Mindset: Effective Spending: Where to Cut Costs and Where to Invest
“You can’t buy it – it’s not on sale.”
I put the shirt back on the rack in disappointment.
I wanted some back to school clothes from Polo Ralph Lauren. 13-year-old me wanted to look cool with one of those tiny horse logos on my shirt.
My mom wasn’t on board.
“Is it on sale?”
No, Polo was never on sale at Macy’s. I knew that already, but a boy can dream, right?
My parents and my culture always focused on saving money.
It’s not cool to talk about how much money you spent on something. Instead, you get more props talking about how much money you saved.
Saving money is virtuous. Waiting for a sale or negotiating shows that you’re able to outsmart the system.
This belief isn’t terrible considering how wasteful most people are. But having this as your only metric is limiting.
Have you ever heard of the phrase, “Penny rich, and pound foolish?“
(Note: I had trouble understanding this phrase at first because I’m an American, and this is a British phrase. Pound doesn’t refer to weight like lbs. Pound in this context refers to British currency. 100 pennies = 1 pound.)
It means that you’re thrifty at saving small amounts of money, and you’re foolish when it comes to bigger decisions with money.
Here’s an example:
A mom spends an average of 5 hours a week clipping coupons to save money. She saves around $30 a week doing that.
She’s penny rich.
It’s time for her to buy a car.
She doesn’t do any research and ends up being hustled by the car dealership. They add in extended warranties, give her a low trade-in value, she has a high APR%, etc.
She ends up paying $12,000 more than if she would have if she was prepared. She could’ve spent 5 hours in one day doing some research, and that would’ve saved her more money than clipping coupons that year.
She’s pound foolish.
This penny rich and pound foolish mentality has harmed me over the years.
I remember in 2009, I spent close to six figures on my dream car. That same year I insisted on trying to do my own bookkeeping to save money.
I’ve tried studying personal finance, but most of the mindset is centered around being frugal. Your average person doesn’t have a lot of leverage.
It has taken me a lot of experience and mistakes to figure out my perfect balance.
For this week I’m going to tell you some stories from my past. I’ll share with you what I’ve found worth spending money on, and what isn’t worth spending money on.
What’s Not Worth It
There are some things that I’ve spent money on over the years that I’ve felt weren’t worth it.
Maybe they’re worth it to you. We have different value systems and goals. The stories are meant for you to see different perspectives.
1. Any Luxury Designed to Show Off
We’re all playing the status game to some degree. One of the Life-Force 8, according to Ca$hvertising, is “To be superior, winning, keeping up with the Joneses.”
It’s in our DNA to flex.
Here’s the issue: trying to play the status game is a losing battle.
Do you have seven figures in your retirement account? Try showing off a screenshot of it on social media. It’s not socially acceptable. You’re a douchebag if you do that.
But post a picture of a luxury car and talk about your “struggles” to get here. Or post a picture of a luxury vacation with a cute caption. You’ll get hundreds of likes. Praise and admiration.
Your brain gets flooded with dopamine and so many feel-good chemicals.
Isn’t that ironic? Social media rewards us the more financially irresponsible we are.
There’s nothing inherently wrong with luxury. You should reward yourself once a while.
It boils down to purpose. Are you buying it because you want it, or because you want to prove something or impress someone?
It’s a losing battle trying to impress others because the haters won’t let you win.
Got a Lamborghini Huracan? Ah man, means you can’t afford a Lamborghini Aventador? Ohhh you got that new Aventador? It must be leased.
You win the status game by not playing it. Instead, focus on building true wealth.
2. Spending the Most Efficient Way Possible
There’s a popular quote that says “Culture eats strategy for breakfast.”
What IS company culture then? It’s hard to define, but you can imagine that working at Pixar is different than working at Uber or WeWork.
Culture is a set of shared values.
It’s the personality of a company.
Culture is a huge buzzword these days and it seems like the cool thing to try to build or buy a company culture.
So that’s where I got inspired to do team-building trips for my companies. I’ve always operated as a remote team, and some of my team members were scattered around the world.
Let’s spend a week together and get to know each other better!
I’d fly everyone into a central location like Belize. We’d rent an Airbnb mansion. And we’d have so many different activities and excursions planned.
You can imagine that the costs added up quickly. I’d estimate a typical trip was around $10k – $20k depending on the location.
Here’s what I’ve learned about Culture:
Culture isn’t free lunches.
Culture isn’t bringing your dog to work.
Culture isn’t doing “team-building” exercises.
Culture is how you treat each other.
Culture is feeling comfortable enough to bring up issues.
Culture is employees feeling appreciated.
All these don’t cost anything.
Is there value in doing a company trip? Sure there is.
But what’s the goal, and what are the alternatives?
What is the most efficient way to reach that goal?
For example, one of my goals with it was to “reward” my team with experience. I wanted to show them how much I appreciated them.
What if I sat back and brainstormed all the options of doing that?
