess your current spending and rank it in order of what brings you the highest value. Spend more on the areas at the top of the list and cut ruthlessly at the bottom where your money isn’t working for you.
You’ve worked hard to earn a salary - you might as well spend it where it has the largest positive impact.
Make intentional spending a habit. Run it for two months and see what happens. You’ll never look back.