The New Psychology of Spending Money

So last weekend, I met up with a friend who’s kind of a huge foodie, like she wouldn’t think twice about dropping 200 bucks for a meal at a restaurant. She’s really fussy about her food, which I can never understand because I pretty much eat anything. Except papayas, they’re gross.

Anyways, this friend was thinking about checking out this flashy new Michelin Star restaurant that just opened. She was excitedly telling me about her plans, but abruptly stopped herself and said, “But you probably wouldn’t approve.”

I was a little taken aback. Why wouldn’t I approve? “Because you’re all about saving money and personal finance,” she retorted.

And then it struck me: Most people believe that “personal finance” and “spending money” are polar opposites. This couldn’t be further from the truth – I’ll tell you exactly why following a personal finance system means you can spend on what you love (and no, you don’t have to wait till you’re all white-haired and wrinkly).

The Toilet Paper Thief vs The Guy Who Spends On What He Loves

Let’s compare 2 friends – we’ll call them Mike and Paul. Mike is your typical frugal saver. He doesn’t have a personal finance system but he tries his best to save more. He cooks ramen at home to save money. He takes the bus instead of the subway so he can cut 10 cents per day on his trip to the office. He wears the same pair of jeans every time he goes out. When he goes travelling, he steals the toilet paper and soap from the hostels. He picks up 5-cent coins from the ground.

Paul doesn’t scrimp as much as Mike does. In fact, he spends on what he loves. Paul manages to do this because he has a kickass personal finance system: He’s automatically saving and investing pre-determined amounts every month. He’s automated his credit card and phone bills so he never has to worry about missing a payment. He’s set aside “Big Play” money for parties and vacations.

Once all that is done, Paul has a few hundred dollars left over each month which he can spend on the things he loves, no matter how much they cost: Clothes, meals, drinks, massages – in short, everything that makes it awesome to be young.

Paul doesn’t break a sweat if his cash runs out before the end of the month. He simply stays home, cooks, and reads a free book to pass the weekend. In a couple of days, he’ll receive his next monthly salary, automatically save/invest/pay off his bills, and with the amount of money left over, continue spending on the things he loves.

Who do you think leads a richer life?

Old Psychology vs New Psychology

Most people assume that just because I write about saving and investing, I’m one of those crotchey old personal finance dudes, hobbling around with a gin and tonic in one hand, nagging people to stop spending money. That’s the old psychology of spending money, the one that most clueless people mistakenly follow.

There’s a new psychology of spending money: If you’re faithfully following a personal finance system, you’re allowed to spend on anything you want with the money left over.

In the past 2 months, I’ve had a $325 dinner, went on a $3,505 vacation, bought a new Amazon Kindle, and last night, I paid as much as $14 for a beer (that last one was totally not worth it). I did all of the above absolutely guilt-free, because I’ve built, and followed, a personal finance system that takes care of my saving, investing and payments.

There’s a key difference between the following two statements:

Crotchy Personal Finance Dudes (like Mike): “I will never ever spend on a $200 dinner”

People who read (like Paul): “I’ll totally spend on a $200 dinner, as long as I can afford it after I’ve saved and invested.”

Which person would you rather be?

PS: Leave a comment or send me an email ( on how you feel about spending money. What do you spend on and why? What is the one biggest thing you struggle with when it comes to spending? What would you like to learn from my blog to help you overcome it?


6 thoughts on “The New Psychology of Spending Money

  1. I would never spend $200 on a dinner, but that’s because my paycheck is only about $400 a month and after bills and food. I’m lucky if I have $150 left. But I’m a full-time student,part-time worker at a university in the US. The price of food keeps going up ><

    Besides, a $200 dinner for one person probably means you'd have to dress really fancy, and that's not my cup of tea.

    • Totally get you – different people have different ways of enjoying their money. While I love going out and eating, I hardly ever shop for clothes and I would never buy a car at my current salary – they’re just not that important to me.

      I also know what you mean when you talk about feeling like it’s hard just to make ends meet – I was a poor college student once too ;). Still though, you might try saving just $10 a month. It seems like a trivial amount, until you check your account a year later and discover that you essentially have one whole month’s worth of expenses tucked safely away. It’s a great motivator, and it’ll inspire you to save even more.

      Also, this is only temporary. You’ll graduate, find a job, and then you’ll be able to build off that stash of savings you collected in college.

  2. I liked this post. 🙂 I like to think I tend towards the “Paul” camp… but I’m not too sure, so that’s a bit of a red flag. One of the black vortex of spending areas is petty cash, as it’s not always a high priority for me to track where I’m spending that and I’m thinking that might be a bit of a mistake. Wondering what thoughts you have on that.

    • Totally agree with you that petty cash is really hard to track. I get around this in 2 ways:
      1. I try to charge most things onto my credit card, so everything appears on my statement. I then log on once a week to compile my expenses from there.
      2. For the small items that I pay in cash, I usually estimate it by observing my spending for a month. For example, I spend approximately $12 a day on food. Multiply that by 30 and I get $360 a month. So I set aside $360 a month for food – sometimes I spend more and sometimes I spend less, but it more or less averages out.

      • Thanks for getting back to me – good suggestions. I like (2), but I guess one would have to reconcile the spend with the estimated budget at one point. Eiher way it points to keeping a closer on eye on the outlays alas 🙂

  3. Pingback: Why You Should Never Be Jealous | cheerful.egg

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