Coming up with a universal definition for “wasting money” is not as simple as it sounds.
We’ve all heard the saying, one person’s trash is another person’s treasure. That applies to how we use our money.
For example, if I was an avid hiker, spending $200 on a pair of hiking boots may be a worthwhile use of money. But, if I only hiked once a year, spending $200 on a pair of hiking boots would be a waste of money.
It’s all about context. It’s in the “eye of the beholder.”
Consequently, determining if something is a “waste of money” is not that simple.
So, how can we make it more obvious if something is a good use of money or a waste of money?
One way is to embrace the idea of trade-offs. According to the distinguished economist, Dr. Thomas Sowell. Dr. Sowell said:
“There are no solutions, there are only trade-offs; you try to get the best trade-off you can get, that’s all you can hope for.”
There’s so much wisdom here.
First, it lets us off the hook. We don’t need to find the “perfect” solution. It’s not about finding that one right answer.
Instead, there are many trade-offs for us to consider and choose from, and it’s our job to find the “best trade-off we can get.”
Think of it like this, every time we use our money, we are making two decisions:
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- We’re deciding to buy something and
- We’re deciding not to be able to buy something else with those same dollars.*
*In economics, this is known as opportunity cost. We cannot spend the same dollar in two different places.
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And this dynamic occurs with every financial decision we make. There’s no getting around it.
The problem is we don’t think about what we’re giving up when we go to buy something.
We focus on what we get right then and there and pay little to no attention to what we’re giving up. We don’t think about the trade-offs because the costs of these trade-offs – the things we can’t buy in the future – aren’t “paid” right then and there. We fail to consider how our purchase today affects our spending tomorrow.
For smaller dollar amounts, this isn’t a big deal; the impact isn’t significant.
But, for larger or frequent purchases, the trade-off costs can be sky high and affect you for years or even decades to come.
This idea of “tradeoffs” is one of the more important concepts in personal finance. It combats our tendency to make short-term, feel-good money decisions, which are detrimental to our financial health.
Factoring in trade-off costs can help quell the desire to get that shiny object that wants us to buy it right now. It gives us time to think and reason through the impact of the decision before us.
Would you be a better financial decision-maker if you asked yourself some version of this question before every significant purchase?
“I can buy X right now, but if I do, I can’t buy Y tomorrow.
Is it worth it to give up Y tomorrow to get X today?”
Granted, it takes a bit of imagination on your part to think of what you’ll be giving up in the future, but that’s it’s easy enough.
For example:
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- “I can buy a new car with a $400/month car payment, but if I do, I can’t contribute that $400/month to my daughter’s college fund. This means she’ll have to take out student loans or maybe I’ll have to give up a vacation (or two) to come up with the money myself.”
- “I can sign up for this monthly box subscription service at $25/month, but if I do, I can’t afford the $300 it costs for the faster laptop.”
Taking the extra step to consider what you’re giving up tomorrow in order to buy something today will make you be a better financial-decision maker. And the best part is it costs you nothing to do it.
If you make this a part of your spending routine, you’ll be better equipped to say “no” to the latest and greatest shiny objects calling out for you to buy them.