[Preamble: this is a post about the way you spend, and how we should think about it. Personally, I believe it’s important to keep the economizing in perspective – because while saving money is important, there are other sides in the cost-of-living equation.]

It seems to me that the world is mainly split into two kinds of people: those that have done the numbers and already know that they spend too much; and those that only suspect they spend too much.

Of course, there is also a small subset of individuals that save almost everything, and beatifically march through life with an air of smug self-sacrifice. And then there are hippies and monastics, who lead a communal life that mostly renounces the concept of personal spending altogether.

But looking at the two big groups, the issue of overspending presents something of a dilemma:

• On the one hand, it is probably true that most people ‘overspend’; but
• Equally, the line between ‘spending’, ‘overspending’ and ‘saving’ is a bit more blurred than it first appears.

The trouble is: one of the framing biases that we have when it comes to the allocation of money is that we tend to define it by blocks of time. And I think that this is a fairly important nuance to be aware of.

Let me try to explain.

The Investment-Time Continuum

When we think about saving, and putting money into an investment, we imagine something like the following:

or

That is: you put money away today for a payout at some point in the future. Whether that future payout is the ownership of an asset that you can sell (like a house), or the purchase of a pension annuity, or some other form of return (like dividends) – there is always some form of a payout.

And after the payout, you are then free to spend (or overspend!) as you please.

So what is the timing bias when it comes to what you spend?

Well, we tend to break time down into months. Specifically: payday to payday.

And the living expenses that happen between paydays are never seen as a saving.

But if we re-frame the investment timeline to be a month long, then you get this:

Because for most of us, our biggest income-generating asset is not our house, or our retirement savings account. It is us. We as workers. Our skills and our ability to employ them (or be employed for them).

Which means that, most of the time, you’re not ‘spending’ so much as you’re just investing in your most significant income-generating asset.

And that should be encouraged – not treated as a sunk cost, or somehow portrayed as vaguely immoral.

So perhaps a different question then: how efficient are you at generating income?

I think this is the real concern that the spending-saving question attempts to address. I could generate my income on a steady diet of Möet and fine-dining experiences. But I could probably generate that same income on a steady diet of home-cooked meals and rooibos tea.

The second is a more cost-efficient way of making that income. It’s also a safer way of doing things: because it creates the disposable income that would allow me to diversify my income-generating risk by putting money aside for rainy days and future payouts.

Because if I don’t diversity, and I leave myself as my only source of future income, then I have literally put all the eggs into one (quite expensive) basket. And if that basket breaks, then no eggs.

So diversification (through saving) is good and necessary. But so is spending money to keep yourself happy and motivated and able to work.

And that’s where too much frugality can work against you. You don’t want to cost-cut to the point where you start to curtail the income generation.

Because income-generating efficiency has many forms…

The obvious (and easy) example: don’t cost-cut on food until you hit the point of starvation, and you’re no longer able to work.

But that seems a bit reductionist. So let me give you an example that is less extreme. It’s a personal example, involving laptops.

So I spend all my time working off my laptop. Now, I could choose to work off a cheap Dell machine – that would be very cost-efficient.

But I don’t.

Instead, I use a far-too-powerful-for-my-excel-and-email-needs Macbook Pro.

That may seem extravagant. It may also look like I’m deferring that future day of financial independence, when I don’t need to work off a laptop at all. But here’s my logic: if I’m going to open a laptop every day, then I want it to be a laptop that I like. It’s the way I generate income, and I want to enjoy that income-generation process (as much as is possible).

Over time, I’m also willing to bet that the additional expense will translate itself (and has translated itself) into higher income. That is: because I like working, I do better work, and more of it. This means higher income to cover the additional expense.

In a traditional saving-spending metric, the Macbook purchasing decision might seem extravagant.

But sometimes, opting for a more costly purchase has positive outcomes for the income-generating side of the equation.

The Saving-Spending Balance

This, I think, is probably the key point: living austerely and living extravagantly are not the only choices.

You could also live generously.

And make the bet that the investment payoff for doing so is a work-life balance that allows you to scale your income-generating capacity.

And in the meantime, you’d be living your sustainably-close-to-best life.

#thedream

Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.