Personal Finance

How you spend is more important than how you budget

Dan Danford
Dan Danford

If you pressed me to guess, I’d say that spending decisions are the most important factors in financial success. No matter your income, no matter your tastes, no matter your sense of discipline or frugality, the ways you spend money will determine success or failure.

Some finance writers and advisers prescribe an austere monthly budget as foundational for success. But that idea of saving/budgeting has almost become cliche.

Do a quick Google search for Starbucks or pizza or even lunch options and you’ll find dozens of stories explaining how daily savings can be compounded into a retirement nest egg.

The math is simple: $3 a day times 200 workdays per year, times 20 years invested in a good growth fund at an average eight percent return annually equals $29,654. Wow: think what you could do with that. (Except in 20 years, that same cup of coffee will probably cost $6. God knows about the price of other stuff.)

Those numbers are like magic … and so dumb. These simplistic budget illustrations do more harm than good. Most people aren’t going to skip their daily coffee or weekly pizza or brown bag lunch every day. Behavioral evidence is abundant.

At this moment in this culture, that is not the likeliest way to achieve financial success. It’s a Don Quixote-like railing at cultural windmills.

I absolutely reject the notion that deprivation is necessary. In fact, one reason people fail is because they envision personal finance as boring, and it very likely has been drudgery most of their lives. A good chunk of personal failure can probably be traced back to some Ben Stein sound-a-like high school teacher droning on about coffee and pizza and lunches.

It’s all about balance and thoughtfulness.

One of the toughest aspects of personal finance is balancing longer-term goals against the realities of today. A budget by itself isn’t a lot of help with smart spending decisions. You don’t have to give up everything you love.

If you make the right big decisions, the little ones don’t matter so much.

In his books, “The Millionaire Next Door” and “The Millionaire Mind,” Tom Stanley revealed that millionaires tend to make purchases with a practiced eye for the future.

They buy top-quality merchandise based on the lifetime costs of ownership. Quality shoes or furniture may cost more up front but last longer and deliver better performance. The wealthy tend to purchase based on value instead of price.

A former colleague repeatedly focused on price instead of value. We were on the same purchase cycle with new automobiles. I’d choose a Honda or Jeep based on research and an eye toward resale value. Ignoring this methodical approach, he instead opted for the “cheapest” deal. Surprisingly, we often spent similar amounts.

But every three years when it came time to trade, I always got more money for my car — sometimes a lot more — and he never understood why. He would blindly launch right back into his “buy the cheapest” cycle.

An otherwise bright fellow, he was living proof that destructive spending habits are not confined to the uneducated.

An affluent client once explained to me how driving a Mercedes-Benz was less expensive than driving a Chevy or Ford. He reasoned that operating costs and depreciation were less than with cheaper cars. I didn’t do the math but I do know that Mercedes-Benz autos have great resale value, which means lower annual depreciation. The up-front cost is markedly higher but once you make the purchase, those numbers might make total sense.

In fact, most consumer goods retain little liquidation value.

If you want to estimate the value of an item, ask yourself what a sensible person would pay for it on eBay or Craigslist. If you owe a large balance on a big-ticket item — such as being “upside down” on an auto loan — it can be extremely difficult to unload without suffering a significant loss. The liquidation price for vehicles is called resale value. In real estate, it’s called market price.

By itself, price is a dubious measure. Many items — especially new consumer goods — reflect costs of production and marketing rather than inherent value. The price of a new television or trendy headphones is based on manufacturing, transportation, advertising and competition. The resulting price may or may not represent value.

Before buying anything, gauge the product’s price as a used item. Stripped of the “commercial” costs, the item’s true value is revealed. For products with inherent or collectible value, the used price might be close to the new price; for most others, the new price is an expensive trap.

Beware of falling into price traps, especially with borrowed money.

Truly, spending decisions are more important than budgeting. If you make the right big decisions, the little ones don’t matter so much.

Dan Danford is a Certified Financial Planning professional and member of the Financial Planning Association of Greater Kansas City. He learned early ideas about money from his late father, Thad Danford, who charged rent on the family lawn mower while Dan cut neighborhood lawns. Danford is a practicing investment adviser at Family Investment Center.