Through conscious spending, you can achieve all of your investment and saving goals and you can live a debt free life.  That’s a bold statement, but I’m going to back it up in this post. 

First, let’s get into what conscious spending is (and isn’t) and how you can use the practice to get filthy rich and not have to clip coupons along the way.

“The heart of frugality is choosing to spend it on the things that are important to you while cutting back ruthlessly on the things that aren’t.  Ramit Sethi calls this conscious spending, which is a fantastic way to describe it. Conscious spending implies that you’re actively choosing to spend on some things and not on others.” - JD Roth, Author of Get Rich Slowly

I hate the word budget because it implies constraints and penny-pinching which is why I don’t really have a budget, but I do have a spending plan.  I actually think about how I’m going to spend my money in advance.  The term used to describe this practice is conscious spending.  I’ve been practicing it for years, but first came across the term in Ramit Sethi’s book, I Will Teach You to be Rich and instantly fell in love with the phrase.

Ramit’s advice is simple and to the point when it comes to allocating your hard-earned money toward expenses:

“Spend lavishly on the things you love, and cut costs mercilessly on the things you don’t.” – Ramit Sethi, Author of I Will Teach You To Be Rich

Side Bar: If you haven’t read the book, get your hands on a copy of it ASAP.  Just look at how much this kid loved the book and you can imagine how much you’ll love it too.

Conscious Spending is the Guilt Free Way to Spend Money
Conscious spending means that you’re actively choosing what you’re going to spend money on (things you love) and not on other stuff (things that don’t matter to you).

The idea really is to look back on your past purchases and what you’re currently spending your money on to figure out what stuff makes a difference to you and has value for you and your family.  You prioritize these expenses and you cut out the excess spending that doesn’t add any value to your life.

What Ramit was getting at is that you minimize the money you spend on things you don’t love or enjoy much, so that you free up money to spend on things that you really enjoy and value.  The problem is that most people never take the time to figure out what expenses truly bring value to their lives and what expenses are truly wasteful and unnecessary.

For instance, personal finance gurus love to tell you to cut out your daily trip to Starbucks or ordering wine or appetizers at dinner.  But what if you really love your Starbucks coffee or a great wine with dinner?  How easy is it going to be for you to cut back this expense?  Not easy at all. 

On the flip side, what if you realized that you were spending $60 a month on a gym membership you never used.  Could you cut that out?  Of course you could and your life wouldn’t change one bit.  So that’s where it all starts – identifying the areas cut back on and where you can splurge when you want to.

Autopilot Millionaire: Automating Your Finances
The easiest way to practice conscious spending is through the process of automation and having money from your paycheck deposited into a number of different investment, checking and savings accounts.  If you follow the below plan exactly, you’ll become a millionaire, automatically with little effort.

Long-Term Investments & Retirement (10% of Gross Paycheck)* - Money is automatically taken from your paycheck and deposited into your 401k or Roth IRA. 

Living Expenses (50%-60% Net Paycheck)* – This account is for food, (essential) clothing, household expenses, insurance, groceries, taxes, etc. 

Long-Term Savings (10% – 15% Net)* - Got a house you’re saving for or some other big expense?  This is the account the money goes into each paycheck. 

Short-Term Savings (10% – 15% Net)* – This is for those irregular payments that pop up over the course of a year that you don’t know the exact amount of but you can plan for, like major car expenses, appliances, repairs, holiday gifts and vacations.

Mad Money (10% Net)* – This is the bucket for expenses that you value and know you’re “blowing” your money on.  This is the account that will hold your cash to spend on expenses you could cut back on, but don’t want to.  Love buying DVDs?  Go for it.  Love Starbucks?  Buy lattes to your heart’s content.  If you have the funds available in this account every week, you consciously decide to spend it on things you love.  Period.  End of successful story.

Your Mad Money account is what you can spend your money on – make that, whatever you want to spend it on.  How can this be?  How can I advocate you burning through those hard-earned dollars?  Easy.  You have to live and enjoy the money you’re working so hard for, that is, only after you’ve paid yourself first and accounted for all your living expenses and other savings goals.  The money that’s left over is yours to spend, however you see fit. 

What if you have no money leftover at the end of taking care of paying yourself first and handling your living expenses?  This is when you get ruthless.

Getting Ruthless: A Thug’s Perspective on Getting Cash
No, despite this silly subtitle, I’m not recommending holding up banks or selling drugs to make a little extra cash.  I’m talking about being ruthless with your current expenses and the assumptions behind your expenses.

This is Ramit’s advice in the quote above – “cut costs mercilessly on the things you don’t [love].”  Figure out what you love and want to spend your money on and figure out how to get everything else for less than you’re currently spending. 

