When Sarah and I started turning around our finances, one of our biggest goals was to achieve complete freedom from debt while fully owning a family home for our children.
That was a pretty audacious goal. When we started, we had almost $20,000 in consumer debt, two car loans, and several student loans, and we lived in an apartment. We had minimal savings.
About five and a half years later, we owned a family home free and clear and had no other debts. Lest you think that we did this due to a secret windfall or something, we didn’t – during that whole span, we only earned over $100,000 in household income once and most of the time we were fairly close to the median household income in America (somewhere around $60,000 a year). Our income came mostly from ordinary jobs – Sarah was a teacher and I was a lab technician who mostly just handled and processed data – and a few side gigs. In the midst of that stretch, I switched to being a full time writer, which was actually a big drop in income – I made the switch mostly so that I could be more flexible and available for my children.
Obviously, to pull this off, we lived very frugally, probably more so than we do right now. We spent far, far less than we earned and found ways to cut back in all kinds of ways.
One of the big “litmus tests” that we used whenever we discussed an unnecessary expense was what I like to call the “debt freedom test.”
Will I get more value out of this purchase than I would get from the peace of mind of being completely free from debt?
While you might want to shout out objections to this question, in the end, it’s a completely legitimate question. As long as I kept saying that some little purchase “doesn’t really matter” in comparison to the size of my debts, then I was never going to have that debt freedom. Every single little purchase was standing in the way of debt freedom. So, I started comparing every single little purchase to the peace of mind and freedom of choice that complete debt freedom would bring, and when I asked that question honestly, almost all unnecessary expenses paled in comparison.
I used a lot of specific frugal tactics to really keep my spending low, but a lot of those tactics ended up boiling down to asking that question of myself honestly about every dollar I was spending.
Would I get more value out of buying soap than the peace of mind of debt freedom? Yes, but would I get more value out of buying name brand soap as compared to the cheap soap than I would from the peace of mind of debt freedom? Not even close. Cheap soap it is.
That was my philosophy about every dollar spent. In general, I tried to keep those choices from adversely affecting the lives of others by never skimping on guests in my home or things like that. I maintained a non-extravagant social life. I did splurge on occasion, but it was usually on something where the upside was very, very clear to me.
So, what happened when we climbed that mountain? What did we do when we hit debt freedom?
For a while, we drifted a little. We weren’t really sure what our goal was going to be. I restructured my career a little by selling Money360 and agreeing to become a long-term writer for the site. We went on a couple of nice family vacations. We kept stocking our retirement savings. And we thought about what was next.
Within a year or two, we figured it out. We wanted financial independence. By that, I mean we basically wanted to reach a point where neither one of us had to work for a living unless we wanted to, and we wanted to reach that as soon as possible.
This restructured the question we asked about every purchase. Now, it looks like this:
Will I get more value out of this purchase than I would get from the peace of mind of being completely free from having to work for income?
Now, I’ll be the first to admit that this question doesn’t have quite the same pull for me as the debt freedom question had. A big reason for this is that I enjoy my work. I have a ton of freedom in terms of what I write and when I write and how I write, very few meetings of any kind, and almost zero direct management. I enjoy helping people, I enjoy the topics I write about, and I enjoy exploring new facets and angles on financial issues and personal growth issues.
This question still works as a nice filter, however, and it keeps me from making particularly bad decisions with my money. We still spend way less than we earn. We still save a ton for early retirement. We sock away a ton for our children’s college educations. We avoid a ton of unnecessary expenses and maintain the vast majority of the frugality practices that we used during our years seeking debt freedom. We’re aiming for financial independence at roughly the same time that our youngest son leaves the nest, giving or taking a bit depending on their life situations, of course.
In short, this question works because it makes us reflect on what uses of our money provides us with the most value in our life. If there’s something we want to buy that has more value than saving for debt freedom or financial independence, we’re free to do that. If it doesn’t have more value, this question reminds us of what we’re shooting for in the big picture. No matter which way we decide, that question ensures that we’re getting the most value for our money in terms of the choice between enjoying pleasures now or saving for peace of mind later.
So, let’s bring this back to you. What does this have to do with your own financial journey?
To put it simply, this question really works for any financial goal. No matter what your financial goal is, this question works as a powerful litmus on your spending.
Just identify your personal financial goal, think carefully about how you will feel and the life benefits you’ll gain upon completion of that goal, and then start running all of your spending through this question.
Will I get more value out of this purchase than I would get from the peace of mind of achieving my specific goal?
If you’ve carefully considered all of the benefits of achieving your goal, you probably know that the value you’d get from achieving that goal is pretty high. It likely comes with a lot of nice perks, even on top of the pure peace of mind of being in a better financial place with more life security and (likely) fewer monthly expenses. That’s a lot of peace of mind, right there.
What purchases could you make that would beat that peace of mind and actually provide even more value? There aren’t many. The ones that rise to the occasion are going to be expenses that are really providing a ton of life value to you.
If you’re finding that lots and lots of expenses rise to this value, then you’re either trying to achieve a goal that isn’t providing a whole lot of value to you or you’re drastically overestimating the value you’re getting from everyday splurges. This means that you either need to seriously re-think your goals, or you need to reflect on how much value you’re really getting from momentary splurges. A few are okay – you can pack a lot of personal value into occasional splurges – but routine splurges just don’t provide a whole lot of life value.
Use this question constantly. Look at all of your bills through this question. Look at all of your expenses through this question.
Then, put your dollars where they provide the most value to your life.