An important ratio in finance is the return on investment (ROI), which is, of course, the amount of money gained (or, sometimes, lost) relative to what you put in. When you’re talking about finance, you’re talking about exact dollars, and the formula is precise. But I think the concept behind ROI can be applied to spending that will yield intangible gains as well. (Now, I usually bristle when I hear people talking about “investing” in a depreciating asset like a high-end dishwasher or a nice pair of shoes, so I’m breaking my own rule here. Just this once. For now.)
The concept here is simple: Whenever you’re considering a purchase or expenditure, take a moment to consider whether it will make you a happier person or a better person or a more interesting person. If it won’t, that’s a strong argument for walking away. Unlike the finance ROI, what I’ll call the “Happiness ROI” is impossible to quantify, but you can break things down into rough categories:
- High HROI: This, of course, would be things that don’t cost much (if anything) but improve your life a good measure. Examples might be an afternoon at a museum, happy hour with friends, a subscription to a news magazine. Everyone’s list will be different, but if you assess something as having a high HROI, don’t hesitate to spend the money.
- Medium HROI: This category might include things like travel, tickets to the symphony, and gifts (including charitable donations). These things are also very good for you, but cost a lot more. Medium-HROI expenditures may have to go into the budget and you may even have to save up for them (I’ll detail my own means for saving for travel in a future post), but they’re probably worth it if you can make the room.
- Low HROI: This speaks for itself. I think most consumer purchases–purchases of things rather than experiences–fall under this category. An unnecessary new gadget, a pretty dress, an HDTV–none of it is exactly character-building. That’s not to say that you should never buy these things (I confess I’ve bought all of the above within the last year), but these are the purchases you should think hardest about. This is the time to ask yourself what you’re giving up to make the purchase. Maybe you’ll have to give up something like a day of vacation or a bit of your retirement fund, or you’ll have to wait an additional month to be debt-free. Is it worth it?
Finally, there’s a whole other category of spending that doesn’t fit into the HROI analysis: Necessities. These you have to buy no matter what, and should budget for (and have an emergency fund available for the big stuff). It doesn’t give me a warm fuzzy feeling to buy toothpaste or write a check to the plumber, but it has to be done.
My philosophy about spending is not to scrimp and save every last dime, but to be mindful of what your spending is doing for you. Scrimping can be destructive, for instance, if you are continually turning down your friends’ invitations because you don’t want to spend $10 on a couple of drinks. Spending can also be destructive, if you are turning down your friends’ invitations because you spent your last $10 on lottery tickets. Sticking mostly to purchases with a higher HROI will allow you to live well and still meet your financial goals.