We’re going back to basics. Today we will discuss how to spend your money with Farnoosh Torabi.
Some of you are OG LMM listeners, but we gain new listeners every day. For those new to the podcast, we want to spend this month teaching essential money skills everyone must know.
There are certain things that we should splurge on. When we spend more money on things like good food, a good mattress and bedding, and good medical care, we improve all the other aspects of our lives.
You can’t function properly if you don’t eat and sleep well. Spending money to see a functional medicine doctor rather than a pill pushing doctor can preserve your quality of life for decades. When the inputs are quality, the outputs will be quality.
Time and Money
Some people don’t understand that time can be more valuable than money. Do you work 70 hours a week and spend your weekends doing things like cleaning the house, doing the laundry, and mowing the grass?
Is that how you want to spend the little bit of free time you have? Some people hate to pay for anything that they can do themselves. Sure if you only work part-time, it doesn’t make sense to pay someone to do those kinds of jobs and you might not have the money anyway.
But if you work a lot, have money coming in, and limited leisure time, outsource some of the life’s more mundane tasks. I can never understand why DINK couples don’t at least hire a cleaning person to come in once a week and instead fight over whose turn it is to clean the bathroom.
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We shouldn’t keep our money in one big pile; it should be kept in individual “money buckets.” One bucket is your long term savings. That money is kept in 401k’s, IRA’s, and ETF’s like Betterment. Short-term savings, any money you are planning to spend in the next five years, saving for a house, for example, should be kept somewhere safe like a checking or savings account.
Money for your monthly expenses is kept in your checking account. Your emergency fund can be kept either an investment account or your checking or savings account, depending on how risk averse you are.
Where is my Money Going?
Personal Finance 101 is to know where your money is going. The only way to know is to have a budget. Mint is our favorite budgeting tool because it’s free and easy to use. You can break down your budget categories as broadly or as narrowly as you want.
If you are doing well financially you can keep them broad. “Food” can encompass groceries, work meals, dinners out, and the snacks you bought at the drug store. If you’re struggling to figure out where you money is going, you should break your categories down further.
The Right Way Costs More
Sometimes extra money spent means less aggravation. Yes, it’s cheaper to fly with stopovers than to fly direct. But how often do you get to go on vacation? If you’re American, not much. If spending an extra $100 means you get to your destination sooner and less frazzled than if you had done a couple of layovers, isn’t that worth it?
And if you’re over six feet tall, fork out for the extra leg room seats while you’ve got your wallet out.
Moving is another good example of this. Moving is one of life’s most stressful events, why make it worse by trying to do it yourself or tricking your poor friends into helping you? Packing and unpacking aren’t so bad and if they seem daunting, you have too much stuff and need to get rid of some of it before the move.
But lugging boxes around and driving your every worldly possession in a big truck whether it’s across town or across the country is just not worth the money saved.
Sometimes the right way costs more.
A Little Luxury Must Fall Into Your Life
You work hard for your money and we feel like you deserve a little something better from time to time. And while it’s true that we are made happier by experiences than things, there are still some good and not so good reasons that it’s occasionally permissible to splurge.
When you have a bad day, month, or year, buying something extravagant can give you a boost. It shouldn’t, we should be above that sort of base behavior, but it doesn’t matter. It works, even if only for a short time. Sometimes things are so shit; a short term boost is good enough.
This kind of retail therapy should not become your regular means of coping. You need to find less expensive ways to soothe yourself; exercise, a nap, a phone call to a friend or family member. You can’t whip out your credit card every time your boss is mean to you.
Your extravagance has to be scaled though. If you’re making $30,000 a year, a dinner out where you order whatever you want without thinking of the cost is a nice indulgence that is relatively affordable. A Rolex is not.
Know Your Limit
We should all have a line in the sand about how much money we are willing to spend on certain things. For me, it’s airline tickets. I will never pay $1,000 to fly anyway. Why? Because I know I don’t have to. There are too many ways to get a cheaper ticket; fly offseason, fly on off days, fly into a different airport.
If you are considering a splurge purchase, know your limit. I will not pay more than X for Y. If what you want costs more than your limit it doesn’t mean you can’t have it. Try to find it for less; buy it used, wait until it goes on sale, ask for it as a gift (just because you can’t afford it doesn’t mean someone who might give you a gift can’t), haggle with the sales person, or even the old standby of saving up for it.
Just Earn More
Some of us hate any kind of penny-pinching, some of us have expensive tastes. People like those would rather just earn more than spend less. It sounds flippant, but it’s hardly impossible. There is a limit to what you can save but no limit to how much you can make.
Let people know you want to make more money. That might mean telling them you’re looking for a new job, telling them about your side business, or asking for advice on ways to do that. Always try to improve 1% from the day before. You can start to learn a new skill, take on a new responsibility at work, or spend an extra few minutes working on your side business.
How can you take some risks that will earn you more money? Apply for a job that you aren’t entirely qualified for, get over your fear of investing and open a Betterment account, start attending networking events even though you feel awkward talking to strangers.
Audit Your Expenses
We tell you to set it and forget it when it comes to money, and it’s easy to do because so many aspects of our finances can be automated (even investing). There is a danger in that though; expenses that we forget about. They can be things like a Netflix or gym membership you don’t use, a magazine you no longer read when it shows up every week, or a membership to a social club you no longer attend.
Every six months comb through your credit card and bank statements and look for things like these. Sure Netflix at $8 a month probably isn’t going to put you in the poor house, but you wouldn’t flush $8 a month down the toilet either. And if you have several of these little hidden expenses, they can add up.
Your Five Things
This was my favorite part of the episode. What are the five things you spend the most money on? What are your priorities? Do those things match? If one of your priorities is to save for a house but one of the top five things you spend money on every month is your bar tab, they don’t match up.
We can do this with lots of things; the five things you eat the most, the five people you spend the most time with, the top five ways your spend 24 hours. This little exercise is an excellent way to audit not just your expenses but your life.
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