Why you should develop a mindset where you question every spending decision

 

So many of the spending decisions that we make now are done without thinking that it’s no wonder people can’t save cash. It should therefore come as no surprise that the people that actually manage to accumulate significant wealth have developed a mindset of not taking anything for granted when it comes to their finances. Another way of describing this would be to “question everything” when it comes to your money.

Since becoming more financially aware in more recent times, I have totally changed my mindset in relation to spending decisions, and thought it might be worthwhile providing some examples of downsides and benefits of questioning every spending decision.




Some examples of the downside of not questioning something

1. The “sale price”: When I was in high school I worked at Target, which is a budget department store. In those days (late 1990s) the prices were on the shelves under each product with a white label, and when the catalog came out each week we had to print up new bright orange labels for the “specials” and place them over the original white labels for the duration of the sale.

Often the “sale price” was actually the same as the regular price, but because it was advertised as a special, people bought it anyway. I found this ridiculous because all they had to do was lift up the label to see the regular price underneath, but it doesn’t seem as if anyone ever did this.

The whole concept of buying something because it’s “on sale” is just crazy – people really should question the terms of a sale to find out what has really changed.

2. The new car: In my post on hypocritical financial advisers, I mentioned the finance “professionals” that trade in a perfectly good vehicle every three years to get a brand new one. While I drive a 10 year old car and can’t be bothered getting into the discussion with them, I do sometimes wonder if they question why they are actually buying the new car.

I think a lot of the time it comes down to an impression that they are trying to give to others, but if this is the case then they seriously can’t have thought too much about it. As they often trade up to the next model of the same vehicle (which sometimes even has the exact same body shape), people wouldn’t even be able to tell that they had bought a new car (except that their latest one is a different colour).

My car is just like this. It looks clean and respectable, has all of the bells and whistles including leather interior, but only cost me $12.5k.

My car is just like this. It looks clean and respectable, has all of the bells and whistles including leather interior, but only cost me $12.5k.

To make this even more bizarre, I wonder if people even realise how rarely people actually see their cars. Clients often visit us in the office (our cars are parked in a big car park so there is no way that they could work out which cars we own), and while we do go out to client premises, our cars are often parked in their carparks or out on the street where the client wouldn’t even see the car.

Also, if your car looks too new or expensive, it will probably work against you since your client will be assuming this is why their fees are so expensive – to pay for your new car!

My alternative approach after questioning the point of spending a fortune on cars is to retain a perfectly good older car that still looks respectable, and keep it in good condition. I also buy the luxury model of that consumer car (mine is a 12/2004 Holden VZ Calais) so that it has the luxury bells and whistles. When people drive in it they comment on how nice it is, and they are usually surprised to find that it is 10 years old!

My car cost me $12.5k in 2012 – not exactly breaking the bank!

3. The swimming pool: In Australia the weather is quite warm for much of the year, and it is therefore reasonably common to have a swimming pool in your backyard. Having a house with a pool is a bit of an aspirational goal for many people (an aspiration that I have in the past been guilty of having), but after investigating it further I have started to move away from the whole idea.

Have you ever questioned whether having a swimming pool is worth the money?

Have you ever questioned whether having a swimming pool is worth the money?

You see, swimming pools cost quite a lot of money (about $50k is usually a fair estimate), and when you look at the investment returns you would forego to fund that purchase price it costs even more. Invested at 5% (a fairly standard sort of return in the share market) over 10 years, this comes to over $81k. And if we put a pool in our new house (as my wife wants to) and lived in that house for the next 30+ years (as we both want to), then the total cost comes to over $216k*.

Now for some people that may still seem like an acceptable cost (I’m certainly not one of those people), but where it really doesn’t make sense is when you consider how many times the pool would actually be used.

While the weather is warm in Australia, even the most dedicated pool fanatic would only swim in their pool for a period of perhaps four months of the year. Clearly they wouldn’t swim in it every day though because they will be at work for much of the time. But for the sake of the exercise, let’s say that they swam in it 5 times per week for four months of the year. Over the 30 year period of ownership, this would equate to 2400 swims in the pool.

Now, if we divide the $216k cost by the 2400 swims, we get a cost per swim of $90!

