How to know if you're spending frivolously

5/23/2022

News flash: I hate the word frivolous. Why? Because it's a judgement on how someone has spent their money. Shame is shown to be ineffective at changing money behaviors and can actually lead to financial disengagement instead (the opposite of what we want!). Imagine telling your wife "you spend too much money on clothes, we have to spend less to save for retirement!" and expecting that to inspire her to cut spending. Let's explore what tools you can use instead to assess your own spending habits, or to assess spending habits together with a partner.

The basics: why do we care

Here are a few simple steps to gain financial independence that are touted by the personal finance community:

Track your spending (i.e. figure out what you're spending your money on)
Build a budget (i.e. goals for spending less each month)
Build an emergency savings (i.e. take the money saved each month and build a buffer)
Pay down debts (i.e. get rid of those credit card bills)
Start investing (i.e. after the emergency savings now you invest the money you're saving)
Start side-hustling (i.e. bring in extra income)

But there is one big glaring hole in most of these plans: assessing the value you get from the things you spend money on.

So right into between steps 1 and 2, that's where we are going to insert today's exercise:

Track your spending (i.e. figure out what you're spending your money on)
Assess your spending habits and the value you get from them in order to determine what you are, and are not, willing to spend less money on
Build a budget (i.e. goals for spending less each month)

Because looking at how much you spent eating out last month and stating a goal of "I will spend less money eating out” is ineffective if there is no trigger for a behavior change. The trigger for behavior changes is understanding why you like eating out in the first place.

No guilt, no shame

Imagine your partner (or parent, etc) comes to you to talk to you about finances. Look at these two scenarios* and note which one feels better:

We need to talk about how much money we spend on eating out at restaurants. I keep telling you that I'd like us to eat out at restaurants less often because we're spending $1,000 a month and that's not sustainable if we want to reach retirement early. Your frivolous spending needs to change for this to work.

versus

I was looking at our plan to reach retirement early. I went through each of our spending categories and see that we are still spending the largest percentage of our budget on eating out at restaurants. It made me realize that we haven't talked about why you love eating out. What value do you get when we get dressed up and eat out at restaurants together? What part makes you the happiest?

These examples also work when talking about spending with yourself: if you tell yourself "I need to stop spending frivolously" then it has the same effect as the first option.

The first scenario feels ick. It's about you and your mistakes. These types of conversations are so common and can trigger feelings of shame or guilt. While a bit of guilt can be effective (usually specific to a particular action in the past), shame can cause intense feelings of low self worth which can cause further financial (and relationship) distress.

* This example was inspired by Kevin's story in the ChooseFI Podcast episode 22R, from minute 38:55 to 42:15.

One simple tool

Once you know what you're spending your money on, how can you make a budget if you have no idea why you're spending your money that way in the first place? By:

Identifying the habits associated with the spending
Identifying the value you get from it (both the perceived and the actual value)
Identifying alternatives that cost less but give you the same value

I've put some examples into the simple tool which are shown below: some are my own, some are not. Here is a link to the tool to download for yourself.

If you have a partner or spouse:
Track your historical spending together (or one of you do it and share the results with the other). Once you have the breakdown, choose 10 items to start that you want to assess. But fill in the tool separately (no cheating!). If one of the items is an expense largely only incurred by your partner and not you, then you should write down what you perceive your partner's value to be from that spending habit (never assume that you know the actual value).

When you are both done, share your answers with eachother. Discuss what you find interesting about your answers and what changes you both agree you would like to make.

One simple tool - visual alternative

If you're a visual person and don't want to go into full-blown historical analysis, try this instead:

Pull down your last credit card statement, Amazon order history, or Amazon wish list
Pull out a pen and paper, draw a bunch of big circles (that you can write inside)
Inside 1 circle:
- from the statements, write down a thing or service that you bought (or plan to buy) in 1-2 words, underline it
- write the value inside the circle using simple phrases
Repeat for more items on the statements

Identify patterns of habits and assess whether your perception of value matches the reality of the value. Note items that you want to change going forward.