I think that the way most people spend money is absolutely nuts. I see people buying things they can't really afford, or things that will have no lasting impact on their lives whatsoever, and I cringe. Be frugal, I want to yell.

On the other hand, there are people who go way out of their way to save a dollar, even When spending that dollar would really make their life better, or create some lasting memory that would impact them long after the dollar was gone. Don't be cheap, be frugal, I want to yell.

Maybe a better phrase for frugal, at least the way I think of it, is financially-efficient. And just like most mistakes I see people make, this one stems from not actually thinking about decisions and just going with the flow.

Money should only be spent if you have it, first of all. Just because everyone else has a car doesn't mean that you are somehow entitled to one, too. If you don't have money for a car, don't buy one. Never finance anything, with the possible exception of a house. Even then, I think it's usually a bad idea.

Financing things ensures that you pay more for them than you have to, whether through interest or a higher price that allows the vendor to offer free financing. If you had just saved the money and then bought the item, the opposite would have happened. You would have earned interest on the money, and thus had to spend less on the item.

If you can get ahead of that curve, you're at a real advantage. You buy a crappy car that gets you around, and then you start saving money. Maybe later you buy a slightly better one with the money you've saved. You can keep repeating that cycle, and eventually you end up with a nice car and no debt. He who finances will end up trading cars as well, keeping debt as a permanent part of his life.

But maybe you shouldn't buy a nice car anyway. The first category I see people spending too much money on is things to impress other people. If the car you have is making the difference between how people act towards you, you need to find new people to hang out with. In the end, unless you have a Ferrari or something, no one even notices.

When spending money, people think most about the price. This is completely wrong. The first consideration should be the value of the item when you're done with it. Will it be worth anything at all? A night in a fancy hotel won't. A fancy car will be worth much less. On the other hand, a used Rolex may very well be worth more. Same with some art. In the middle are things like Apple laptops, which depreciate, but not by much.

If you operate in a surplus, always paying cash for things, keeping a buffer, never going into debt, the only real cost is the difference between what you paid and what you'll sell the item for later.

You have to spend some money on things that depreciate to nothing. Food, for example, unless you're selling your sewage. If you have to buy something that depreciates, optimize for utility. With food, that means that you buy healthy inexpensive food. Unhealthy food actually depreciates beyond zero because it damages you and causes medical bills down the road.

Experiences and travel depreciate to zero, but are often worth spending money on. The key is to spend money on the things that make the expenditure worth it. Your trip to Japan will be remembered forever because of the people you spend time with, and the culture and nature you see. A fancy hotel will be forgotten.

Education, even if it's not going to lead to a income, can be worth spending money on. I paid to have a one-on-one MMA lesson from a fighter I admire. I'll probably never even fight, but it was worth the money to see the world from a different perspective and understand what fighting is about.

Experiences and education are methods of transferring financial value into personal value. You become a better person by going through them. On the other hand, that doesn't mean that every experience or educational opportunity is worth the cost. The only reason I haven't gone back to Burning Man for a full week is because I don't think it's worth the money for a week, compared to other experiences I could have. College has a lot of value, but I think it's radically overpriced. Fifty thousand a year could buy you a thousand hours of one on one training with experts at $50/hour. Instead you get bulk training, a fun social environment, and no flexibility.

The key to a good life is thinking about one's decisions, rather than going on autopilot. This extends to financial decisions. Build a surplus rather than debt; focus on the cost of things, not the price; spend on experiences and education when it's a good value.

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Photo is an awesome home-chopped car that I saw at the Flying Circus air show.

My habit book is coming out next week! I think it's easily my best book yet and I'm really excited to have you read it. Just have to finish up one chapter and do the layout. Goal is to have it ready by Thursday next week. Will be available on Kindle, and I'll post here about it.