- How to balance enjoying money now vs. enjoying it later
- The three questions Lisa and I ask when making a purchase
- Why the amount in your bank account doesn't tell you what you SHOULD do, it tells you what you CAN do.
- Should I be spending on luxuries when I'm in debt?
- Quote of the lesson from Warren Buffett
of the most common issues that I encounter when I’m working with an
individual or a couple is how to balance long term goals like saving,
investing, or paying off debt vs. making a big purchase such as a car or
a fancy vacation.
It’s a great question, because while we do our
monthly budget and perhaps do set aside money for big purchases, the
budget can’t tell us whether or not we *SHOULD* do it, it really can
just tell us if we *CAN* do it.
On today's lesson of the podcast
I'm going to share the process that Lisa and I use when making a big
spending decision and whether or not we should do it now or later.
much like most thing in personal finance, the decision is a personal
one that all depend on your situation and financial goals. But when it
comes to making big purchases decisions below is the process that Lisa
and I do when we look to make a big purchase.
We always like to ask ourselves the following three questions first
- How much is it going to cost?
- How are we going to pay for it?
- If we have to budget for it, what will we need to change in our budget?
important first to determine how much the purchase is going to cost.
Doing so will help give you a clearer picture and will assist in
determining whether or not it is something to do now or wait for another
After you know how much it costs, it’s then time to figure
out how you will pay for it. Is it going to come out of savings? Will
you have to adjust your budget for a few months to save enough cash? Is
there something in your home that you can sell on EBay or Craigslist to
get a cash infusion?
If you already budget for it, such as a car
replacement fund, do you have enough time to save the correct amount
between now and when you would like to make the purchase? If not, what
will you need to change in your budget to have enough saved by then?
other things to consider as well is, if I make this purchase, what else
is this going to prevent me from doing financially in the next few
months? Save for my emergency fund? Not going out with my friends on the
weekend? Postpone my debt repayment plan? You then have to weigh that
loss against the gain of the purchase.
As for me, my #1 goal would
be to have my $1,000 emergency fund funded first. Because if I don’t
have my emergency fund fully funded and I make this purchase it’s like
I’m spending my emergency fund on a luxury and a luxury is not an
emergency. There’s nothing wrong with spending on luxury, but not at the
expense of an emergency.
In addition, I personally wouldn’t be
going on trips or spending big purchases on wants if I’m still in debt. I
just think it is unwise. Often though I hear back from young adults in
their 20’s and early 30’s who are looking at huge student loan balances,
lower incomes, and don’t feel like they are ever going to get to spend
their money on something nice so they want to go on a trip to be with
While I might not agree with the purchase, I’m OK with it
as long as it is paid for in cash and credit isn’t being used to fund a
purchase. I’m never going recommend borrowing money to travel for
luxury for example, but if someone can save up the money then going on
the trip isn’t a “bad” or “un-wise” financial decision necessarily. It’s
just different from what I do and teach.
However there needs to
be a point where we focus and are more serious on paying off our debt
then on travel. If the travel is a once in a few years type of deal
that’s ok, but if it is a once a year thing I think I you might need to
reevaluate how much getting out of debt is important to you.
this example it is a great opportunity to ponder on what your goals and
priorities are. Yes you can go on vacations or buy a new car, but that
is probably going to slow down the acceleration of getting out of debt,
postpone your investing, or subtract money from your ability to do
something else. Is that worth it to you? There isn’t a wrong or right
answer but a question to ponder.
Hopefully that is enough
information for you to make the best decision next time you are in this
position. I think going through this exercise, whether you make the
purchase or not, is a good real life example of how to handle money. You
aren’t just acting on a whim and just making an impulse purchase,
rather you are thinking critically whether or not to go and I’m sure
you’ll make a wise decision.
Other resources mentioned in today's lesson
Today's quote of the lesson is brought to you by book on our experience of buying and selling a house titled "A Tale of Two Houses"
"Do not save what is left after spending, but spend what is left after saving” ~ Warren Buffett
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