Now that you have reconciled your financial statements, you have a better understanding of your financial situation. The next step towards effective money management is to recognize your purchases or expenses and categorize them into one of the following categories: Productive, Consumptive, and Destructive. By categorizing your expenses, you can identify areas where you may be overspending and make adjustments to your budget to achieve your financial goals.
It's important to note that what is productive, consumptive, or destructive is subjective to the individual. What may be productive to one person may be consumptive to another and vice versa. For example, gasoline to get to work may be a productive expense for someone who relies on their car to produce income, but it could be a consumptive expense for someone who lives within walking distance of their workplace. To help you get started here are a few examples of the various things we love to spend money on and how they might be categorized.
Productive Expenses
Productive expenses are those that produce a return on investment in the future. These expenses contribute to your long-term financial goals and can help you generate income or improve your earning potential. Examples of productive expenses may include:
Education and Training: Investing in education or training can improve your skills and knowledge, which can lead to better job opportunities or increased income.
Home Repairs and Improvements: Home repairs and improvements can increase the value of your home, which can lead to higher resale value if you looking to sell soon.
Business Expenses: If you own a business, expenses such as equipment or marketing can lead to increased revenue and profits.
Consumptive Expenses
Consumptive expenses are those that provide immediate gratification but do not contribute to your long-term financial goals. These expenses are often unnecessary or could be replaced with a less expensive alternative. Examples of consumptive expenses may include:
Dining Out: Dining out is often more expensive than preparing meals at home and can quickly add up over time.
Luxury Items: Luxury items such as high-end clothing, accessories, or electronics are often unnecessary and can be replaced with a less expensive alternative.
Entertainment: Entertainment expenses such as concert tickets or sporting events can be enjoyable, but they do not contribute to your long-term financial goals.
Destructive Expenses
Destructive expenses are those that have a negative impact on your long-term financial goals. These expenses often harm your health, relationships, or earning potential. Examples of destructive expenses may include:
Smoking: Smoking can harm your health and increase your medical expenses over time.
Substance Abuse: Substance abuse can harm your health and relationships, and can lead to decreased earning potential.
Gambling: Gambling can be addictive and can lead to financial ruin.
It's important to be honest with yourself when categorizing expenses. After all, the goal is to improve your financial situation, and that starts with understanding and being honest about your spending habits.
Once you've labeled each of your expenses, P,C,or D, I invite you to eliminate all destructive expenses, limit your consumptive behaviors, and properly manage your productive expenses as your lifestyle and needs change over time. It's a good practice to ask yourself before each purchase whether the purchase that your about to make is productive, consumptive, or destructive.
By being mindful of your spending habits and putting the money you save from foregoing consumptive and destructive purchases into savings, you can quickly make significant progress toward your financial goals.
So, next time you're making a purchase, ask yourself: Is this productive, consumptive, or destructive?
I think you might just be surprised at the results.