April 13, 2019
Since we’re just getting warmed up here, I thought we could talk about a seemingly simple topic—spending money.
But instead of telling you exactly what to buy (hint: not much) and what to avoid (most things), I’m gonna share my own mental checklist for making better financial decisions.
This checklist isn’t about being extreme or turning into a monk. It’s just about being more thoughtful with your spending. This mindset has become second nature to me because I’ve realized that every purchase we make has its own set of consequences – some good, some not so good.
Now, sure, we could take the “head-in-the-sand” approach that most people take. But where does that get us? Nowhere!
So, it only makes sense to consider each purchase carefully, and I’ve developed a framework that helps make those decisions way easier.
I’ll save my favourite mental model for last! OK, first one…
When we talk about spending money, we need to establish the difference between what we need and what we want.
It might seem like an obvious point, but you’d be surprised how often people confuse the two. Needs are the things that are essential for literally staying alive and losing your mind.
Food, shelter, healthcare, and basic utilities. These are the things that, if we don’t have them, we’re in trouble.
On the other hand, wants are everything else. The new gadget, overseas holidays, car upgrades, and restaurants – these are things we can live without if we need to.
Here’s the thing: our brains are really good at justifying wants as needs.
How many times have you thought, “I need that new phone, because this ones pretty old now” or “Let’s eat out tonight, we’ve had a busy week”?
But when you pause and think about it, those are wants, not true needs. When you start pausing for just one second to reflect on your own behaviour, it becomes easier to see which ones are essential and which ones are indulgences.
And that’s not to say you shouldn’t do any of these things. It’s to simply catch yourself falling into the trap of ASSUMING they’re needs. So I’m not saying you forgo all this stuff. But the habit of being mindful about your spending makes a huge difference.
Let’s start with the most obvious: every time we spend money, our bank balance goes down.
That’s an immediate, unmistakable cost. And while that’s not always a bad thing, it’s something we need to consider.
Some things are definitely worth spending money on—like a trip to visit family, healthy food, catching up with friends, groceries, phone bill, or even a catchup with friends.
These things add value to our lives. But we still need to stop and question ourselves: Is this really worth it?
Because here’s the thing—if you’re not already financially independent, every single dollar you spend is a trade-off. You’re giving up your future freedom for that purchase, so it better be worth it!
And the truth is, much of our spending isn’t a one-off thing. Sure, it might feel like buying a new jacket or fixing the car is random, but those costs add up year after year. So they need to be factored into our long-term plans. Which brings us to the next point.
You’ve probably heard that to be financially independent, you need about 25 times your annual spending saved up in investments—things like index funds for example.
With these investments, your savings can produce a passive income stream of about 4%. So, for every $1 you spend each year, you need $25 in investments to generate that $1 in income.
Let’s break this down with an example. The $50 takeaway meal you enjoy each week (which adds up to $2,600 per year)…. well, it’s not just a small treat.
It requires $65,000 of investments to maintain. So that’s the true cost if your goal is FI.
How long would it take to save an extra $65,000? Is it still worth it? Maybe, maybe not.
Looking at it this way, some of our spending can really shock us. But rather than dwell on it, look at the positive. For every $10 you cut from your weekly spending, that’s $13,000 less you need in investments to retire.
Not only that, but any savings give you more cash to invest! Each time you lower your spending, you’re accelerating your path to financial freedom. That’s powerful!
This is extra powerful in the beginning where there are lots of savings to be found and you might be starting without much wealth.
But later on, as your situation improves, you might decide that more things are worth spending on to enjoy life a little more. But that’s a topic for another day.
The next thing I consider is the happiness outcome of a purchase. Ultimately, a lot of our spending choices are driven by the desire to live a happy life.
But here’s the catch: we’re actually really bad at predicting what will make us happy.
So when I’m thinking about spending, I ask myself: Will this make me any happier? Not just right now, but in a lasting way? And the answer is almost always: “No, probably not.”
We often get these short-term “sugar-rush” highs from things like a holiday or a new purchase. But those highs fade fast, leaving us with less cash than we had before and the same desire for more.
The truth is, the bulk of our happiness comes from things like:
A comfortable place to live
Good health
Meaningful relationships
Personal freedom
Learning and growth
Helping others
Enjoyable work and purpose
When was the last time something you purchased brought you ongoing happiness? I can’t even think of anything!
