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spending money wisely

The Trick To Spending Money Wisely

By Billy B | Money | 9 comments | 3 August, 2017 | 0

A year ago, a friend shared this tip about how to spend 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.

how to spend money wisely

 

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:

 

how to spend money wisely

If you want to be average, spend this way:

how to spend money wisely

If you want to be wealthy, spend this way:

how to spend money wisely

 

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:

 

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  • AdventureRich August 3, 2017 at 11:26 am

    I really like framing spending as Consumables, Depreciables and Investments. I have never thought of it this way but I love it! Thank you for sharing ?

    • Bill Banholzer August 3, 2017 at 11:41 am

      Hey thanks for commenting @ adventure rich! Yeah, the thought was pretty eye opening to me when I first heard it. The underlying philosophy involved really made me understand how some of my wealth originated. Alot of it wasn’t because I was making a huge income. Most of it came as a result of avoiding the bad purchases (consumables and depreciables), and buying the good ones (Investments). Mastering your spending creates a huge step to climb the ladder toward wealth. Thanks!

  • Holly Scherer August 4, 2017 at 7:10 am

    LOVE the story about your dad!

    Great advice! It’s all about balance. Be wise and enjoy *a little* along the way.

    I don’t know if you listen to podcasts, but the last two Freakonomics episodes have been about personal finance. Something I found particularly interesting in the last one was that 70, yes 7-0, percent of people are financially illiterate. There was a super simple test they shared that 70 percent of people failed. This is like third grade math stuff, you’ll be floored! http://freakonomics.com/podcast/everything-always-wanted-know-money-afraid-ask/

    That’s what makes these simple lessons so important! Nice work!

    • Bill Banholzer August 5, 2017 at 8:38 am

      Hey Holly, and I am in total agreement with you about the shock and awe when you learn what the “average” American knows about personal finance. This point was made very clear to me when I once had coffee with a financial adviser who reads this blog. Since he is out selling and meeting with clients all day, and has his pulse on what people know, I asked him, “So how many people understand the simple concept of compound interest?” Shockingly, he said, “Only about 10% really get it.” 10%!!!!!! Only 10% of people understand one of the most basic and important pieces of information you should know about finance and investing!!!!!! That really inspired me to try to be a light in this dark world of financial knowledge.

      I also clicked on the link, and was again shocked that 70% of people can fail that test. Jeesh!!! I don’t listen to podcasts often as I am more of a reader, but I probably should as I drive around listening to music alot and go on long walks all the time. Some podcasts may be a fun change up to my normal routine of extended Phish, Grateful Dead, Techno music, Hillsong and indie Jams. Thanks for stopping by the blog.

      • Holly Scherer August 5, 2017 at 8:42 am

        Crazy and sad!

        I love podcasts. I listen to them while cooking, gardening, cycling, hiking, etc. It’s a great way to keep learning and get positive messages into the brain. ? Audiobooks are good too if you’re driving a lot!

        • Bill Banholzer August 5, 2017 at 8:51 am

          I should listen to them more. Podcasts were very helpful in the beginning of our marriage. There was a philosophical communication gap at first between my wife and I. I’d say things one way, and she’d say them another way. Listening to motivational, philosophical podcasts on utube together, and then having a conversation afterward on what they meant to us, really helped us build a communication bridge between our two worlds so we could understand each other better. In fact, that’s a good marriage tip right there. I should write a post on that as it really helped us develop our communication in the first year of marriage.

          • Holly Scherer August 5, 2017 at 8:54 am

            Haha, we still have a communication gap – 13 years in! We are opposites and simply don’t process things the same way. It’s a life long journey to live and grow together. You should write a post on that. What podcasts did you use?

          • Bill Banholzer August 5, 2017 at 9:03 am

            I’m lucky with my wife in some ways. Financially, we think the same way and naturally make the same financial choices. I don’t think we’ve ever had a disagreement over money. But where we differ is that I am a long-term visionary planner. I am always playing “mental-chess” with the future, strategizing to build the steps to create a more fulfilling life. Where my wife sometimes enjoys just living in the moment and focusing on “fun” over constant strategy. So that can cause tension between us. Because I am always thinking about ways to “win” against reality, and she just wants to feel like we’re already winning and having fun in the moment. So that’s the biggest philosophical gap in our marriage we are always working through and finding that middle ground. There are benefits to both life views, so we’re working to find the happy medium. I didn’t know many podcasts, so I just found some Tony Robbins utube videos and we listened to those together.

          • Holly Scherer August 5, 2017 at 9:10 am

            Balance! ?

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The writer’s at, Wealth Well Done, only claim that our thoughts are real and true inside our heads.  Anyone outside of the writer’s head, should consume these thoughts as inspiration to find your own real and true thoughts. We are not licenced bankers, CPA’s, money managers, or anything else of that sort. Please seek a reputable professional for any advice in which a licenced professional could better serve you. More info: DISCLAIMERS & DISCLOSURES

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