Value Spending: How to Really Save Money

We used to worry about every dollar spent. But then we learned to stop fretting and live well through value spending, putting our efforts where it matters most.

Here’s how we made major and repeatable changes to our spending habits without materially changing our enjoyment of life.

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Value Spending is What Works

Folks think we spend little money. Perhaps you imagine us huddled together with cheap blankets on a 5th-generation Craigslist couch, the heater set at 45 degrees, clutching our spreadsheets with white knuckles and clattering teeth. Nay. 

To be clear, we spend less than the average American family by far. But that doesn’t mean we’re cheap. Nor does it mean you have to be concerned with spending, so long as you have the bucks to back it up.

What’s our solution? A focus on value spending.

Value spending is when we spend (relatively) freely on items that enhance life enjoyment or reduce pain, while being critical of big, bulky expenses that don’t meaningfully change enjoyment or pain.

When there’s something that brings value to my life, I buy it*. For other expenses, I simply ask myself if this product or service will enhance my life or reduce some sort of pain. If the answer is no, I try to avoid the purchase or minimize the expense.

However, some expenses are simply unavoidable, whether or not they impact our well-being. So, our goal is to systematically rank and minimize expenses without undermining well-being.

*Mrs. CC may force me to wait until “next month,” but I still eventually buy it.

Value Spending: Where it Matters Most

As discussed in my previous post, But I Don’t Want to be Frugal, we once obsessed over every dollar spent. We failed to realize the importance of weighting.

For instance, I would once put equal concern over the importance of six months’ worth of floss…and a house. Once we learned to put extra scrutiny on the budget line items that mattered most, we made huge step-changes in our spending without noticeably changing the enjoyment in our life.

…If we can identify and focus on the inputs that have an overbalanced importance in the desired outcome, we can be more effective in producing said desired outcome without being a miserable and vile cheapskate.

The Pareto Principle: What Inputs Most Influence the Result?

Pareto’s Principle, named after economist Vilfredo Pareto (a great name, Vil), suggests that 80% of outcomes come from 20% of the inputs, or the “vital few.” Therefore, if we can identify and focus on the inputs that have an overbalanced importance in the desired outcome, we can be more effective in producing said desired outcome without being a miserable and vile cheapskate.

This concept is everywhere. We certainly see this in the world of training for climbing. Climbers want to do everything: we want to run, do endurance circuits, boulder hard, boulder easy, limit boulder, starve, eat less carbs, eat more carbs, eat more protein, climb more outside, and try all 78 hangboard protocols this week.

Instead of identifying and targeting our weaknesses where we are lowest on the learning curve—and therefore have the most to gain—we put unnecessary and wasteful effort into any and all inputs that have been shown to matter for anyone and any time in the history of climbing.

If Adam Ondra is campusing, by God, we’re going to campus.

Conversely, if our primary weaknesses are, say, (1) finger strength, and (2) fear of failure, an overzealous desire to lose two pounds or do an extra pitch on the route we have wired is arguably the antithesis of the Pareto Principle. We’re putting time and effort into one of the 80% of the inputs that, at best, only contribute 20% towards our desired performance objective. If we instead focus our efforts and attention toward our two prime weaknesses—in this case finger strength and fear of failure—we stand a much higher chance of systematically changing the result.

Luckily, identifying the components of our spending that matter most is much easier than identifying a personal or sport weakness.

I mean, much easier.

Identifying our Spending Weaknesses

How do we identify our spending “weaknesses?”

Easy, we track our spending. Note, all new subscribers to this website get a FREE spending and net worth tracking spreadsheet, so plug in that email and get going!

Once we’ve tracked for ideally 1-3 months (the more the merrier), we start to see what floats to the top. For those unwilling to do this exercise (or just want the answer now), I’ll let you in on a secret that holds true for most Americans.

Behold: The Big Three.

The “Big Three” Spending Categories

When it comes to spending categories, the big eaters are housing, transportation, and food, generally in that order. By applying the Pareto Principle mentality to our spending, we thereby impact the ultimate result the most without worrying about every stupid dollar. We should target our efforts on reducing the money we spend on the top spending line items.

But as an aside, maybe we should be reading more than smoking tobacco. I don’t know, I’m just a guy with a keyboard.

