The majority of personal finance advice can be boiled down to some simple rules. The biggest two?
Spend less. Save more.
This is good advice, and certainly part of the fundamentals to master if you want to be financially successful.
But putting all of the focus on spending less and saving more means we’re telling people to avoid using money. We don’t devote nearly enough time educating people how to spend better, to use money wisely.
This is a huge problem, because there is such a thing as saving too much. It happens when you try and put so much of your income away for some point in the future that you don’t have anything left over to experience your life right now.
And, cliche as it sounds, right now is all we’re guaranteed to have. That’s why, at BYH, we’re so adamant about building plans that balance your competing priorities to save for the future while also enjoying the life you want to experience today.
Spending Money Isn’t the Problem
Spending money isn’t an inherently bad thing — because our money acts as a tool. We can leverage that tool to get more of what we want, access experiences that align with what we value, and build a lifestyle that provides happiness and satisfaction.
The problem is most people are really bad about using money well.
We don’t know how to spend better because our brains aren’t necessarily wired to be good with money. As humans, we suffer from countless cognitive biases that cause us to act less-than-rationally (and even against our own self-interest), especially when it comes to our finances.
We also have a lot of emotions tied up around money — and whether they’re positive or negative, they can lead us to do some silly things with our finances.
The result of this is that we tend to:
- Spend on things that we think will make us happy, but don’t
- Experience buyer’s remorse
- Develop self-defeating money mindsets
- Overspend in an effort to “keep up,” and spend money on things that we don’t even truly care about or don’t align with our own goals
- Beat ourselves up over our money habits because we know we’re not making optimal choices… but we don’t know what to do differently, either
Again, the act of spending money isn’t the problem here. It’s how we’re spending. It’s why we’re using money, and when and on what.
Money Is a Tool — You Just Need to Learn to Use It Skillfully and Productively
Like any tool, you can leverage your money to create amazing things in your life. Or you can use it self-destructively and have it act against you and your progress toward what you feel is most important to you.
The tool never changes, but how we choose to use it does. That takes us back to where we started, though:
Most personal finance advice you can find doesn’t teach you a thing about using money well. It’s almost always focused on not using it: on spending less, saving more, and setting it aside for another day.
What we need is to learn how to spend better — so here are 5 tips that can help you understand how to use your money far more effectively than you’re doing now.
1. Get Crystal Clear on What You Actually Want
Everything with your finances starts with getting clear on what matters to you. If you don’t know your priorities, your values, or your goals, you will never be able to make sound decisions on how to use your money because you lack direction.
You don’t need to have highly-defined, super specific SMART goals here, either (although if you do have them, good for you; you’re ahead of the curve).
What you need to understand is, what is most important to me? What are my CORE values?
A core value is something integral to who you are. It is something so important, so sacred to you that you can’t imagine not living in alignment with that value.
If you’re not sure what yours are, check out James Clear’s list of core values here. Go through and choose no more than 5 that resonate most with you. As Clear explains, “If everything is a core value, then nothing is really a priority,” so that’s why it’s important to choose 5 at max.
This may take a bit of time to develop a clear picture on. If you’ve never stopped to consider what is most important to you — what you most want to accomplish or experience with your life — it might not pop into your head overnight.
That’s OK. Give yourself the time and space to do some soul searching.
Have conversations with others that you love, trust, and respect (and you know have your best interests at hear) to bounce ideas off of. Ask questions; seek answers. Let things simmer and sit with you for a few weeks if needed.
When you do have more clarity on what it is you most want, make a list. Try drawing out goals on a timeline, too, to help organize your thinking. (You can make a timeline from now until age 100, then plot what you want to do or have on that line.)
Once you have your list and timeline, it’s time to put things in priority order. If it’s not clear what ranks first, second, third, and so on, then ask yourself: if I could only do ONE thing on this list, what would it be?
That’s priority number one. Ask that question again of the remaining items on the list to get priority number two — and keep working down the list until you have everything in order.
2. Align Your Money Use with Your Priorities and Values
Once you have clarity on what matters to you, spending money well becomes much easier. Use this question as a shortcut to make smarter decisions and spend better:
Does it align with your values?
