“Price is what you pay. Value is what you get.” – Warren Buffet
In 2006, Scotia Bank launched its “you’re richer than you think” campaign. Over the past 10 years, the campaign has been heckled, applauded, scorned and discussed and has worked its way into the nation’s consciousness, becoming one of the most recognized tag-lines among Canadian banks.
For the most part, I agree with Scotiabank’s contention that we’re richer than we think. Several years in the personal finance industry and hundreds of hours spent poring over budgets and cash flow estimates have proved to me that most of us are spending more than we intended to on stuff we don’t necessarily need. Choosing to redirect this “unpurposed” money towards a clearly defined savings goal can transform a person’s financial situation and put them on track for a much more solid financial future. Similarly, identifying opportunities to increase your income, whether it’s by taking on another job, creating an additional income stream or negotiating a higher salary in your current role can also help you increase your wealth and achieve your financial goals. However, where I struggle with the idea of being “richer than I think”, is when it’s presented as an opportunity to redirect money from one thing in order to spend it on something else.
Redirecting vs. Saving
It’s not that the strategy itself is a bad one; it’s one I’ve used myself and one I’ve written about in several posts. Over the years, I’ve cancelled a cable subscription in order to create $1000 a year for flights to England, cut back on lattes in order to spend more on books, rented a room rather than an apartment in order to pay down my debts more aggressively and sold items I didn’t really need in order to invest in training that took me closer to my goals. However, while each of these choices helped me spend my money in a more purposeful way, none of them actually put more money in my pocket. While you could argue that reducing my debt increased my net worth and made me richer (on paper) it definitely didn’t feel as though I had any more cash at my disposal or any more money in my investment account.
The truth is that we don’t get richer by repurposing or redirecting our spending. If I allocate $200 a month for cable and then cancel my service and spend $200 a month on something else instead, then I’m still spending $200 a month. I might be richer emotionally or experientially but I’m not richer in a financial sense and, in a society where savings rates are far lower than they need to be, debt levels are sky high and retailers are using ‘sales’ and discounts as their primary marketing tools, it’s important to make that distinction.
Paying Less isn’t Saving
The challenge comes when we confuse paying less with saving money. Just because something is on sale doesn’t mean that we’re better off financially because we bought it. Even though we paid less than full price, we still spent money to acquire it and, if we hadn’t planned on spending that money, then we’re actually worse off after the purchase. This is a message that my dad has drilled into me for years but it took a long time before I actually came around to his way of thinking. As a teenager, I was continually frustrated with my dad’s lack of appreciation for my bargain hunting skills. I would come home from a trip into town with a new piece of clothing that I’d picked up for a great price and, when I told him how much I’d “saved” by buying it, his first question would be, had I gone into town intending to buy it? When I’d admit that I hadn’t, he’d proceed to point out that if I’d headed into town with $20 in my pocket and come home with $5 then I was actually poorer and so I clearly hadn’t saved anything. It didn’t matter how much of a discount something is offered for, the truth is that, unless you planned on spending the money before you walked into the store or logged on to the internet, you don’t save money by spending it, you save money by holding on to it and putting it to work.
Building wealth isn’t rocket science: if you consistently pay yourself first, spend less than you earn and keep track of your spending, you’ll find yourself on track for financial success. Save more than 10% of your gross income and invest it wisely over an extended period of time and you’ll discover that you are indeed richer than you thought you could be.