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Maximum frugality is a good way to save money, but perhaps not the best way to live a good life. Instead of saving money at all costs, I recommend that you make a habit of letting your living expenses trail behind your income. Ideally, by a wide margin.

This means you can still increase your spending and have the experience of buying nice things and increasing your living standards - but you're doing it while on a fast-track to lasting wealth.

The key is to use the power move to your advantage as you build your wealth, i.e. make more money and don't spend it.

Think Like an Investor

Most people think like consumers.

We want to think like an investor and think in terms of assets.

Here's the difference between the two:

Consumer Thinking
  • "With $10K, I can buy a car!"
  • "With $100K, I can buy a really nice car!"
Investor Thinking
  • "With $10K, I can buy a car and still have $2-5K left to invest."
  • "With $100K, I can buy a car on the interest next year and still have $100K in my account."

This is why I didn't buy a car for years, although I wanted one. And why my first car was a 10 year old, third-hand Honda, which I bought even though I could have easily afforded a brand new car or the lease on a luxury car at the time.

Instead of spending my money on stuff I don't need (an expensive car), I bought only what I needed (a decent car) and put the majority of my money towards assets.

Investor thinking makes you a minimalist with a cause.

Minimalism is about being very deliberate about what you want and need, and only spending money on those things.

What Minimalist Spending Looks Like

How to Hit the Sweet Spot: Be Clear About Your Priorities

Being clear about your priorities means knowing what you really want.

  • Just buying stuff in general doesn't make us happy.
  • Studies show that prosocial spending makes us happier. This is when we spend on others vs. ourselves or on shared experiences like a trip with friends.
  • Not having money problems reduces stress and makes us happy.

Sad Spot Spending vs. Sweet Spot Spending

Sad Spot Spending

  • Spending money on stuff and wondering why it's not making you happy.
  • Not being able to afford shared experiences or prosocial spending.
  • Having money problems and feeling trapped on a treadmill of endless consumption.

Sweet Spot Spending

  • Spending money on things that actually improve your life quality.
  • Spending money on shared experiences, gifts & donating to meaningful causes.
  • Having a positive relationship to money, escaping the consumer mindset.

An important idea behind all this is that spending less money does not have to be a terrible sacrifice. It doesn't mean living a less enjoyable life. In fact, when you change your relationship with money and free yourself from the consumer trap, you can live a far better life on a lower budget.

Worst Case Scenario

The most effective way to stay poor is to buy stuff you don't need on credit.

This is the worst trap that many consumers fall into and I recommend avoiding this at all costs.

How to Identify Your Priorities

For the car example I use in the video, you can ask yourself:

What do I really want/need in a car?

  • Utility of moving from A to B.
  • Feeling of freedom.
  • Shared experiences: like going on road trips.
  • Status, admiration, getting laid?

The sweet spot is the point when you are a minimalist.

This means that you are deliberate in your actions and you know why you spend money on one thing and why you don't spend money on something else.

Self Assessment

It is worth your time to do a self-assessment about the things you want and why you want them.

When you know why you want something, you can spend money on it guilt-free.

Knowing what's important to you helps you avoid unnecessary spending on things that don't make you happy.

If anything, by not spending on things that aren't important to you, you will feel happier because you saved more of your money!

You can use this writing exercise here to do a self-assessment and figure out what's important to you.

The Poverty Trap

Many people are stuck in the poverty trap. That's when you're so broke, it's costing you money.

A very clear cut example of this is when your bank charges you overdraft fees (which they love doing). If you didn't have to pay the overdraft fees, you could get back to a positive balance more quickly...

Remember how I talked about the cheap car I bought? Note that it wasn't the cheapest possible car. I spent about $5,000 on it, when I could have easily found a car for $1,000 or less.

The thing is, a 10 year old, $5,000 Honda will cost you very little in terms of upkeep, repairs etc. But a $1,000 car? That's probably going to break down every other week. And before you know it, you've paid more than $5,000 for your $1,000 car, just spread out over time.

This is another example of the poverty trap. You can be too poor to afford a car that won't cost you a fortune in repairs every year.

It's important to be aware of the poverty trap and:

  • Do what you can to get out of it.
  • Avoid spending behaviors that keep you stuck in it.

Key Takeaways

To summarize the takeaways from this lesson, this is what it comes down to:

AVOID THIS:
  • Buying stuff you don't need, that doesn't make you happy.
  • Digging a deeper hole into the poverty trap.
DO THIS:
  • Spending money on getting yourself out of the poverty trap.
  • Spending money on things that are truly meaningful to you.

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