- in Spending
- 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
One 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.
Now 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?
It’s 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 time.
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?
Some 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 friends.
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.
To me 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
- Podcast Lesson #113-The result of 30 years of frugal living with guest John Pugliano
- Podcast Lesson #38-How do you decide when to save and when to spend
- Podcast Lesson #7-What to do with all your extra cash
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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