What if we skipped the trip and distributed $10k cash as bonuses. And then I could re-invest $10k into growth?
3. Find the Point of Diminishing Returns in Every Purchase
You can spend $10 on a pair of dress shoes from Payless. Or you can spend $1,000 on a pair of handcrafted Italian shoes.
What do you do?
Here’s some of my philosophy.
Be careful with going too cheap on anything. “Buy nice or buy twice.”
I bought an electric kettle for around $10 a few months ago. It broke a few days after the warranty expired. I’ve spent more on another one so that it can last longer.
I’m always looking for the “sweet spot” whenever I’m purchasing things.
With every purchase, there’s a point of diminishing returns. It’s where more money doesn’t necessarily mean higher quality.
- $100 dress shoes won’t last. You’ll have to keep buying new ones every year.
- In my opinion, $300’ish is the sweet spot for dress shoes. You can get them repaired anytime.
- After $300’ish you’re mainly paying for the brand name. Pay for the quality and not the brand name.
I’m addicted to Costco. I love their Kirkland Signature products. I’m paying for the quality and not paying for their marketing or branding.
Gucci dress shoes cost around $1,000. I guarantee you can find much higher quality shoes for half the price. The other $500 goes towards Gucci’s marketing and retail stores.
I’m never going to buy a new car ever again. As soon as that car goes off the lot it loses 30% of its value.
The “sweet spot” for me is a car that’s two to three years old. Depreciation has taken a chunk off of it, and it’s still within warranty.
I rather buy a used car and invest that 40% difference in making more money.
I remember talking to my Chemistry partner back in Ga Tech one day. We were chatting and she brought up that she was accepted into MIT.
I asked her why she chose to go to Ga Tech?
Her: Ga Tech offered me a full ride. MIT would cost me $40,000 a year at least. Twenty years from now it won’t matter where I got my undergrad at, but I’ll probably still be paying those MIT student loans.
Damn, I wish I was that smart at 18.
What IS Worth the Money
You should read about my Productivity Flywheel philosophy to understand my spending philosophy more.
The best use of money is to invest it. Invest it into assets to make more money, or invest it into getting more resources like time or health.
1. Good Employees and Contractors
When you hire someone, you hire them to do work. It’s easy to underestimate the value of their knowledge and decision making.
Let’s say you hire a virtual assistant for $5 an hour to book a trip for you. I’ve made that mistake before.
You spend so much time delegating. It’s a back and forth on every little decision. It’s death by a thousand papercuts.
Versus hiring someone more qualified.
You tell them the vision and they execute.
Let’s say I want to hire someone to build me a funnel.
I don’t want to hire someone who just executes. That means I have to sit down, research what funnels I want to build, and give them specific directions. Then they execute.
I’d rather spend more money to find someone that knows more about funnels than I do. I want them to tell me that my shit sucks, and that they’ll build one better than me.
When you hire someone, you hire them to do work. It’s easy to underestimate the value of their knowledge and decision making.
There’s a limit to how much you can save, but there are huge upsides when it comes to value creation.
I’ll give you a real-life example when it comes to virtual assistants. A few years ago I started with cheaper virtual assistants.
They weren’t that experienced, and they were scared to make decisions.
I’d tell them to book a flight to Asia for me. I’d have to break down the project and delegate every little detail. I’d have to take a screenshot of the exact flight I wanted. I had to tell them I needed a visa to certain countries.
The delegation was exhausting. It was death by a thousand papercuts.
Eventually, I brought on a much higher skilled assistant.
I’d tell her I want to book a flight to Asia.
She’d gone ahead and created timelines for me. She researched different flights to business class, and sent me YouTube videos of the passenger cabins.
She gave me choices, and I simply said yes. Over time, she started making certain decisions for me because she knew my preferences already.
She was more expensive, but how much time, energy, and frustration did she end up saving me?
And those resources were allocated towards making more money.
You can only make so many good decisions a day.
Don’t just hire someone because they can work for you. Hire someone who you can trust to THINK and make DECISIONS for you.
If you’re interested in more information about this topic, the founder of Trello has a great article about the case for hiring the best programmers
2. Buying Your Way In
There’s a philosophy that I love called earning your way in versus buying your way in.
Anytime you want to learn something, you have to pay somehow.
Do you want to learn how to become a better chess player? You have to pay with your time and energy to become more skilled.
Buying your way in means you hire a coach. Someone who has put in their 10,000 hours. An hour with them could save you hundreds of hours as a result.
This is powerful because it can be difficult to unlearn bad habits.
Imagine that you learned how to shoot basketball the wrong way your entire life. It’ll be hard to fix that muscle memory that you’ve developed.
I’ve taken many private lessons in Brazilian Jiu-Jitsu. I’ve observed that “you don’t know what you don’t know”. A coach corrected me once where I’d always let the opponent get an advantageous grip on me.
I had no idea that this was a problem. But because we caught it early, I’ve now developed the habit of grip fighting.
Do you know how much your time is worth?