Plenty of things are worthwhile and super enjoyable to spend money on. But we often assume we’ll be happier as a result, when that’s not really true.
So, next time you’re about to spend, ask yourself: Is this really worth it, or am I just assuming it’s going to bring me lasting happiness?
It doesn’t feel good to admit, but a lot of the things we buy have an impact beyond just the price tag.
Whether it’s the resources used to create clothes that are often worn only a few times or the waste generated by single-use packaging, these things do add up over time.
For example, when we purchase new clothes or use disposable items, it turns out there’s a shitload of resources that go into making these products – and if they end up in landfill it seems kinda wasteful.
That’s why I try to be more mindful about the things I buy. Sometimes it actually makes sense to buy a more expensive item that will last longer than the cheaper one that doesn’t last as long. I’ve found myself doing that more as time goes on.
Paying more for better quality is often lower cost over the long term, and saves a bunch of waste and the hassle of having to replace items more frequently too.
The point isn’t to try and be perfect—just about being a little more conscious of how we can make better choices, even in small ways, to reduce financial and other waste.
Okay, now let’s move onto probably my favourite one to think about.
After considering all of the above, we get to opportunity cost.
This basically means: What else could this money be used for? And for our purposes, the obvious answer is, investing!
Let’s say you spend $50,000 on a new car instead of a decent used one for $10k, and you invest the extra $40,000.
We’re assuming you’re paying with cash here, rather than adding fuel to the money fire with a car loan!
Anyway, over 15 years, with a 7% annual return, that $40k investment would grow to about $110k.
So, the opportunity cost of spending that extra $40,000 is not just $40,000—it’s actually $100,000! And you can roll this forward for longer and the opportunity cost gets bigger.
Now, I just bought a new car in 2024, so I’m certainly not saying you should never buy a new car. What I’m saying is, when you’re trying to build wealth and create freedom, there is a HUGE cost to pay for any money you don’t invest – not just financially, but in terms of missing out on retiring earlier.
To be clear, I gladly drove absolute shitboxes for the entirety of my wealth-building process. The one I drove to my warehouse job for 8 years would’ve been worth about $3k!
Understanding opportunity cost lets you see what your money could turn into if you invest it rather than spend it. I find this the most motivating way to look at things.
This little framework has helped me make much smarter decisions on my journey, and I hope it helps you too.
None of this is to say spending money is bad. It’s about doing it deliberately, after you’ve thought about it first. I call it Deliberate Spending.
After running through these steps a few times, you’ll start realizing that a lot of our spending is costing a lot more than you think. The investments you could’ve had, and the freedom you could’ve built.
But it’s all a learning process and figuring out what your priorities are. Yours may be totally different to mine, and that’s perfectly fine. But once you figure it out, you’ll be able to focus on using your money for what really matters.
Maybe you have a different approach for making better financial decisions. If so, I’d love to hear about it. Share your tips in the comments…
I follow a somewhat similar process to yourself with this Dave. One of the first questions I always ask myself is “Do I need this?”. If I do then I just buy it (usually after a bit of shopping around to make sure I’m getting the cheapest price). If It don’t need it then it becomes more of a question of will this be something that makes me happy, and for how long will it make me happy. I don’t tend to find myself wanting material things like clothes or electrical gear too much so that’s easy enough, and I’m comfortable with what we’re spending on groceries, utilities, stuff for the kids etc.
My biggest problem is I have a sweet tooth and am constantly being tempted by chocolate, donuts, sweets and the like so I try to ask myself if I’m genuinely hungry or just wanting something tasty. And then I think about how much exercise I’m going to need to do to burn it off…
Dave, great post. I have just started on this journey, about 8mts now and am already feeling the financial benefits. For myself it’s the little regular payments that add up, so i have been one by one eliminating as many of those as possible and i have found it has been a massive help to date. It’s incredible the benefits of comparing health insurance and phone plans ect!
Thanks Essen. Great to hear you’re already seeing the benefits! And awesome job cutting down those ongoing payments. Small regular purchases and subscriptions are an easy way to make lots of money disappear unknowingly!
Thanks for sharing your approach mate. The old sweet tooth ey 🙂 Must admit I also love a good donut or some dark chocolate! Looking at it through the lens of how much exercise it equates to is a great idea. Do you find that works as a motivation to stop yourself?