I don’t care if you buy stuff in bulk, buy used, borrow it instead of buying it or cut out the expense altogether, just get it done.  Get ruthless on the stupid expenses and you can spend lavishly on the stuff you love.  I think that’s a GREAT trade-off, don’t you?

Conscious Spending in Action
So that’s the theory behind what you’re going to do, but you might be asking yourself exactly how the heck am I supposed to put Conscious Spending into practice?  Glad you asked.  Luckily, it’s easier than you think and with a little practice and time, the questions or thought process become automatic.

1. Want or Need? - Is the purchase I’m thinking of making a need or a want?  If it’s a need, then I’ll likely buy it on the spot if I’ve done my research on the item previously (see below).  If it’s a want, I likely will hold off because I might not use it.

2. Will I Use It? – I’m not a young kid anymore and I’ve had my share of bad purchases over the years.  I know that while I love cool pens and journals, a simple free pen will do and I don’t tend to use my journals.  An app for my phone might be cool, but I’m probably good with the few that I currently use.  Consider how many times you’ll truly use the item and don’t convince yourself that you’ll use the weight set or handyman tool if you’re not prone to stick to exercise regimes or fix anything.

3. Do I Already Have Something Like It? - This is why I advocate organizing your closets, house and life.  If you can’t remember if you have a shirt like the one you’re about to buy, you probably either have too much stuff or you’re not organized enough.  Regardless, this question is something you should ask yourself. 

4. Can I Borrow this from a Friend? – If the item is something you’d use infrequently, like a power washer, ladder, bread maker or whatever it is you’re looking at, then you might just borrow it from a friend.  I was going to buy a wet/dry shop vacuum for over a hundred bucks.  Useful tool, but I could just borrow my brother’s for the one time I needed it and use my regular vacuum cleaner for everything else.  Would it have been great to have the wet/dry vacuum in the house for some unknown uses down the road?  Sure, but that $100 got spent on a wonderful dinner with my wife, something I love spending my Mad Money on.

5. Can I Get it Cheaper Somewhere Else? – It used to be hard to price compare when you were in a store, ready to purchase.  Nowadays with phone apps like Red Laser, you can price shop just by scanning the bar code and finding the best deal around.  For big ticket items, you should always check out online reviews and shop for the best prices.  By the way, not to beat a dead horse on this one, but the cheapest place to get the item is to borrow it from a friend.  Second cheapest, buy it used.

6. Can I Wait to Buy It? – You should never buy anything on impulse.  Impulse purchases lead to a lifetime of regret.  If the item is a want and it’s something I just want to have and know I might not really use, but is cool and just calling my name from the store shelf, I force myself to come back next week and buy the item.  The gold standard is to wait 30 days, but I’ve found that after a week, I come to my senses and realize that I don’t really need the thing after all.

7. Should I Use this Money for Something Else? – Lastly, ask yourself if you should spend the money on something else, like paying down your credit card debt.  I know, buzz kill, but it’s important to ask yourself this question.  If the thing you’re thinking of buying really is a doodad that will be piled on top of other worthless stuff in your apartment or home, then you might want to rethink the purchase and use the extra cash for something more important – paying down debt or a short-term/long-term goal.

If you go through all of the above questions, you can afford the item and you’re not going to go into debt to get it, go ahead and buy it.  Your money is to be enjoyed on things that bring value to your life, so enjoy the process and have fun with it.  I don’t even have to go through most of these questions these days because I’ve learned what I’ll use and what’s in the budget for the month/year.  I spend my Mad Money on the things I love and I rarely think of money.  It’s something I hope you get to experience one day soon.

Conscious Spending: How to Make It Work
I know it might sound like a lot of work to go through all these questions and really think before you buy anything, but the reward is huge – as in a debt-free, retire rich type of lifestyle.  Once you realize that you get to still indulge in the things you love on a weekly basis with guilt-free spending, I think you’ll love the idea of having a spending plan.

Remember one thing with this idea.  Your goal isn’t to eliminate any non-living expenses completely.  Your goal is to spend consciously on the things that matter most to you and bring you a little joy.  Indulge, have fun and don’t feel guilty spending on the things you value.  Just remember to cut ruthlessly on everything else.

If you slip up once and a while, don’t beat yourself up.  After years of practicing conscious spending, I still have an impulse purchase from time to time.  I don’t sweat it because I have the extra cash in my Mad Money account, so no getting into short-term bad debt for me.  I guess you could say that automatically planning ahead pays off, so go ahead and blow your mad money at the end of the week without feelling guilty.

* Note on Autopilot Millionaire Allocations – Percentages will vary based on individual circumstances, goals and income.  It’s hard to do the math on gross allocations to your 401K and then figure out what’s left on a percentage basis for your other accounts.  I advise people to max out their 401K contributions and then allocate the balance to the different investment, savings and spending accounts. 
Photo Courtesy of Steven DePolo and Hello Imwes