If you’ve never heard of First Principles Thinking (FPT), I can’t say I am surprised. It’s just starting to gain ground as Elon “The Future” Musk (not his real nickname) has become increasingly popular in the last few years. He’s gone from eccentric genius/businessman to pop icon and more and more people want to be like him. Naturally, being like the man first requires thinking like the man, and we can apply his thought process to our own personal finances.
There are a number of good articles out there that would do a better job of describing the idea behind FPT better than I could here, or, at least better than what I really want to do here. The thinking process isn’t really the key point of this post. This is about how we can apply it to finance. But the gist of FPT is to start out at the most fundamental truths of whatever you’re topic you’re focused on and reasoning up from there. An example of this would be Musk’s SpaceX company. He reasoned that space flights were so expensive because the launches were so expensive, and the launches were so expensive because we were basically building rockets to be used one time and then thrown away. He reasoned that if you were to make multi-use rockets, you could bring the costs down significantly.
Applying First Principles Thinking to Finance
The other night, I found myself at Target again (not sponsored, not even a big fan, it’s just on my way home from the gym) shopping for groceries. As I walked up and down the aisles and found myself once again looking at dog toys, I found myself thinking about what I really needed. I thought back to the last time that I was in this aisle and about how little control I had. I chose this time to spend $0 on puppy stuff and continued on my way to buying my groceries.
While I believe the biggest reason for this change was that I came across the dog aisle early in my shopping, before my defenses had been worn down by the fluorescent lights and endless availability of stuff, the other reason was that I came in determined to purchase only what we needed for our daily lives; Food, clothing, and shelter. I walked out of the store with a t-shirt (where do all my workout shirts disappear to?), with milk (which is what brought me there), and with other food (but NOT cookies!).
This applies to shopping, sure, but FPT could and should be applied to all areas of our personal finances. At least until we have made enough to comfortably live the rest of our lives off of. I have written about driving a junker before and about shopping (unsuccessfully) for only the essentials, but I haven’t ever really discussed recognizing and cutting out unnecessary spending before. This is how FPT works into personal finance; by recognizing what we actually need we can make our money do more for us.
The Big Three
Everyone knows that they need three things for basic survival: Food, Clothing, and Shelter. We can, of course, cut the spending in these three categories down, but at the end of the day we need these things. This is where you should start your spending. You should do all you can to get down to spending money on only these things in a month and work your way up from there. This is the point I am at on this journey now.
Outside of the big three, we can reasonably assume there will be other necessities to spend money on. Gasoline to commute to and from work, while not necessarily a necessity, is likely to be an expense for you. Hopefully, you don’t need to commute an hour each day, like I currently do, but until I work from home full time or find new employment, this is where I am stuck. Not ideal, working on changing it, but reasonable for the time being if I want the paychecks to keep coming in. Along with gasoline comes things like oil changes, maintenance, and a thermostat that hasn’t worked in months and is stuck open even though IT’S BEEN NEGATIVE TEMPERATURES HALF THE TIME FOR THE PAST 2 MONTHS!
We could also cut down on the other things we let build up in life; cell phone, cable, Netflix/Hulu, etc. You can see how quickly we can get away from FPT and how it relates to finance. But here’s the point; I am working my way into not spending money on those things anymore. I am committed to purchase this phone and keep it for at least 3 years, thereby reducing my phone spending to only the essentials. I am working on reducing my time spent commuting. I am working on cutting cable. I am working on not having Cable AND Netflix AND Prime. I really only need one of those.
A Lifestyle is Built One Day at a Time
When we’re talking about personal finance we are really talking about lifestyle. There are people in the world who do just fine spending a tiny fraction of what I spend in a day. I just need to keep in mind that spending less is the goal. I also need to keep in mind why that is the goal, in order to better achieve it and stay in the mindset. The fact that I haven’t dropped all these excess expenses TODAY is alright with me, because I know that my personality is one that if I don’t have a couple of things to do when I get home, I will go out spending frivolously until I have plenty to do. And if you’re like me, which explains why you’re reading this site and find me hilarious, you can understand the urges that consumerism has for you.
This is why putting yourself in a First Principles Thinking mindset is so important. The next time that you go to Target, you leave with only the essentials. Then each time after that, it gets easier and easier. You start to see your bank account building up more and more. You start becoming able to live on less and less. And then you retire early and play with your puppy all day. We can do this together! That’s the whole idea behind this site; talking to each other and working together to reach ever higher personal finance heights!
What You Can Do Today!
If you haven’t started tracking your spending like a hawk, you should really get started. There’s no possible way you can recognize what’s coming out of your bank account without doing so. There’s also no reason not to sign up for an automated service that does it for you. It makes it pretty easy. I don’t get paid to recommend Mint and Personal Finance, so you should definitely consider these to free services.
Fellers: Do you have any common expenses that you feel are necessities? That you actually can’t live without or that simply can’t be cut out of your budget today? Have you ever considered any alternatives?