“Do I need this?” is perhaps the best way to look at any purchase, though that assumes the person is willing to admit the difference between their wants and needs!
I actually have trouble sometimes trying to figure out what people spend money on, since the vast majority of the time I don’t feel the need for anything. But of course I have to stretch the imagination and come up with some ideas to seem relatable 😉
I find that thinking of how much exercise I’d need to do to work off somethign sweet works a fair amount of the time. It’s definitely not a sure fire thing, but it definitely reduces the spending that I’d be doing otherwise!
As you say a lot of it comes down to what people thinking they need actually being a want. You don’t need an SUV for your kids, it’s a want although admittedly it would maybe make things easier. Likewise a lot of families probably don’t need a second car, they just want it because it makes life a bit easier. And then they buy a brand new second car, because well why not and then they wonder why they’re not getting ahead…
You definitely seem to have that frugal mindset come easily to you, I find that I can do it with some areas of my spending but not others. I think a large part of the problem is likely that I used to spend a lot more when I was living overseas and once you’ve started down that road it’s hard to go back. Still, looking at my budget compared to most other I still seem to be doing ok.
Awesome that it actually works a fair bit!
Interesting! That could very well be the case, and you’re definitely doing well! We did used to spend way more than we do today, but it’s true I’ve never had any long standing expensive habits (though I did imagine a much more expensive life eventually, but that desire has now melted away).
Yeah it’s funny (unfortunate?), making life that little bit easier or nicer across the board ends up with most people broke and with a mountain of debt/bills – life isn’t quite so easy then!
Thanks SMA, good article.
Yes, I tend to focus on the opportunity cost one the most – and consider the lifetime of returns I am giving up by making an expenditure in a depreciating (consumer) item, compared to the alternative. I’ve also found for me separating that out into an identifiable bucket – I use Raiz, but there are other ways of doing it is additionally motivating, as it becomes essentially a small but growing fund out arising of a series of small disciplined decisions.
Cheers Explorer!
Totally agree, that’s probably the biggest way to motivate people. As soon as someone learns the power of compound interest and starts thinking in terms of opportunity cost over 50 years, it’s mindblowing how much things are really costing.
Hi Dave,
I love that you have taken this beyond just hitting FI or retirement. Instead of thinking about what you can start spending all that money on, think about the ongoing impact of how you life and what you do with your money. Great stuff.
Cheers, Frankie
I appreciate that Frankie! Don’t want to get overly preachy but this stuff is really important for all of us. Thanks for your support mate 🙂
Thanks for this very thought provoking post Dave.
Thanks for reading!
After so many false starts over the years with budgeting, we have landed on the one that suits us best (no right and wrong here). We now budget by percentages.
If you are young with time on your side then 20/20/60 approach of 20% invest/20% save for major purchases/60% everything else will work OK. If you are older like us before you sort your mess out (ha!), then we have 60/20/20 approach version of the above with 6% of income being invested etc ….. it’s much easier to start early, than trying to play catch-up (which you simply cannot truly do). I am thankful all my daughters have taken this seriously and are investing a goodly percentage of their incomes every fortnight.
There is no perfect way to budget or organise money as long as the math works and you. Also, automate as much of it as possible. Automation is my key winning money tip.
Thanks for sharing Phil. Great lesson in there about automating savings and starting early due to the power of compounding!
I think that’s similar to the Barefoot approach? That would definitely work and put folks ahead of the game, since most people save close to nothing. Personally I never liked the idea of dedicated buckets and percentages, but certainly see how that works wonders for others. As you say, whatever works for you is the best approach to take 🙂
Hi Dave,
not that you are a financial adviser, , but
I may come into some money. anywhere between 100k and 200k within the next 6 months.
If I got the $200k ,my idea was to put 80k in super, $40k in blue chip shares and most of it in LICS, and 60k itowards the investment property I have. and the rest for renovations that I need to do.
what do you think. I am single, own my home, and am 56, and may retire at 60.
Hey Sue, thanks for the comment.
I can’t tell you what to do obviously. But out of those options, paying down your investment property debt and putting money into super are the two most attractive options considering you’re pretty close to retirement. Your super is likely mostly invested in shares anyway so you’d still be buying shares just in a different way.
That’s probably what I’d consider. Again, not advice, but hope those thoughts are helpful. Cheers!
