We all know people that make a lot of money but always find themselves behind the 8-ball financially. Money flows out faster than it flows in and as a result, they struggle to pay their bills on time. Credit card debt begins to pile up and this makes it even more difficult for them to pay their bills. This is the beginning of a vicious cycle that often ends in financial ruin.
Spending to impress others
I often wonder how so many people who should be prospering are struggling to get by. One thing they all have in common is they overspend. Specifically, the things they overspend on are very visible to others and help to declare their status to the world.
- Big houses
- Luxury cars
- Lavish vacations (with plenty of pictures to post on Facebook)
- Designer clothes
- Expensive jewelry and watches
They want to project an image of success. This is both ironic and sad because the money they waste on projecting an image of success is the direct cause of their financial misery. There are different phrases used to describe these people who spend to impress; “keeping up with the Joneses” and “lifestyle inflation” comes to mind.
One of the underlying reasons people spend to impress is a lack of self-confidence. Managing money is often more about psychology than math. Someone who spends half their paycheck on a gold watch might do well to ask themselves who they are buying this watch for. Are you buying it for yourself or for everyone else?
Money is a zero-sum game; the more we spend to impress others, the less we have to invest in our financial future.
It takes self-confidence to live a frugal life
I have two degrees in finance and economics. Nothing I learned from my years of studies has helped me increase my net worth more than the simple fact that I do not give a damn what other people think.
If you need expensive and flashy things to feel confident, you don’t have real confidence.
- Real confidence is going into a jewelry store to shop for your wife’s engagement ring wearing an old hoodie and an old pair of track pants you’ve had since high school.
- Real confidence is driving around your beater of a car with 300,000 miles on it because it’s paid off and it still runs.
- Real confidence is when you learn to be happy in the home you have even if you know the bank would lend you money to go buy a bigger house.
When I am faced with a decision to spend money, I ask myself two questions.
1. Will this add value to my life?
2. Will I even remember I bought this thing a year from now?
If the answer is a “no” to both questions, I will not buy it. Remember, money is a zero-sum game. If I spend $100 on something that is not a value add or a memorable purchase, that is $100 I will not have to invest.
I will gladly spend money on travel because it is something I value and will create memories that stay with me years after the money has been spent. On the other hand, I pack my own lunch when I go to work because paying a premium to eat out does not add any additional value and I can’t even remember what I had for lunch last Wednesday.
That does not mean every meal I eat needs to be prepared at home. If I am out doing something fun with my wife or friends and I start getting hungry, I’ll eat out even if I must pay a premium. At that moment the food is a value add. It allows me to stop being hungry and continue having fun. The same purchase can be a good purchase or a bad purchase depending on the circumstances.
We live in a society that puts a lot of pressure on us to look “like a boss”. Making decisions with your money based on external factors like how it looks to other people is a recipe for disaster. Good money management happens when your financial decisions are guided by internal factors. If you have clear goals and make choices that move you towards those goals regardless of what other people think, you’ll put yourself on the fast-track for success.