When It Comes to Money, Decide With Your Heart

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This advice may seem contrary to what you might think a personal finance Blogger would say. After all, it’s clear that our irrational relationship with money is the root of a lot of our money problems (otherwise, why would so many Americans get into debt for things that aren’t necessities). However, while using your brain definitely has a place in making money decisions, ultimately I think the allocation of your assets should be decided by your heart. Let me explain what I mean.

You Should Spend Money On The Things You Love

Money only has value when it is spent, for the most part. If we never spent money (i.e. turned it into something else) it would amount to nothing more than useless pieces of paper or meaningless numbers on a spreadsheet. So, the ultimate trick to money management is to figure out how to spend that money, and when (i.e. what your current monthly budget is, and how you allocate portions of your income to spending or savings).

The question comes down to how we make these decisions. When I was drafting this post, this article from The Simple Dollar showed up in my reader, and it touched very well upon what I was trying to say, urging readers to focus on the things that bring you happiness and organize your time to maximize these experiences. The Simple Dollar article talked of making a list of the 10 things that brought happiness over the previous few days in order to decide what to was important and what should be focused on.

I like this idea, and this is sort of what I was trying to get to. Since money is only as valuable as the things that we exchange it for, it only makes sense to spend it on things that give us value. If I buy a $100 DVD player but it only brings me the equivalent of $40 in happiness, I have just wasted $60 even if the DVD player was an amazing deal. So, it makes sense to figure out what is really valuable to us, and prioritize our limited resources (money and time) accordingly.

However, my idea differed slightly from the article at The Simple Dollar. Instead of making a list of 10 things that make you happy over a ten day period, I advocate making a list of the 5 most important things in your life. Be selective, you can only choose 5. And they have to be really important to you, things that if you no longer had them you would be an extremely unhappy person.

My list, for example is:

My Family & Friends
My Pets
Financial Security
My house
The internet

I chose these because these are the things that I absolutely would be miserable if I did not have. I could live without cable. I could live without a nice car. I could live without eating out or going to movies. This list will be different for everyone, but they should be the top 5 things that you wouldn’t want to live without.

Now, I think the top 5 categories in your budget should correspond to these 5 items. If something is one of your top 5 largest expenses, it should directly be related to one of the items on these lists. Obviously, we have to have other items in our budget too (like cars, food, etc.) but if these items aren’t on your top 5 list of things you love, they shouldn’t be your 5 biggest expenses.

Now, you might be thinking, how does that work? How does “Family & Friends” cost you money? Well, money cost is more than just what you spend. There is also a cost to not making money. Since Family & Friends are number one on my list, I chose to take a job that pays me less than a different job I could have taken, so that I would have more time to spend with my family and friends. This could be a decision you make too (and probably is), reflected in choosing not to get a second job to buy more stuff, for example.

Financial security is on my list, which means that one of the top 5 categories in my budget should relate to achieving financial security (i.e. paying off debt, establishing an emergency fund, saving for retirement).

Pets are on my list, so it is ok if their food and vet bills are one of the top 5 categories in my budget, but for some people they would rather put a fancy car, or eating out, in this slot and spend more on that and less on their pets. And so on, and so forth.

Making a list like this allows me to put my life in perspective, much like the list at The Simple Dollar does. I’m just looking at the big picture to establish what my most significant uses of money should be. I’m sure I’ll re-evaluate this list (and my resulting budget) many times over the course of my life, as I grow up and have children and my life changes. But, I always want to keep track (even just mentally) of what the 5 most important things are to me, so I can make sure I am using the bulk of my money towards only things that actually maximize it’s value.

August 5th, 2008 in Spending |