If not, it might not be the best choice to use your money on. Consider saying “no” to that spending opportunity, and refocus on what matters most.
Don’t use your hard-earned dollars on stuff that doesn’t reflect what you say is most important to experience in your life.
If something does align with what’s most important to you, then it might make sense to use your money on that thing — whatever it may be.
Of course, nothing in personal finance is this black and white; this is just a general guideline to help you form the habit of priorities- and values-based spending. It also highlights why personal finance is so personal.
What matters to you might seem silly to someone else; what someone else values might look like a total waste of money to you. Neither one of you is likely wrong if you’re both spending in accordance with your personal values.
There is an important caveat here: this is not carte blanche or permission to start overspending on discretionary items in such a way that it interferes with your ability to save and invest for things down the road.
If you value freedom today, for example, you’re probably going to value it in some form tomorrow… so don’t rob your future self of the ability to live that value because you spent everything you had today in the name of “I’m doing what’s most important to me.”
You have to watch out not just for present you, but future you, too! (Here’s a great way to execute this balance between now and the future; this is strategy we personally follow to save 30 to 40 percent of our income without depriving ourselves of the opportunity to live well today).
3. Don’t Do What Everyone Else Is Doing Just Because They’re Doing It
It really is that simple. It doesn’t matter what other people are doing or think is worth spending money on.
If it doesn’t resonate with you, or if it doesn’t align with your values, or you don’t even like the damn thing… don’t buy it, don’t make the purchase, don’t put the money down.
A big example of this in our own personal life is our total lack of interest in buying a house in Boston. It’s just not something that aligns with our goals or our interests at the moment.
That doesn’t mean buying a house is bad. It doesn’t mean someone else is wrong for following that path. It just means we are not currently interested and so use our money in other ways.
(It also doesn’t mean we’ll never buy a house; we’re actually currently looking at doing that, just in a unique way: we’re buying a vacation house in the mountains and keeping our rental in the city.)
Don’t spend money on something just because everyone else is. Period.
4. Remember That Experiences Tend to Provide More Happiness Than Stuff
You’ve probably heard this before… but it bears repeating, and maybe explaining why we get more enjoyment and value from what we experience than the stuff we can buy.
A few years ago at a financial planning conference, psychology professor and author of Happy Money: The Science of Happier Spending Dr. Elizabeth Dunn explained that that, scientifically speaking, you can use money to buy happiness.
The trouble is, we’re just really, really bad at predicting what will provide us with the happiness we seek.
The reason that stuff usually fails to provide lasting happiness is that it’s very easy to compare and to quantify. You can look at what you have, and then you can look around and compare your possessions to those of your friends, your neighbors, your coworkers, your family members, and even strangers.
Suddenly, how “good” your stuff is — or how happy it makes you — is all relative to what other people have or don’t have. When we find people who have more/better/newer things (and there will always be someone who has more/better/newer than you), we suddenly feel less satisfied with what we have.
This is one big reason using money to buy stuff is not a way to spend better. This puts us into a vicious cycle where we’re constantly seeking out things that will make us happy, only to realize those things didn’t make us happy and the solution must be to go find more and better things.
It’s crazy! And it also doesn’t help that as humans, we’re masters of adaptation. From an evolutionary standpoint, this is great and one of the reasons our species is so successful.
But from a personal finance standpoint, when you’re trying to spend better? Adaptability can be bad news.
Because we adapt so easily and so quickly, what feels new and novel and exciting today becomes routine, normal, and unexciting tomorrow. We quickly get used to what (and how much) we have so the items that felt special and valuable when you first bought them quickly lose their luster and just become part of your everyday life.
This is part of the reason Dr. Dunn advises to never buy a luxury car if you drive it every day. The more you drive it, the more “normal” and less luxurious it seems. Save your luxury purchases for items that you use less, and you’ll extend the happiness and enjoyment you get from them.
None of this is to say “never buy material things.” What this does suggest is to be mindful when you choose to spend on stuff. Look into your motivations the next time you feel the urge to use money to acquire more things.
Are you just bored? Did you recently go on a comparison spree and now feel like you don’t measure up to your friends? Is there some other emotion running high right now and you’re just looking for a quick fix to feel better?
