Between the four partners and affiliated professionals with whom we work, we read a lot of books, articles, and research papers, on top of attending educational conferences. Every now and then, we come across a work that we feel is worth even the busiest person’s time.
Here’s a summary of a recent book that I enjoyed plus some related thoughts about budgeting: Dollars and Sense: How We Misthink Money and How to Spend Smarter by Dan Ariely and Jeff Kreisler.
Most clients dread that word—budgeting—almost to the point where we’ve considered striking it from our firm’s “approved lexicon” when communicating with clients about cash flow. But why is it that budgeting is so repellant?
The Dollars and Sense authors describe why we overspend and what’s behind our decisions to say “yes” to one item and “no” to others. They also allude to the practical side of how we advise a good number of our clients about their cash flow. To quote: “When we bring money into the equation, we make the decision much more difficult and we open ourselves to mistakes.”
Perhaps we shouldn’t even acknowledge the existence of money at all, they suggest. Instead, a more useful approach is to think of the thing we want to buy as it relates to other things in life that we’re either giving up or having to do to afford the purchase. This approach requires a trade-off mentality.
Let’s say we decide to buy a new car costing $50,000. How do we decide whether $50K is a lot or a little, or affordable or not? Most of us, the authors state, cannot honestly and accurately rationalize or make good sense of that question (and I fully agree with that assertion).
As an alternative, Ariely argues, think of what we give up to have that new car and ask ourselves if it’s worth it. For example: “That $50K car will cost me 15 weeks of work” or “If I buy, then I can’t take a vacation for the next two years.” After you’ve explored the trade-off, then ask, “Is it worth it?”
Ariely and Kreisler posit that spending money should be considered as a trade-off for something else. Now, of course, most of us need a car. It’s not a question of “whether or not.” So, in this example, it should be a question of what a $50,000 car really costs in hours worked versus, say, a $15,000 used car.
Is the $35,000 difference worth sacrificing two years of vacations or 15 weeks at work? That should be the question you ask yourself, especially if you find that you’re struggling to save money.
Oftentimes, when clients want budgeting help, we, as their advisors, spend a fair amount of effort getting the numbers into a format that helps them understand whether they’ll be able to save for and fund future goals, as well as to look for areas of opportunities.
However, we always try to relate how spending habits either allow or prevent clients from achieving financial goals. For example, we commonly work with clients who want to do a home remodel, and we analyze the estimated cost of the remodel against future goals: “The remodel will actually cost you three additional years working at your current salary.”
Sometimes clients are confused by this approach, in that they expect us to be the spending police. But what we try to accomplish is to relate each purchase in terms of what it costs a client’s “future self.” Think of how many times you’ve heard the story of how one spouse in a relationship works incredibly long hours, driven by whatever motivations are in play. That spouse may ignore their friends, children, spouse, health, etc. The story often ends badly. This is exemplary of the trade-off of value for value.
I appreciate this trade-off line of thinking and believe we would all be much happier if we lived by this simple concept when spending money. It may take some work in reframing our day-to-day or big-ticket spending decisions, but I think it’s absolutely useful.
Remember: You cannot have one thing without sacrificing another.