About a year ago, a friend shared this thought with me about spending money wisely, and it stuck with me to this day:
“Spending money wisely is the trick to improving your financial situation and creating wealth.” He said, “If you can learn to master your purchases, you can begin to master your finances.”
My friend continued:
“All purchases can be boiled down into three distinct categories. Almost all money problems can be avoided in life by skipping the first two categories of purchases, and targeting the third category with as much of your income as you can.”
So what are these three categories? Here are the three types of purchases we all make on a daily basis:
1) Consumables, being the worst type.
2) Depreciables, which are Ok, but not the best.
3) Investments, being the best type.
This below illustration is the map to wealth. By the time you’re done reading this article, you will know how to read it, use it, and find your dreams with it.
Before I dive into these three categories, I want to tell the story of how I met this friend and share a little life advice along the way.
Growing up in an outdoors-loving family, I went on many fishing trips with my father. I remember on one trip, we stopped at a gas station to fill up his truck and boat with gas. As he looked out at his truck and boat, he said this:
“My truck and boat are the third and fourth biggest investments I’ve made in life. Do you know what my top two investments are?”
I thought about it for a minute, and finally asked him. “What?”
“Well my house is worth more than these things, so that would be my second biggest investment. But my marriage to your mom is probably my biggest investment I’ve ever made. That’s why I consider my marriage to be my biggest and most important investment. If you want to really succeed in life, take care of your biggest investments, which are all the relationships which you prioritize the most.”
That bit of advice stuck with me through the years. Once I was married, it led my wife and I to prioritize the health of our marriage even above our financial decisions. The first step we took to build a solid foundation for our marriage was by joining a “Married For Life” small-group through our church. This group was filled with other younger couples just like us, working hard to build happy and healthy marriages together.
At one of these small groups, the subject of money came up. This is where I first heard my friend explain his philosophy on how to master money by understanding the three categories of purchases.
As my friend began to break down his philosophy, I sat forward in my chair and listened eagerly to him. I had never thought about exploring the psychology of spending before. As he spoke, I realized that if we can understand what we’re spending our money on, we can have more success unlocking our paths to wealth.
Consumables: The First, and Worst, Category of Spending Money.
“The first, and worst, type of spending you can make if you want to build wealth, is by buying Consumables.” He said.
“Consumables,” he said with almost a disgusted tone in his voice, “Are the worst type of purchases you can make. Because once you buy consumables, you can never return or re-sell those products. That money you worked so hard for is gone forever once you buy consumables with your cash.”
“The consumable category includes purchases like restaurant food, cable TV, and lots of stuff that you think makes you happy, but really just numbs you to the reality of life. These consumables include things like alcohol, entertainment tickets, and unhealthy food.”
“You can never re-sell a consumable product. The money you spent on that purchase will disappear into thin air like and never be seen again. If you want to create wealth, you have to care about your money.
“Purchases that make your money disappear has to become an extremely depressing thought to you.”
Depreciables: The Second Category of Spending Money.
“The second type of purchases is called Depreciables. Depreciables are better purchases than consumables, but they’re still not great.”
“Depreciables are items that do retain some value even after you use them, and can be re-sold after you use them to recover some of the money you spent on them. Depreciables are the category that includes: vehicles, furniture, and hobby equipment, like bikes, fishing equipment, art supplies, or whatever hobby gear you personally like to buy.”
“The reason Depreciables are a slightly better category than consumables, is because even after you’ve had your fun with depreciables, at least you can re-sell Depreciables and get some of the money back that you paid for them.”
“But depreciables are still not the best purchases. Even though you can re-sell them, Depreciables always go down in value so you can only get a fraction of the money back you originally paid for them.”
“Never make the mistake of thinking that buying a Depreciable is a good investment. The only reason Depreciables are better than Consumables, is because at least you own something of value, and won’t lose ALL of your money when you buy them because you can always re-sell them.”
Investments: The Third, and Best, Category of Spending Money.
My friend gave our group a wise smile as he explained his final, best, and favorite, way to spend money wisely.
“Investments are the best purchases you can make if you want to build wealth. Investments are purchases that start rising in value the minute you buy them, and keep going up in value. Investment purchases are things like real estate, stocks, and collectibles.”
“In some rare cases, even used Depreciables that are bought at bargain prices — and can be re-sold at a higher prices — can fall in the investment category.”
“The trick to becoming wealthy is to become aware of which category the majority of your income falls into.”
“If you want to build wealth, try to buy the highest percentage of investments that you can every time you spend your money. Wealthy people are wealthy because they understand this concept. They target buying investments with every dollar they have. And broke people remain broke because they can’t see the difference between a consumable, depreciable, and investment. Consumables and depreciables can look more fun in the short-term, but they can reek havoc on your finances in the long term.”
Here are a couple pie charts to illustrate these different perspectives:
If you want to be poor spend this way:
If you want to be average, spend this way:
If you want to be wealthy, spend this way:
Wealthy people are wealthy because every time they prepare to make a purchase, they target buying investments, and ask themselves this question first before they buy consumables and depreciables:
“How can I make this not-so-good purchase fall into a better investment category? How can I get creative, and buy low and sell high, so that even a depreciable purchase will become an investment for me down the road?”
“The way to wealth is simple. You become wealthy by allocating the highest percentage of your income toward making investment category purchases.”
That above sentence is the secret to mastering money and creating wealth. If you can master your purchases, you can begin to master your life. Be disciplined. Be smart. Get creative and always spend your money wisely every time you make a purchase.
Avoid purchasing consumables and depreciables even when they look fun and exciting, and buy stable investments instead. Anyone can find wealth once they choose to buy investments — instead of consumables and depreciables — every time they have a little bit of extra money.
IN CONCLUSION, THIS IS WHAT YOU NEED TO KNOW TO SPEND MONEY WISELY:
Consumables: The worst.
Depreciables: Just Ok.
Investments: The best.
MAKE YOUR SPENDING BUDGET LOOK LIKE THIS:
RELATED READING: My Five Best Investments to Make You A Millionaire.