These are red flags that tell you to put the brakes on an upcoming shopping spree — because it probably won’t give you the result you want.
People tend to regret buying things because stuff doesn’t make us happy. So what about experiences? Something really interesting happens when you talk about spending money to experience something:
People report more regret when they had the chance to take part in an experience and chose to skip it instead of spending the money.
Again, financial success isn’t all about saving. It’s using your money well to fully live. And experiences often come with better ROI because it’s a more effective way of getting closer to your values and provides opportunity for growth and development.
And the icing on the cake? “The emotional return on investment with experiences may grow over time, too,” Dr. Dunn explained in her session. Our brains tend to enhance those memories over time, which in turn give us increasing pleasure and satisfaction from a single experience.
5. If You’re Unhappy Now, Spending Money Won’t Make You Happier Tomorrow
A huge number of people that we talk to firmly believe that once they just have more money for X — with “X” being their latest goal or desire or project — then they’ll finally be happy, satisfied, and content.
After working with thousands of clients to develop financial strategies for them over the last decade, let us let you in on a little secret:
That’s not how this works.
If you’re miserable right now, more money is not going to eliminate the source of all your stress, anxiety, and pain. Research shows that after about $105,000 in household income, more money does not equate to more happiness. (The original study by psychologist and behavioral economics hero Daniel Kahneman stated $75,000 was the threshold for happiness.)
It certainly gives you more freedom and options; this isn’t to say you don’t need more than $75,000 per year. We believe earning more is a critical component to increasing wealth.
Let’s reiterate that: earning more money is important for increasing wealth. But more money will not directly increase your happiness.
More money is not the solution to things like unhappiness, lack of confidence, angst over not being good enough, fear of failure, and other big hairy uncomfortable challenges like these.
If you want to spend better, you must beware of thoughts or statements that go something like this: “Once I have X, I’ll finally be Y.”
You probably have a few of these running around your head right now. Maybe they sounds something like, “Once I have an Audi, I will be more confident and I’ll get that promotion at work.”
Or, “Once I have a new house, I will feel like a success.” Maybe even something like, “Once I earn $250,000 per year, I will be worthy of respect” or “Once I can buy nicer clothes and furniture, I will deserve love.”
We usually don’t think these things so consciously; the “once I have X then I’ll be Y” statements tend to operate at a subconscious level. You may need to listen closely to your inner voice and true beliefs to uncover exactly what your “once I have X, then I’ll be Y” statement.
Be aware that these statements are almost always categorically false. Why? Because they reverse the real way to become who and what you want to be.
The true formula for becoming the person you desire is to DO, and then you’ll BE.
In other words, if you want to be a certain way you need to act like it first. Belief follows behavior, not the other way around.
So, as an example, if you want to be more confident, ask yourself: what would a confident person do in this situation? And then go do that thing.
(By the way, a truly confident person does not answer this by saying “I’ll go buy some new clothes and then I’ll feel like I can walk into that room and hold my own.” A truly confident person believes in their own capabilities no matter what, and could march into any room in whatever outfit and still shine. You can’t spend your way to confidence.)
So to spend better, don’t try to use your money to change who you are. You can grow, develop, improve, and change, but that’s largely an internal process, not something you can purchase.
Bonus Tip: Don’t Ignore Your Financial Reality
If you follow the tips above, you’ll have a better sense of how to use your money wisely (and what you might want to avoid along the way).
One thing we haven’t discussed in all this, however, are the actual numbers. A great way to spend better is to carefully track the money coming in to your accounts each month, as well as how much goes out and where it goes when it leaves.
You can’t measure what you don’t measure, and your personal finances are no different.
Tracking your money isn’t something to do just when you’re on a tight budget; it’s an important practice for anyone who wants to better understand their financial picture and therefore be able to make better choices about how they use their money.
Get familiar with your financial reality, and understand how every dollar gets used throughout the month. Once you’re aware, evaluate what could be improved: are there expenses you can cut? Costs you can reduce? Savings opportunities you’re missing?
Tracking and keeping a close eye on your cash flow allows you to consistently fine-tune how you use your money. And the more you can optimize, the more likely you are to feel good about your spending and how you leverage your money as a tool to live well today while still planning responsibly for tomorrow.