A Simple Hack to Transform the Way You Spend

It’s quite a struggle to resist the temptation of purchasing on impulse when you’re at a shopping centre. In fact, my bank account was taking quite a beating because of my unhealthy spending habits and I constantly found myself struggling with buyers remorse.

Eventually, I pulled up my bank statement – eyeballs popping out when I saw how bad it was – and decided that it was time to put an end to it. It was a lot easier said than done. I later began to wonder if my usual optimisation approach could be applied to fix my overspending.

Enter the utility approach

(You can think of utility as an arbitrary measure of happiness – it’s a concept I borrowed from microeconomics)

I devised a method which was deceptively simple, and yet managed to significantly reduce my spending. Here’s how it works:

  • I rank my potential purchases in terms of the amount of utility that I will derive from it.
  • Since the measurement of utility is arbitrary, I assign odd-numbered values to my purchases. For example, on a scale of 1 to 9, clothing would give me a utility of 3, while a good pair of earphones would be a 7.
  • I choose odd-numbered values because it’s easier for the brain to differentiate between a 3 and a 5, as opposed to a 5 and 6 because 5 and 6 are too close together to have any meaningful difference.

The rankings are based on a number of factors:

  1. How long the product will last
  2. How often I will utilise the item, or the frequency of use
  3. The opportunity cost (and this is a big one). Essentially, this means “What are you giving up, in order to buy this item?” I go into more detail later on in the post.
    • For example, if I’m buying a set of speakers, I am giving up my ability to purchase the new Kindle that I’d been waiting for.
  4. How things/life will improve as a consequence of the purchase

So if, for instance, I’m looking to buy a new guitar, this would be my checklist.

  1. It will last many years
  2. I use my current guitar almost every day so it’s very likely I will continue to do so
  3. I’m giving up my ability to purchase the new jacket I wanted, the hiking boots, and will probably need to cut back on spending as it’s a large purchase
  4. Quality of life will significantly improve because it’s a very big part of my life and I derive a lot of joy from playing the instrument

If the product/experience is very valuable, lasts a long time, can be used often and improves my quality of life significantly, I award it 9 “units of happiness” or a utility of 9, and I can prioritise it over, say, a new jacket with a utility of 5.

Noel, a good friend of mine, taught me to look at purchases as long-term investments. If the price was high but provided good value and long-term use, that would be considered a good buy. Credits to him for showing me this way of looking at items.

Going through this checklist, even in your head, can dramatically reduce the occurrence of impulse buying. It forces you to think about how happy the item is actually going to make you. In most cases, it’s probably not going to make you happy or even impact your life meaningfully, in which case you can happily pocket your money and know that you’ve made the right decision.

Delay your purchase

A tip that’s helped me very often is to hold off on buying big-ticket items. Half the time, you end up realising you don’t really want the item that much or you find a better deal and end up saving a ton of cash. Wait a couple of days or even a couple of weeks and see if you still want to buy it. After all, if you’ve lived without it for so long, do you really need it now?

Opportunity cost and how it helped me cut my spending in half

Whenever I am about to buy something, I go through the checklist very quickly, and I always consider the opportunity cost. I am currently saving up to travel in Europe. This means that if I’m buying overpriced popcorn and a drink at the cinema, I am aware that my opportunity cost is a night’s accommodation in South-East Asia (The price of popcorn here is unbelievable).

That sobers me up a little and makes me wonder about how much I value the popcorn (or whatever it is I’m thinking of buying) in relation to my travel budget. The more I spend on things which don’t give me very high utility, the less I have to spend on travel, which gives me considerably higher utility. I ended up cutting my expenditure by more than half once I started considering my opportunity costs.

As cliché as the saying is, moderation is key

All that being said, don’t start starving yourself of simple pleasures. I still go to the movies, have a cup of coffee etc, but I keep it to a minimum. I’ve replaced many of these expensive hobbies with free activities that make me equally as happy, such as playing the guitar, hiking with friends or enjoying a great book while at the beach.

The point is, you don’t have to buy stuff to be happy. Only make your purchase if it enhances your overall experience or quality of life in a meaningful way, and if you go through the checklist and the item passes your criteria, go ahead and make your purchase with confidence.


3 thoughts on “A Simple Hack to Transform the Way You Spend

  1. It wasn’t until I had all of my valuables stolen in Chile did I really consider the minimalist approach. It forced me to only buy things of value and necessity. So to the thieves, I thank you for giving me a new outlook on life.


  2. Some great tips here, I really like the opportunity cost methods. Do you track all of your expenses? I have an app to track every penny and I have a target average spend for the month. I try to make sure my disposable income is spent on experiennes rather than material possessions.


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