Great read Dave,
Completely agreed about on going costs. I think it’s the elephant in the room for most people.
I sit down and check my ongoing costs every year and try to minimise them. Makes a massive difference as you explained especially in the long run.
Really nice to see you post on waste and it is too true that as a country, we should be ashamed of ourselves on that front.
I also stopped budgeting ages ago. 20/20/60 is a great ratio to start with as per Mr HM (Phil) above but then that 60% can be 30k or 100K depending on how much money one is making so that can translate to a massive opportunity cost.
So for me , unless the money contributes to the ” bulk of our happiness list ” that you put nicely in the post, it will go straight to savings/investing.
Thanks very much Paul – I like your approach 🙂
Yeah I think that’s absolutely true, it just pays to be mindful of everywhere our cash is going so we understand it fully and can decide whether that’s really a good idea or not.
Totally agree with you on the buckets approach! It’s not for me either, but it’s probably not a bad rule of thumb for those new to saving.
It means those on average incomes and higher will be blowing substantial amounts of money. For those interested in Financial Independence, I don’t see the value in having ‘splurge’ account for example, there should be nothing exciting about wasting money. If you really want something and it’s worth it, then buy it. But if not, just save and invest all your spare cash, minimise the waste and work on getting your freedom first.
After that do what you like with extra cash, within reason. But until then, any money wasted is costing real freedom for no extra happiness.
It’s interesting how being on the FIRE path makes you evaluate your mindset and decision making approach. Being on high incomes made us pretty lax in the budgeting department, especially since we could still see our savings growing easily despite living a consumerist lifestyle.
Now that we have a young one we’re changing our spending habits. I ask “Do we really need this?” before every purchase. If we identify that it’s a true need and not a want, I try to see if we can get a secondhand version for cheap before we look at buying brand new. Going minimalist has been the best decision we’ve made!
I also like your approach using opportunity cost as a factor in decision making. It adds gravity to the decision, makes you think what opportunities you could lose tomorrow if you made this spending decision today.
Thanks for sharing your approach! Minimalism is something I really gravitate towards but I never knew why – but it makes sense on many levels.
Great to hear the simple self-questioning is helping turn the ship around, it’s pretty powerful once you get in the habit of it! Great comment Ms FireMum 🙂
Nice post, Dave.
Here’s a quote from multimillionaire Jim Penman, founder of the company that runs Jim’s Mowing and Jim’s everything else.
“I don’t like spending money and I don’t enjoy expensive things,”
“I just don’t think it’s right — the purpose of money isn’t to live a luxurious lifestyle, it’s to be financially secure but with a sense of purpose”
Thanks Robert, interesting quote. There’s much more important things you can do with money than spend it on a fancy lifestyle!
Dave, have you come across the Buyerarchy of Needs?
1. do without… does it really spark long-term joy?
2. use what you have
3. borrow or swap
4. make it yourself
5. buy used
5. buy new
I haven’t seen that before, but it’s pretty damn good! Thanks for posting!
This is great – especially the first and last points!
This is exactly why we’ve almost eliminated takeaway food – $50 even twice a month is $1,200 a year, which translates to around $1,000 wasted money each year (even allowing $200 to replace those 24 take out meals with home cooking). That means we need to invest an extra $25,000 to maintain that (more unhealthy) lifestyle – no thank you!
If we decide we do need it, then the next step for us is “Can I get it cheaper? and then “Can I use less?” We’re still gradually optimising our household budget, but we’re finding things we buy regularly that we can get cheaper by switching brands or buying in bulk. I’m also realising I don’t need to use as much shampoo or need to put conditioner in my hair as regularly as I thought I did. These changes are very small, and won’t save us a huge amount of money, but every little bit counts if they’re sustainable changes.
Still working my way through your back-catalogue 🙂 So much great stuff in this blog! Keeping me focused on the goals and ways to get there.
I love that you’ve done the sums on that one. $20 a week sounds like peanuts, but really it’s a $25k cost as you said.
It’s super cool that you’re reading all these older posts, thanks! Sometimes I wonder if they get forgotten about 😉
I’m addicted to reading your old posts at the moment! So much great stuff in them.
It is great to read about how you have evolved on your journey as well, and to read what you’ve learnt along the way.
Such an inspiring blog – my current fav!