Financial Poise
Frugal living tips to grow wealth

The Psychology of Spending: Overcome Bad Habits, Save Your Money and Grow Your Wealth

Frugal Living Tips to Redefine Rich Living

Living a life of fiscal responsibility sounds so boring. Delayed gratification and a lifestyle of responsible spending aren’t exactly the things people are celebrating on magazine covers or TMZ Live. Yet living frugally is one of the oldest, most reliable and fastest paths to wealth. From tiny homes to minimalist living, there is actually a burgeoning subculture that has become attractive to people hoping to build wealth outside of a traditional 9-to-5 grind.

There are many ways to better save your money, from paring down to coupons and so on; but there are some frugal living tips that everyone can generally accept and put into daily practice.

Our top frugal living tips include some finance fundamentals:

  • Know your assets.
  • Pay down your debts.
  • Understand the difference between spending and investing.
  • Learn the psychology of spending and differentiate needs vs wants.

Record Your Inventory

Before you grab a coupon, the best way to save your money is to know what you have in the first place. In other words, know your assets and record them. How much cash do you have, including emergency funds? What do you have in savings now? How much is your car worth? Your home? Calculate your equity and analyze your assets to understand your current financial health, and perhaps, what you can sell or further invest in.

In the same vein, what are your debts, and where are they coming from? Are they a mortgage and student loans? Well, those may be hard to budge. Are they from credit card spending and vacations? Then there is room to improve.

What Do We Want? Stuff! When Do We Want it? Now!

A Saturday Night Live sketch once poked fun at Americans’ apparent confusion about how they got into debt in the first place. It’s funny, because it’s true.

According to BankRate.com, average consumer debt for Gen X (40-55) is just over $135,000, while millennials (24-39) have an average debt of just over $78,000. It may seem that millennials are learning a lesson from their elders, but that’s not exactly the case. In fact, millennials’ average personal debt has increased by 58% since 2015, and average credit card debt has gone from $3,499 to $4,889. Their average mortgage debt is also second-highest of all age groups.

It’s not easy to tackle debt, but there are basic steps to managing debt, including:

  1. Consolidate debt, including debt on multiple credit cards or loans, to make payments easier and more manageable.
  2. Use a debt calculator to estimate the monthly payments you must make until you are debt-free based on your balance and interest rates.
  3. Don’t treat credit cards as cash. If you can’t pay off your card by the next scheduled payment deadline, don’t buy it.
  4. Check your credit card statements regularly for errors and to track spending.
  5. Get rid of useless subscriptions (e.g., cutting cable if you spend more time on Netflix).
  6. Make a major change, such as sharing living costs or selling a vehicle and biking to work.

Yes, there is good debt, such as your mortgage and other major investments that appreciate (more on that later) and improve your quality of life—or your nest egg—in the long-term. How you define your debt is based on the quality of your purchases. Indeed, one of the biggest issues to the American personal debt problem is that people value a host of experiences and things without much forethought.

Will Your Purchase Make You Money, Or is Your Money Out the Window?

The debt issue isn’t going away—it’s going to continue to grow. The lack of financial education seems to be a common denominator. For example, will your purchase appreciate or depreciate? An understanding of terms like “depreciation” should govern certain expenditures.

If you put $100,000 into a luxury car vs purchasing a home, one will grow in value, and the other will quickly decline. This understanding should apply to every financial decision made: what long-term benefit will this bring? This will help you assess what to do with your disposable income and apply money toward improving your quality of life and building your wealth.

Therefore, are you spending or investing? Better financial literacy and an understanding of investing (not just in the stock market, but in tangible items and property, too) can help you grow your wealth by differentiating what will give you a return on your investment and what will drain your account.

The Psychology of Spending

While most people wouldn’t spend $100 a month on nail polish or a wine club subscription, plenty would spend that much (and more) on a subscription to cable TV or gaming services. Value is determined by the buyer, and sales companies everywhere are desperate to convey a sense of value to consumers so that they’ll open their wallets.

In 1943, American psychologist Abraham Maslow wrote in his essay, “A Theory of Human Motivation,” that people are driven by a hierarchical system of human needs. According to Maslow, the most basic of needs are sleep, food, water, breathing, sex, homeostasis and excretion; these are all physiological. As the pyramid ascends from the bottom up, the next level of need is safety, then love and belonging, self-esteem and, finally, self-actualization.

The heart of the issue is that too many people buying out of want has overshadowed buying out of need in most of the Western World. There is more to buy that feels like a need and not enough money to go around. That’s where an understanding of the value of investing is of tremendous benefit. Yet, very few people will stop spending long enough to question why they never have any money.

Most items people would be tempted to purchase that fall into the “want” category (e.g., another pair of shoes) are also notably recognizable as items that add to one’s self-esteem. An easy way to recognize if something is a want or a need is to ask yourself, “Does this contribute to my safety or my physiological needs in any way?” If the answer is no, then the purchase is probably a want, and not a need.

But, hey, what if there is something you want and need, like a new phone or car because your old one is starting to decline? In a case like that, it is best to reflect on the potential purchase by giving yourself a “cooling off” period before you act on impulse. However, if your car or phone is broken, and you need it to secure your other basic needs, then it falls into the need category as well. You’re good to go.

One In, One Out

These frugal living tips can be overwhelming, especially at first. If eliminating all spending on want items still feels extreme, then consider the “One In, One Out” rule. Before buying a new item, such as a dress, car or couch, you should ideally sell an old dress, trade in your current car or post your couch on the Facebook Marketplace. For every non-essential item that you buy, get rid of one similar non-essential item as well. You’ll not only save your money, but you’ll feel less guilty as well.

Living Frugally is Less More Fun

By the way, you’re most likely familiar with the idiom, “Time is money”, right? If you’re living frugally, that can, and maybe should, apply to how you spend your time as well.

Over at DaringtoLiveFully.com, blogger Marelisa Fabrega advises, “Time is your most valuable resource. Start thinking of the way in which you use your time as an investment….Suppose that you were given $24,000 to invest. What would you do? Would you open the newspaper and randomly pick seven or eight stocks to invest in? Of course you wouldn’t. You would think carefully about which stocks could potentially bring you the biggest ROI. However, when it comes to your time, you usually spend it without giving much thought to what return—if any—you’re going to get back from your expenditure.”

The bottom line: Living frugally has the potential for big payouts financially and in the quality of the life you live apart from your money. Redefine rich by the quality of your assets and your quality of life, rather than the amount of “stuff” you can buy.


[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds and Goal Based Investing – Planning for Key Life Events. This is an updated version of an article originally published on November 24, 2017.]

©All Rights Reserved. September, 2020.  DailyDACTM, LLC d/b/a/ Financial PoiseTM

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About Alicia Purdy

With a Master's degree in Journalism and extensive experience as a freelance writer and editor, Alicia has found success across genres including: news, business and finance, government/politics, faith and family as well as blogging.

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