Why Focus on Spending Rather Than Income

June 26, 2018

Shifting Focus from Earning to Spending Behaviour

For years, I have been focusing all my energy on earning more (how many hours I was given as a bartender or how I am going to negotiate my salary at my performance review) in order to fund my cost of living. However, I’ve come to realise that it’s your spending behaviour that sets you for life.

Most would say ‘yeah, that’s not necessarily rocket science here buddy,’ but I’ve figured that most of our spending is based on our income level trying to equalise our satisfaction level (okay, this is actually an economic theory but I’ll narrow it down).

Purchasing Decisions Based on Perceived Value

When we purchase goods & services, we do it based on how much value we perceive from them (or satisfaction in this case). For example, if you just finished running and only have $5 in your pocket, you may just buy a regular bottle of water. If you have $0, you may just try and find the nearest water tap. But if you have $500, you may just buy a product that has a story behind its brand but yet it’s still water (e.g. water from some random alp nobody really knows about).

Basically, what I’m trying to say is that you’re not going to buy 100 regular bottles of water if you could because by the 3rd bottle of water you’ll start feeling sick. Instead, you would preferably buy the water that has a well-marketed brand, and the design of the bottle is attractive to you.

Rethinking Needs: Essential vs. Optional

Now, what does satisfaction have to do with anything if I don’t really earn that much? Well, let me explain. If you sit down and write your main physical needs to exist, it should go something like this: Food, Water, shelter, and in some cases transport. Basically, that’s all you need, and the rest is optional, which is the biggest change in mindset for me since early this year.

I moved to a new place in January and decided (mostly ran out of time) not to have internet and its derivatives (Netflix, Spotify, console membership, etc.), and I have to admit, I can’t believe I’m still breathing! My perception in value for the above-mentioned was so high I thought I couldn’t really have a quality of life without them – WRONG.

Before I purchase anything, I now start using different wording in the questioning (you play tricks on yourself). Instead of asking myself what do I want for dinner? I’d ask, what do I need for dinner? The big difference here is that we all want the best (value) for us but we only need counted basic goods. Ask yourself the same question, what do you need? Do you need Netflix? How about what’s on free national TV? Or instead of Netflix, you can spend that extra time cooking your much-needed food? Think about it; I was born without internet & mobile phones yet I had an existence and a pretty awesome one, I must say!

For my next blog, I will go into the specifics of this concept and how you can apply it to your everyday life in more detail to achieve specific financial goals.

Until then,

Pedro Marin Ramirez CFP ®