It's Not All About Income

My grandpa used to say, “It ain’t what you make; it’s what you spend.”

As a financial planner, I deeply appreciate grandpa’s financial wisdom. Many households in our country would sit on much firmer financial footing if they heeded his sage advice.

Unfortunately, many don’t.

It’s entirely too easy to rack up gobs of debt on a credit card – or, these days, with a swipe of your mobile phone – and dig a six-foot financial hole. Instant gratification and freewheeling spending have been a part of the human condition ever since money was invented. It’s nothing new and certainly not a generational thing.

But access to financial wizardry and whizbang software has certainly made for a potent combination that sucks more people than ever into making choices with their money that they later regret. Debt can be a fine thing under the right circumstances and for reasonable purposes, but it can destroy you if used unwisely.

So why is it that we sometimes spend more than we should? Why do we struggle with carefully assessing our expenses?

I think the answer to those questions was fundamentally articulated by a once-famous-but-now-largely-forgotten essay written by Wesley Mitchell. It is called “The Backward Art of Spending Money.” In addition to its content, what’s revealing to me about the essay is when it was written. It wasn’t written this decade. It wasn’t written in the ‘70s, ‘80s, or even ‘90s. Like I said, spending has been a problem for people for far longer than that.

The essay was written in 1912.

In the essay, Mitchell asks the following question, “Why is it that we are, all of us, so sophisticated about the activities in which we earn our living and tend to be so unsophisticated and backwards in the ways in which we spend our money?”

Mitchell then suggests an answer.

In his view, we spend a significant portion of our day focused on one pursuit, which is our job. There is intense concentration and understanding on how we make money because it usually comes from one source.

On the other hand, we buy a thousand and one things in a year – milk and mattresses, gas and gadgets, socks and subscriptions. And the list goes on and on…and on.

So, it’s a problem of focus. We devote incredible amount of attention to how we earn our income, but because our expenses are so vast and scattershot, we can’t possibly dedicate a similar amount of effort into measuring how we spend those earnings.

Milton Friedman, who was a world-renowned economist, referred to this essay in a speech he delivered in 1978. Fun fact: That speech was at Kansas State University for the Landon Lecture Series. Friedman tied together Mitchell’s theory on earning versus spending with an equally important observation about humans. Friedman said, “The greatest human capacity we have is not to reason but to rationalize.”

In short, we know how to reason – we know what we should buy or not buy. But our power of rationalization is stronger than our power of reasoning, and we talk ourselves into purchases that we know we shouldn’t make.

It’s not that people are intentionally self-destructive with their spending patterns. It’s that our DNA sometimes gets in the way.

Now, don’t get me wrong, I’m an advocate for spending responsibly. We shouldn’t hoard money. By all means, use it for things, causes, experiences, and on people, that you care about.

But as Mitchell, Friedman – and my grandpa – have all advised, try to occasionally focus some attention on what you spend. You might be surprised by what you discover.