If you’re interested in getting smarter about how you spend your money, enjoying life more, and growing wealthier, please join me in the following exercise:
Open a spreadsheet (you’ll need to sort columns at the end) and at the top, create the following columns: Item, Frequency, Annual Price, Value, and Value per Dollar Spent.
Under the Item Column, list all the things you spend money on or would like to spend money on, being specific as possible. For instance,
Note how I specified “living in a studio apartment” vs “owning a house.” Owning a house has many advantages, but it also costs more. Likewise for driving a new car, vs a used car, or bicycling, vs public transit. Food likewise breaks down to: “preparing easy meals at home,” “preparing fancy meals at home,” “getting quick and easy food out (like local burgers, sushi),” and “going on fancier dates.” And of course, the different ways of consuming beer, as I described in the [previous article].
Frequency exists primarily to help with the math when calculating Annual Price. If you go out to eat twice a week, your Annual Cost is [Cost per meal]*[2x per week]*[52 weeks per year]. Simple math.
Next, calculate the annual price of each item. This includes both the annualized cost of purchase, and annual costs associated with owning it (maintenance, storage, insurance…). To find the annualized cost of purchase, take the cost of the item and divide it by how long the item will last you. If you’re making payments on it, such as with auto loans or a mortgage, use your monthly payment x 12 to find your annual cost of purchase. Add the cost of purchase and the costs of ownership to get the annual price of this item. This is the price you are paying to have this thing in your life.
Next, rate each item on a scale of 1-1000. 1 means “I’m indifferent to this” and 1000 means “this is the most valuable thing to me.” Hopefully, you don’t rank anything in your life 0 or below. Consider too, how not having that thing would impact your life, as well as how having a lower quality version would impact your life. For instance, having a place to live probably ranks near a 1000 for most people. However, living in a big house might register somewhere closer to 500. I encourage you to think long term, so with each item ask yourself, “one year from now, will having or not having this thing make a difference in my happiness?” Really try to imagine your life under those different circumstances. It’s important to factor in the improvements that investing and saving money can yield in your life. Becoming financially independent doesn’t happen overnight, but the impact it can have on your life is so massive that it still makes sense to save and invest consistently even when it takes a long time to come to fruition. Finally, ask yourself, “why?” Why is this thing important to you? What are the values that it fulfills or expresses? This can be an exhausting and time-consuming process. So I suggest either doing it in chunks, or starting broadly and simply, and them getting more specific over a couple different versions.
Finally, in the last column divide each item’s value by the annual cost of ownership.
Finally, review your results. If you’ve put this together in a spreadsheet, sort the spreadsheet by the last column so you can see where you get the biggest value per dollar spent. Then, look through the numbers in that last column, the exact number doesn’t matter as much as how they compare to each other. And reflect on those rankings. Does a new car offer a comparable degree of enjoyment as a series of international vacations? Is your large house giving you a better quality of life than you could have in a smaller house, even after accounting for the added expenses?
I’d like to hear your thoughts, both on the results and on ways of refining this exercise. Please leave a comment below!