When developing a spending plan (or budget), an easy trap to fall into is focusing on the cost of something as opposed to the value. Quite simply, just because something is cheap, doesn’t mean purchasing it is OK and, conversely, not all high cost expenses should be avoided.
My golden rule with developing a spending plan is that money spent on things important to you is, in general, money well spent. It is actually likely that the things that add most value to you are also going to be more expensive.
When we focus on the cost of something as opposed to the value it brings, it will result in a bias towards low cost expenditure. This can also lead to death by a million cuts; “it’s only a few dollars”, over and over again, adds up pretty quickly.
With this focus, a lot of your expenditure will be on things that add no real value to your life. It can also lead to purchasing poorer quality items and false economy; the cheaper item may not last as long or be as useful as a more expensive but higher quality item.
If we change our focus and base our decisions on the value that it brings to us rather than the cost, it will reframe our spending decisions. It is likely that we will make fewer purchases that may cost more, but will be more meaningful to us.
If we look at each transaction with the first priority of how this adds value to my life, most times the answer will be that it doesn’t. This mindset will remove a lot of meaningless spending. It will also free up income to be spent on more expensive, but more meaningful items. It will see us allocating our income to the things that we deem most important. This usually results in a higher standard of living.
Bringing lunch from home three days a week instead of spending $15 per day on something that provides little enjoyment, will save $45 a week. That $45 could be used to have a lovely lunch with your partner on the weekend that you will both enjoy and value. Although they are both essentially ‘just buying lunch’, they are not the same thing. This is an example of basing the decision on value rather than cost. The cost of the weekend lunch is more, but the value is much greater.
If you continually make decisions based on the value it adds, rather than the cost, you will find yourself allocating more of your money to things that you deem important. Ideally, we would like to be using as much of our income on the important stuff as possible.
Alex McKenzie, Future Financial Services
Alex McKenzie is a financial planner, and the owner of Future Final Services in Penrith. He is a graduate of Western Sydney University.