In this post I wanted to take a step back and focus on what is important to you and how to realize it. The key message in this post besides saving money is don’t waste money on things that aren’t important to you. What makes you happy is not decided by your friends, your neighbors, or the commercials on TV. This is very important for you to figure out so it can help motivate you to pursue financial independence.
Just because the car industry spends billions of dollars every year trying to convince you that parting with $30,000 of your hard earned money will make you feel good, doesn’t make it true. Just because your friends enjoy spending lavishly on clothes, doesn’t mean that’s for you. Maybe you enjoy travel more. Maybe you enjoy something else entirely.
Thankfully, I have devised a system for evaluating your spending which eliminates all waste, and ensures your discretionary income goes only to buying what is most important to you.
Step 1. Putting Your Spending into Perspective
Imagine you make $50,000 per year (before taxes). You find a bottle, and inside that bottle is a genie. He proposes you a deal.
You can have that new $25,000 car you’ve always wanted, but there’s a catch. You are indebted to him for 6 months. For 6 months straight, you are under his watchful eye between 9 AM and 5 PM. You do exactly as he says, working on exactly what he wants. No arguing allowed, he sets the rules and you carry out his tasks. He’s a generous genie though. He allows you a 30 minute break for lunch, and he allows you two days of leisure each week.
At the end of those six months, the only thing you get is your new car. Would you trade a half of year of freedom for that one nice car?
Everyone, every day, is granted options from this hypothetical genie. And day after day, we fail.
The question you have to ask yourself before every purchase is:
“How long would I have to work to buy that?”
Money, at its core, is a unit of exchange for time.
- When a plumber fixes a toilet, he’s selling his time to diagnose and fix a problem.
- When a craftsman sells a table, they are selling the time and expertise that allowed him to create a desirable piece of furniture.
- When an office worker receives her paycheck, she and the company are placing a value on the hours of her life devoted to the business’s strategic goals.
Reaching financial independence grants you unlimited freedom with your time. Burying yourself in debt imprisons you to spend time earning wages to pay off your dues.
The key lies in trading your time for those few special things in the world which are truly important to you.
And to do that, we must determine an item’s true cost.
Step 2. “How Much Does That Really Cost?”
When you buy any item, how much are you really paying? Our good friend Uncle Sam has a say in that, and he’s awfully skilled at quietly pushing prices up without us realizing.
Yes, I’m talking about taxes. This is why you should first calculate your discretionary income to determine how much you really earn per year.
Everything in the United States is purchased with after tax dollars. Assuming you’re in the 25% income tax bracket and a law abiding citizen who contributes to Social Security and Medicare, you are paying somewhere around 27% of your salary to taxes.
That’s nearly a third of your working hours before you ever see a penny.
Your $30 steak dinner? You have to earn $41 dollars to pay for it, because the tax man collected $11 before you ever got a cent.
Don’t forget about regular old sales tax either. My city has a nearly 10% meal tax (what’s yours?) which pushes the final cost of that dinner to about $45 dollars. If I drove to the restaurant, I can expect to pay taxes on the gas as well.
And what about the hidden costs of employment? Is your $25 an hour salary really $25? Or do you have to:
- Buy expensive suits and clothes for your job?
- Drive 10 miles to work every day and have the gas bill to prove it?
- Perhaps your groggy mornings force you to grasp every last minute of sleep, leaving no time during the frantic a.m. for packing a lunch but plenty of holes in your wallet from eating out?
Remember our hypothetical genie? He really was generous, because he didn’t yet calculate the effects of purchasing with after tax dollars, sales tax, or work related expenses. Had he done so, he’d have seen that the car listed as $25,000 actually costs well in excess of $36,000, and 6 months is a deal compared to the nearly 9 months of salary it will really cost you.
Rest assured, slowly but surely through the veil of hidden costs, the true sticker price of everything you see can be nearly doubled.
Step 3. Re-Thinking the No Thought Purchase
With this in mind, it’s time to bust out the seriously scrutinizing magnifying glass on where we are spending our money.
- $8 lunches: Are those extra 10 minutes of sleep really worth the $12+ true dollars this lunch is going to cost me? Are those extra 10 minutes of sleep really worth working nearly a half hour in a cubicle? Or would it be a better use of my time to hit the hay a little earlier the night before and take one small step towards financial freedom?
- $20 event parking: Working for nearly two hours just so I can shuffle my lazy self right into the event? No thanks. I’d rather plan ahead and park a little farther down the street. Not only does this grant the opportunity to carry out the world’s most currently underrated activity (walking) but it also allows exploring the beautiful city or neighborhood first hand.
- Trinkets, gadgets, souvenirs: Throwing down a couple bucks on a cute, modestly priced whatever in the gift shop seems like a quick and painless process. It’s a fast transaction and you didn’t even notice the $25 dent in your wallet. Now consider the time spent at work, on calls, and dealing with difficult customers that earned you the nearly $34, which finally whittled down to the $25 in your pocket today. Is it still worth it? Lord help if you that gadget happens to be a $1,000 MacBook…
I recently went on a much needed vacation. I scored a deal on airline tickets, which was the one mammoth expense I imagined making up the bulk of the trip’s cost. Yet when I reviewed my spending from the trip, I was shocked to see my airfare cost paled in comparison to the no-thought purchases throughout the vacation.
Snacks for the car ride, a quick beer at an interesting spot, last minute sunblock, lunch at the airport. It was this sort of no-thought spending that ended up costing the most. The airfare and vacation were unquestionably worth it. The mindless spending? I can’t say the same.
This exercise can be applied for nearly every item that scrolls across your mind’s never ending conveyor belt of impulse purchase ideas. When the buying decision is framed in the quantifiable days, months, and years of life an item truly costs, the money wizard thinks twice.
Money’s Most Powerful Feature
What we’re really getting at is something much deeper, and it’s one of the most important aspects of frugality: the power to buy time.
No, not a gold plated pocket watch…
We’ve seen from the effect of taxes that saving is more powerful than spending.
Because every dollar spent is representative of an even larger number of dollars exchanged for your precious, limited time on earth, any lack of spending implies the exact opposite. Refusing to buy leaves a commodity far more precious than any piece of man-made metal or plastic. Not spending your money immediately and instantly buys you time.
By opting out of excessive consumerism, you no longer trade your hard worked time for material goods. Instead, that time and effort is retained. It’s not gifted away to a restaurateur or a car manufacturer, but it’s held by you, ready to be cashed for freedom.
To spend is to fight the current of taxes. To save is to take a bridge over that river, grab a life raft, and begin rowing with the currents of compound interest and tax advantages.
The next time you are faced the burning desire of purchase, run a quick calculation to see just how much time you are trading for the want.
If you still feel like trading your hard earned time and money for whatever-it-is you’re dying to have, then you just may have found one of the rare purchases worthy of passing through the money wizard filter. But if you wouldn’t take the deal with the genie, then it’s not worth buying.