The way we manage money is influenced by how we value money. In human society, there are a few groups of people with different attitudes towards money:
- Savers value money for its security and peace of mind. They save compulsively for a rainy day or for their dream home.
- Spenders believe that money is meant to be spent for them to enjoy themselves. They like to indulge themselves while they still can, even if it causes them to incur a lot of debt.
- Monks believe that money is below them and will avoid dealing with money whenever possible. There are poor as well as rich monks (i.e. those who marry into wealth and tend to devalue money because they always have more than they need).
As a saver, I used to focus on saving every single penny. It did not matter if I lived spent half an hour calculating the shortest bus route I would use only once to save 20 cents. However, I would lose a lot of money making ill-advised large ticket items such as useless electronic gadgets.
I have found that this attitude of being penny smart but pound foolish did not serve me. Saving for a rainy day may be good advice, but it is also not making good use of the stockpile of money that is slowly eroded away by inflation. The spenders’ idea of indulgence did not appeal to me. I tried being a monk and just doing charity work but found that I am not interested in a life of constant stress and poverty.
In the end, I decided to remain a saver but implement new policies to cover the weaknesses in my strategy:
1) Whenever I wish to spend money, I would consider its value in terms of the amount of work I need to do in order to afford it. If I earn $16 per hour and the vacation will cost me $1,600, then I consider if it is worth working for 100 hours for that vacation. This helped to control all my big ticket purchases.
2) I invest part of my extra cashflow in research and self improvement. The investment must provide a long term recurring benefit and be value for money. I favor tangible objects like supplements and eyeglasses since they convey a tangible benefit. Intangible objects like memory techniques learned from workshops tend to be forgotten, unless these are for skills or certifications that can increase my income.
3) Whenever I have to decide between spending money or time, I choose the alternative that gives me the most value for money. For instance, if I can spend $1 more per day to save half an hour of travel time, I will do so.
4) I do my research and invest in shares of businesses with good management, cashflow and a conservative policy of borrowing as little money as possible.