I would like to introduce a term that perfectly describes the way I spend my money. It's called Value-Based Spending and it's allowed me to buy what I want, live happier, all while maintaining my financial goals.
I'm going to show you why value-based spending works and how you can use it to live a more balanced life.
A life somewhere between extreme frugality and frivolous spending.
What Exactly Is Value-Based Spending?
Simply put, value-based spending is when you align your spending decisions with your most important values in life. To elaborate, that means that you only spend on what's important to you and on nothing else.
This may seem easy but in a consumerist world, it isn't.
Our society is filled with corporations and people telling us how, when, and where to spend our money.
It comes from many places like the constant bombardment of commercials we see every day or the social pressures to spend money to keep up with appearances.
This pressure is real and makes people spend money in places that aren't important to them. Value-based spending makes you analyze what really makes you happy and then focus your spending only in those areas.
Before I discovered this concept I fell victim to spending money on expensive clothing because I felt that as a professional, I needed to dress accordingly.
I bought a lot of nice clothes but I didn't feel any happier. Now I know it's because clothing is not a priority for me.
Now I buy a few simple clothing items that are comfortable so that I can focus my spending in other areas that make me happier.
Discovering Your Values
The first step to practicing value-based spending is to find out what you value and what brings you the most happiness. You can do this by reflecting on your goals in life.
Ask yourself what makes you happy?
Is there an activity that brings you the most happiness such as traveling or trying new restaurants? You must take time to reflect on this step.
If done right, you should be able to identify a couple of activities, items, or passions that stand out in terms of bringing you long-term happiness.
In my case, I've identified time as something I value. Time for family/friends, travel, and my blog/podcast. That is why I pursue financial independence. I know the 3 categories above bring me much more happiness compared to other things.
Once you know what matters most to you, you can start practicing value-based spending.
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The Secret To Spending And Still Growing Rich
Value-based spending is the secret to having the best of both worlds. You no longer have to choose between being a rich minimalist or living a YOLO broke lifestyle. There is a way to have a little of both and live a more balanced life.
For this to work, you have to accept two things.
First, always live within your means. Don't spend money you don't have on things that don't matter. Also, don't justify spending more than what you have because it's something you “value”.
Second, pay yourself first. Ideally, you would contribute to your savings, retirement, paying off debts, etc… and live off the rest.
Just because you can afford it doesn't mean you should buy it.
-Suze Orman
If you are having trouble deciding the best order to invest your money, you can read how I prioritize my investments for financial independence. I recommend investing with Vanguard or M1 Finance.
Both are great companies and allow you to invest at a much lower cost compared to other brokerages.
By simply living within your means and paying yourself first, you are already ahead of most people financially.
Now with the money left over, you can spend it on whatever you like without the guilt of knowing you really can't afford it.
Spending The Rest
With the money you have left after paying yourself first, you can practice value-based spending. I have a mental exercise I do before every purchase.
I ask myself if what I am about to purchase is worth the extra time I'll need to work to make up for the money spent. This is also known as the opportunity cost of a purchase.
Let's say I see a nice brochure for an all-inclusive resort in the Caribbean.
It looks beautiful and the cost is $3,000 for a 4-night stay. I won't add airfare for simplicity and also because I would probably travel hack my way there!
In this case, I would ask if the $3,000 stay at the all-inclusive resort is worth it?
This decision is ultimately a personal one so there is no right answer.
However, some things I consider are:
- How much will the $3,000 invested today grow to over 30 years? (The answer: $30,188)
- How long does it take me to save up $3,000?
- When was the last time I vacationed with my family?
- Would I be happy during and after the vacation or will I regret the decision?
These are thoughts that are necessary to make a value-based spending decision. Right now my feeling is I would probably take that vacation and spend the $3,000.
However, I would be making that decision only after paying myself first, living within my means, and aligning my spending with my values.
Pitfalls Of Value-Based Spending
So far value-based spending sounds great, you get to spend on what you value and still grow rich! This is true but there are still some things to watch out for when using value-based spending.
Don't let the fact that you “value” something, influence you to spend more than what your willing.
I value time spent with friends but if my friends want to go to bars and restaurants every week I wouldn't do it. I can still accomplish my goal of spending time with friends without spending more money than I need to.
So I would do that by getting creative with our hangouts.
Some examples would be suggesting we meet at the park, play sports, play board games, or go to the beach.
Another pitfall is not setting the right values. You might say you value something but is it bringing you happiness? Make sure the 2 or 3 categories you consider your “values” are actually what makes you the happiest.
That way it's easy for you to cut off spending in other areas since they are not making you happier or richer.
Having said that, I am usually somewhere between extreme frugality and value-based spending. I have Mr. Money Mustache to thank for the frugality lessons.
Conclusion
Value-based spending is a powerful way to align your spending with your goals in life. It usually leads to a more fulfilled lifestyle without hurting you financially.
I've successfully been using this strategy in my life and it's made a big difference for me and my family. I hope you have the same success!