The Art and Science of Spending Money
How Should You Make a Budget?
Morgan Housel is a wonderful writer and observer of personal finance. His book, The Psychology of Money, is a recommended read (I've given it to all my kids and is required reading for our new hires)!
Housel's recent blog post, The Art and Science of Spending Money, is an insightful look at all that goes into how we make decisions to spend money. While lots of people agonize and fret over investing money, few of us are as contemplative over how we spend it. It's a truism that one has far more control over one's spending than one's investment returns - yet we collectively spend far more time contemplating the latter than the former. Housel asserts the following are some of the variables that influence how we view spending:
Your Family Background Can Heavily Influence Your Spending Preferences
To someone who grew up in an old-money affluent family, a Lamborghini might be a symbol of gaudy egotism; to those who grew up with nothing, the car might serve as the ultimate symbol that you’ve made it.A lot of spending is done to fulfill a deep-seated psychological need.
Some People Place An Emotional Attachment to Large Purchases
If I said, “How much are the memories with your kids worth?” you’d say it’s impossible to attach a dollar figure. But if I said, “How much is the home where you formed memories with your kids worth?” or “How much does staying in your local town impact your salary?” you could probably spit out a dollar figure with ease.Understanding the difference between those two helps explain a lot of spending decisions.
Be Aware of Parkinson's Law of Triviality
The law states the amount of attention a problem gets is the inverse of its importance. Here's an example - a fictional finance committee has before it three agenda items: approval of a $10 million nuclear reactor, $400 for an employee bike shed, and $20 for employee refreshments in the break room.
The committee approves the $10 million nuclear reactor immediately, because the number is too big to contextualize, alternatives are too daunting to consider, and no one on the committee is an expert in nuclear power. The bike shed gets considerably more debate. Committee members argue whether a bike rack would suffice and whether a shed should be wood or aluminum, because they have some experience working with those materials at home. Employee refreshments take up two-thirds of the debate, because everyone has a strong opinion on what’s the best coffee, the best cookies, the best chips, etc.
Many households operate the same.
How I Review My Spending
As I've aged I've become far more reflective over my spending - both large and small. I've become more willing to spend money on experiences, and far more discerning spending money on "stuff." I try to periodically review my spending - not just quantitatively (budget) but also qualitatively. My "best" (I define this as most bang for my buck) spending last year was on two family trips (Austin & Kiawah) and my worst was a pair of expensive athletic shoes that turned out to be neither comfortable nor durable.
Everyone's money journey is different - but being reflective about our spending probably deserves equal if not more attention than how our investment portfolio performs.