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Value-based spending provides a calm around our finances, as we are spending exactly on the things that are worth it, to us.
Money is a way to trade the energy we put into paid work (our salary), for food, shelter, transport and things. By understanding this trade-off and learn how much we truly have to work to pay for our stuff, we start prioritising our spending differently. This leads to mindful spending habits that are in line with our values.
What is money?
The Oxford English Dictionary defines money as what you earn by working or selling things, and use to buy things and while this is absolutely accurate I think if you asked this question around a table of friends you would get other answers like:
- Money makes the world go round.
- Money is the root of all evil.
- Money is freedom.
- Money is a medium of exchange.
The list goes on. Personally, there are two ways of looking at money that I find valuable when we look at the way money impacts our own life. The first one is:
1. Money as a Tool
Money in itself is not good or evil. It is not the ultimate goal or the ticket to freedom. Money is a tool that we can use to build the life we want. A life that makes us happy to live it.
Not having money is difficult, no doubt about it. It’s a very useful tool and unless we have built a completely self-sustaining life, it’s a necessary tool. However, treating money as a goal in itself, working late nights and weekends, missing out on life, family and friends with the goal of having a big bank balance will not make us happy.
Money can however be a great tool that we can learn to use well and that can serve us in building the life we want. By understanding the basics of personal finance, and how we can make money work for us instead of us working for money, we can change the way you think about our life choices.
2. Money as Life Energy
Another useful way of looking at money is as life energy. You spend your life’s energy working, which you then convert to money. Vicki Robin and Joe Domingues explores this concept in the personal finance classic Your Money or Your Life where they ask you to do the following experiment:
Consider all the time you spend on work.
This is the time you are actually at work, your commuting, shopping for work and recovering afterwards. How much time is this in a month?
What is your actual income?
What is in your bank account at the end of the month?
Do you have any additional costs associated with work like commuting or needing clothes you wouldn’t otherwise by?
Factor all of this in and get your actual monthly take home pay.
Divide the number of hours you actually spend at work with your actual take home pay to get your actual hourly pay.
This is, all considered, what you are selling your time for.
Let’s start with an example of someone (let’s name her Susan) who makes £40 000 per year and has a contract for 37.5 hours per week.
(There will be some numbers and calculations here but please bare with me as there is a point to all this!)
Susan usually works a bit of overtime taking her working hours to 40 hours a week. Susan commutes to work which takes another hour every day.
Finally, she needs an hour every night to just stare at the telly as she is too tired to do anything else, something she doesn’t do when she has had time off and is rested.
In total, Susan is working 40 hour + 5*1 hours commute +5*1 hour recovery = 50 hours per week.
Susan is earning £40 000 and using an income tax calculator (this one is for the UK) it shows me that her monthly take home pay is £2570. Susan’s commute is costing her £200 per month and she needs to wear a suit for work. She buys two new suits every year for a total of £300 averaging £25 per month. Taking £2570-£300-£25 = £2245 which is Susan’s actual monthly pay.
Taking the 200 hours Susan worked in a month and dividing it with his monthly pay of £2245 gives us an actual hourly pay of £11.2. This is not much more than the current UK minimum wage of £8.72…but I digress.
When you do this for yourself (and I recommend you do!) you will get your own number. This number may surprise you, but remember, this is a tool. This is a help and a guide, not a measure of your value.
How much life energy are you spending?
Now that you know your actual hourly pay you can start using it to consider your spending habits and how much life energy each of them are costing you. Let’s continue to use Susan as an example and look more closely at her budget:
As you can see from the above, Susan works 8 days a month to pay her mortgage (10 hours a day). She then works 3 and a half day for her car payment and she works more than 1 day a month to pay for the lunches she purchases at work.
To be able to do this calculation for yourself you now need to know how much you are spending every month. It can be a bit scary but if you don’t know where your money is going this is a great time to find out! Then find out how much life energy you are spending for the different expenses in your life.
Are you practicing value-based spending?
We now know how long we are working for everything we are paying for. Is it what you thought? Is it worth it? There is no right or wrong answer here, it is just a question for you to decide for yourself but there are a few questions that may help you do that:
Does the hours I work tally with the pleasure I get out of it?
In the case of Susan, is it worth working 8 days to cover her mortgage and 3 days to cover her car payment? Is this value-based spending? If not, would it be better to have a smaller house or buy a less expensive car (or cycle!)?
Are you spending on things because you value them, or is it because of expectations from others?
Your mum is expecting you to have a nice house, your friends all drive BMWs and you get a lot of oh’s and ah’s for a new designer bag. You should spend on what you value but it needs to actually be your values.
Is there anything you don’t actually need to spend as much on without losing out?
Can you switch electricity or internet provider for a better deal?
Are there things you can do it yourself in less time than you would have to work to pay for them?
If there are leftovers from dinner that can be made into a lunch, can you save yourself one day of working for others?
What are your values?
Consider the time and the value you get from the different items and remember that this is not an exercise to judge your spending but to make sure that you are comfortable with it. That you can feel calm in the fact that you are spending in line with your values.
Personally, I’m really happy to spend money on having a cleaner as I really don’t like cleaning, but for someone else it would be ridiculous to spend money on something they could do quicker themselves.
Value-based spending is just that, spend your hard earned money on the things you value and not on what you don’t.
Don’t tell me where your priorities are. Show me where you spend your money and I’ll tell you what they are.James W Frick
Are you paying yourself or only working for others?
In Susan’s example she is spending everything that she earns. This means that for all the time she spends at work she pays a lot of people. However, other than as a part of her mortgage payment she is not paying herself at all.
What if she could spend just one day a week working for herself, being able to save or invest that money? What if she would work for herself for a full week every month? How would her life change?
When we look at our spending from a value-based perspective, it is not enough to determine if an item is “worth” the hours you need to work for it. We also need to take into account how much we want to pay ourselves. Is the total sum of all our spending at a level we are happy with?
What did the Habitista do?
When I did this exercise I found it difficult at first to think in the terms of working to pay others versus working to pay myself.
I could easily look a scarf (I really enjoy a new scarf), andthink that it’s four hours of work, that’s fine I’ll buy it. But when I put it all together and contemplated how much I worked to pay others, and how little I worked to pay myself I knew it was time for a few changes.
I haven’t drastically changed my life in terms of what you can see from the outside. I live a good middle class life, I have a nice car (yes, it’s a BMW but I did buy it used and without finance….) however by making priorities about what I spend my money on I now work significantly more for myself and significantly less to pay others.
And the best part is that when I spend, even if it looks lavish or unnecessary to someone else, I know that it is line with my values and that way buyer’s remorse is finally a thing of the past.
I know this exercise sounds like a lot of work but if you do want to take a closer look at your finances I really urge you to go through it, as it will challenge many of your habits and beliefs and once through it you will have taken a big step towards financial calm.