I don’t know about you, but in my opinion that is a staggering amount to pay for one swim, especially when you can go to a public swimming pool (the one in our suburb really isn’t very busy, especially on a weekday), with two adults and two kids for under $15!

So, do you still want a pool in your backyard?

* Also, none of this factors in the time and money costs of maintenance of the pool, which makes pool ownership seem even more crazy again.

Some examples of the benefit of actually questioning something

1. House insurance: Our house is currently worth $285k according to local real estate agents, which includes the land value. I therefore made an estimate last year that the house would be worth insuring for $250k, which I figure is more than enough to cover the cost of rebuilding the house. This is especially so given that my father is in the transport business and often carts demolished houses for a local demolition business, so removing our burnt-down house wouldn’t be expensive in the event of a fire.

Anyway, when I received the renewal paperwork for the insurance I was staggered to find that the proposed insurance amount for the house is now $286K. Usually the insurers try to argue that inflation has driven up the cost of replacing the asset, but I find it hard to believe that the replacement cost has gone up by almost 15% in one year!

I would say that this is just a case of them replacing the original insured amount (my number) with what their system has calculated it would cost to replace and they had hoped that I wouldn’t notice!

It really does make you wonder how many people just receive the renewal paperwork in the mail and pay the amount without questioning whether anything has changed in their policy.

2. Fancy private schools: Many people in my position send their kids to high-priced private schools, thinking that a more expensive education will mean that they will be more successful in life.

While I’m sure that a person can be successful having gone to a high-priced private school, I have actually found that there is no real connection between success and the amount spent on the school.

Sure, going to a school that is full of trouble-makers may well increase the chance of your kids going down the wrong path, but in my experience the kid going to the $3k/year private school has an equal chance of success as the kid going to the $20k or $30k/year private school. In fact, only one of the many partners in our firm actually went to anything more expensive than the local catholic private school, with many attending public schools, although more than half of them sent their kids to the most expensive private school in our city.

Melbourne Grammar School: For the 2015 school year, it will cost around $30k to send your kid here for years 7 to 12. Can it really be worth it to spend so much on a school?

Melbourne Grammar School: For the 2015 school year, it will cost around $30k to send your kid here for years 7 to 12. Can it really be worth it to spend so much on a school?

Coincidentally, none of their kids (the ones that have finished university anyway) have gone on to any sort of career that pays anything more than a school teacher or a nurse, and some don’t even have real careers.

We could have easily gone down this path with our kids, but having had workmates that have achieved very little after having so much spent on their education, we instead chose to send our kids to a local catholic private school at a cost $1,400 per year. This is the same type of school that we (my wife and I) went to, and we both seemed to turn out OK.

3. Regular expensive holidays: Many of my peers go on expensive overseas holidays as a way of “getting away from it all”, but I’m not sure if this makes much sense for a number of reasons.

The first reason is that we find that travelling through airports and over very long distances staying in expensive motels is actually quite tiring with young children, and when we have done this we have actually gone back to work more tired than when we left it. Even so, it has been something that has kept us going up until the holiday arrived.

Fortunately we travelled extensively throughout Europe and South East Asia before we had our kids, and don’t feel like we have missed out on anything by not going on regular overseas holidays at this stage. We are therefore planning on travelling extensively once we actually retire (under 8 years to go according to our projections), at which point we can do it much more slowly at greatly reduced cost.

The other key reason why we have a different perspective on regular expensive holidays is that because we don’t have a 30 year career left to go, the idea of making the “sacrifice” of not going on expensive holidays now actually doesn’t seem like a sacrifice at all. I would be the first to admit though that if I had to hold out with only one or two international trips over the next 30 years then that would seem like quite a sacrifice.

By having a different perspective on this sort of travel, it really is possible to save a lot of money. For us, our typical holidays are within Australia, preferably within driving distance (we are prepared to drive a fair distance) of our home town so that we can have a car to drive around at the holiday location. This tends to cost a lot less, and is also a lot less stressful, making the whole holiday actually more relaxing.

Unfortunately my peers don’t think about holidays in this way, and they therefore spend a fortune getting away every year for 30 years…

So what have you questioned lately?

Have you questioned anything lately that has saved you money? Have you identified anything (or a number of things) that will significantly change your financial future?

IA

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