Sit down and calculate it.
Let’s say you make $60,000 USD a year. That’s around $30 an hour. You should outsource everything under $30 an hour.
Don’t mow your lawn. Give it to the neighbor’s kid for $20.
You could spend 10 hours learning how to set up a WordPress website. Your 10 hours is worth $300. Someone overseas can set up your WordPress website for $50.
Value your time more. You can always make more money but you can’t get back more time.
3. Improving Your Health
I don’t need to dive into this area too much but health is everything.
Don’t be an obese millionaire.
Sitting at your desk all day as an Internet marketer wrecks havoc on your body.
A few things I spend on health:
- Float tanks
- Higher quality food
- Higher quality supplements.
- Tracking devices such as an Oura ring and a badass scale.
- Things that help me sleep better. Higher quality thread sheets. Bedjet device.
- Tests. Blood Tests. Genetic Tests. Testosterone tests.
- Gyms. I have a BJJ gym membership and have a gym for weight lifting.
- Yoga classes.
- Prehab: I see a physical therapist once a while to fix things to prevent injuries.
You get the point.
I don’t care how you spend your money on health, but it should be a huge priority.
Health is a force multiplier.
It’s one of the biggest levers you have.
Bad health eventually catches up to you.
If you have children then you have a moral obligation to be in peak physical condition.
4. Making Your Financials More Robust
We’re facing a health and an economic crisis with this pandemic.
The future is unpredictable.
What is worth it to me is being financially robust. The world is unpredictable. Are your finances strong enough to handle the unknown?
Some ways include:
- Having a solid emergency fund.
- We have a six months emergency fund in an online savings account.
- It’s tempting for me to want to invest it or spend it. But having an emergency fund means that we can handle any small emergencies.
- Strong insurance.
- Most people get the minimum requirement on their car insurance. We go higher. Probably because Atlanta is full of dumbass drivers.
- We have coverage in case we’re in an accident with an uninsured motorist.
- We have higher than normal property damage. It does suck to pay more for insurance than other people. But I know I can handle a black swan of a $250,000 worth of damage.
- Diversify Your Income.
- Not many people saw this pandemic coming. It’s still unbelievable to me. The people that are the hardest hit are the ones who relied on one source of income. That’s a single point of failure. You should always work on having multiple sources of income.
- One question I ask myself is… “if I couldn’t physically work for six months, how much money would I have coming in?”
- Just make sure to strike the right balance.
- Some people out there have too many sources of active incomes. Would you rather have one business that makes $25,000 a month or 5 businesses that make $1,000 a month each?
- You have limited time and energy. There are tradeoffs.
- My philosophy is to have 1 – 2 forms of active income. Stay focused. Put your excess capital into passive forms of income: index funds, managed property, commodities, etc.
5. If You Own a Business, Re-Invest into Creating Competitive Advantages
It’s never been easier to start a business.
It’s never been easier to research and see what’s profitable.
IF you do become profitable, you’re going to have to deal with other people trying to take what’s yours.
Are you making $50k a month profit dropshipping something from Aliexpress? That’s great, but what’s stopping someone from seeing your ads on AdSpy and competing against you?
Once you start making money, then it’s time to start re-investing in creating some moats.
- Create better-branded content and creatives instead of remixing the videos from the Vendor.
- Improve your fulfillment so customers can get it in three days, and not a month.
- Work with the manufacturer to create some product improvements
- Hire influencers to increase your perceived value
I don’t believe in “passive income.”
Every day is a competition and you should always be trying to move up the ladder.
Spend to Reach Your Dreams
Figure out what you value.
Some of you will value a brand new iPhone 11. I think it’s a waste of money and barely any better than an iPhone X.
I’m willing to spend several hundred dollars on a new Chef’s knife. Some of you think it’s a waste of money.
We’re not wrong—we just value different things.
Allocate your resources in the most efficient way possible.
Think about it like this:
You have $5,000 in disposable income. You want to go on a vacation, and you want to start a side business.
You COULD spend $5,000 and have an Instagram-worthy vacation. You have no money leftover for your side business so you have to use your labor, and focus on “free.”
Or you can allocate the money better.
Spend $1,000 on a cheap vacation. You still get a great vacation. Now you have $4,000 in your side business.
Hustle for a few years.
Your side business has grown.
You can now spend that $5,000 on your dream vacation.
But the difference is you didn’t sacrifice your dreams for it. You have your dream life AND your dream vacation.
I use the term sacrifice a lot.
It’s because you have scarce resources.
You can have anything you want, but you can’t have everything you want.
The people who can’t control their spending are the ones who become slaves to debt.
You’re always making trade-offs each day.
Some people will spend their $1,200 stimulus check on a new iPhone. They’re choosing that over $1,200 in their emergency funds or $1,200 worth of groceries for a few months.
I want a nice wedding whenever that happens. I could do a courthouse wedding and save a ton of money. But I’m choosing to have a nice wedding, and I understand the opportunity cost of that decision.