Housing

At the top of the pile is generally what we pay in rent or a mortgage. For homeowners, then comes property taxes, insurance, and maintenance and renovation costs. Renters and homeowners alike are likely responsible for bills (internet, gas, electric, etc).

For many, housing costs are eating up entirely too much money. According to the U.S. Bureau of Labor Statistics during the reporting period of July 2019 – June 2020, the average American is paying 37% of take-home pay towards housing costs*. Paying 30-50% of income towards housing is a very real financial risk. A sudden job loss can quickly spiral into insolvency. If you find yourself paying more than 30% of take-home income for avoidable reasons, it’s time to consider a change.

*Note: This level of housing spending relative to take-home pay existed prior to last year’s exciting events and cannot be blamed on those job losses or pay cuts. This reporting period noted only a 2.3% increase in the housing/income ratio.

Cost Saving Solutions:

·  Rent or buy an affordable property. No more than 30% of income (in most cases) should be going towards all combined housing expenses. A one-time decision to take on too much house can impact financial health for years or even decades. See the links below for helpful articles on how to assess relocation potential and all the hidden costs of home ownership, even in this crazy housing market.

·  Consider a roommate or rent a room in the home you own. Gary doesn’t do dishes. But at least Gary is paying the mortgage.

·  Consider high deductible insurance. Folks with a high net worth can easily afford the high deductible in the unlikely event that it is required. Paying more towards insurance is generally a false (and expensive) sense of safety.

·  Be mindful of frivolous heating or air conditioning use. Don’t suffer, but also be aware of the costs to your wallet and world. Energy comes from somewhere, and most people don’t like where it comes from.

·  Consider DIY home maintenance and renovation. Be mindful, however, that a shotty job will probably cost more time and money to correct.

·  Cut the cable. Is there really anything good on cable TV anymore?

Transportation

Transportation costs include either one-time cash or monthly car payments, fuel, bus passes, bikes and associated supplies (if used for transportation), and other forms of maintenance.

Cost Saving Solutions:

·  Purchase vehicles out-right and avoid debt. Try and avoid, at all costs, high-interest car loans.

·  Save on fuel costs by walking, riding a bike, or taking public transportation for local needs. Come on now, who is too good for the bus or a bike?

·  Consider being a one-car household. Of course, occasionally being a one-car household really sucks. But most of the time it doesn’t.

·  Insurance: shop around at least once a year. Those premiums will creep on you like southern kudzu, my friend.

(Related Post: Van Life: The Economics and Trade-Offs)

One-Off Expenses and Compulsive Spending

Readers occasionally inquire about discipline regarding one-off expenses. This is especially difficult in the modern world of Amazon and other online retailers. These companies offer platforms that make spending money very easy. I can whip out my phone and order a couch right now. It will be here in a day or two, at my door. Then Mrs. CC and I get to fight about how to get it in the house. Remember the divorce door? Anyway, the struggle with impulsive spending has never been more difficult.

Regarding Amazon, I use Camelcamelcamel (CCC) to watch price fluctuations. Don’t ask me why this website has tripled down on camels, because I see no connection. Anyway, let’s imagine I have a large-ish one-time expense I’m considering. Instead of compulsively adding it to my cart and mashing the buy button, I put the item in my wish list instead. Once an Amazon account is linked with CCC, a multi-year price history is displayed. A user can examine the price history of an item and decide if the current price is a good deal, or if a history of lower prices exists. When my desired price is reached, I get a fancy email.

As an example, I’ve been watching one of those snazzy YETI coolers (do you guys like these, by the way?). As you can see, the current list price of $299.98 (for a cooler!) might be my best bet. There is a history of lower prices, but not often. This sort of analysis not only gives me an extra couple of days to cool my impulsive jets (new wish list items take about a day to sync with CCC), but adds some real data to the decision.

So, that’s neat.

Value Spending: Save Money and Live Well

By using a Pareto Principle and value spending mentality, we can make dramatic reductions in expenses. These reductions provide two critical opportunities:

(1)   Potential for savings and investing. We can build wealth through the wondrous powers of compound growth.

(2)   Enhanced value spending on what makes life good. Do I want new climbing shoes? No problem. Do I want to fly to Europe? No problem (Although, we can save a lot of money on travel too).

So, next time you find yourself starting to pull your own hair, look where it matters most. With focus on “the big three” and the principles of value spending, we can cut spending but not slash enjoyment.

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