We have all been there. We vow to cut back on spending and save a certain amount of money, only to buy a few big ticket items that we vainly try to rationalize. The purchase might even have made sense at the time, but when we review our finances, our savings goals are far out of sight! Here are two simple questions to ask yourself – before you make a big ticket purchase.
1: Do I Need It?
It seems obvious: don’t buy things you don’t need! Of course, this is also the hardest question to ask and to answer honestly. A new car? If your current one is doing fine, and you just wanted that new car smell and extra features, then no. A new TV? Already have one, I just wanted the latest high-resolution screen.
If you answer ‘No’ to the first question, then the process is already over. Move on and try to forget about it. But you might be asking, “So I can never buy anything I don’t need because it isn’t financially the most prudent thing to do? Haven’t you ever heard of something called enjoying life?”
There are two things to keep in mind to this response. The first is that lasting enjoyment in life usually doesn’t come from shiny new things and spending gobs of money. However, there are of course things that we don’t necessarily need in the strictest sense, but nevertheless make life pleasurable; maybe a nice vacation comes to mind. These things can be purchased, but only after other financial goals and obligations are met. This includes setting and sticking to a budget and meeting savings and investing goals. Therefore, focus on how you can achieve those things first, so you can enjoy the luxurious spending with a clear conscious.
2: Can I Do It For Less?
If the answer to the first question is ‘Yes,’ then proceed to this second one. One reason the answer to the first question might be a ‘yes’ is because it could be a necessity. For example, your car is completely broken down and you need a car to get to work. As a personal example, I ran into this last summer when I needed a new computer for work and school obligations, because my seven year-old laptop just wasn’t up to the task anymore.
Once it is clear why you need to buy a certain thing, and what its purpose is, it makes the answer to this second question clear. Another way of phrasing it could be, “What is the minimum amount I need to spend in order to achieve this objective?”
For example, how much do I really need to spend to get a reliable car to travel to work? There might be some room for debate over what qualifies as ‘reliable’, but it clearly doesn’t include mag wheels, a moonroof and seat warmers. For my computer decision, it was clear I needed something that could handle my daily tasks, but I wasn’t going to need to play the latest and greatest video games.
Ideas for finding ways to do things for less include used or refurbished items, Craigslist, eBay or finding someone with whom you can barter services. A real easy way to get things for less is to get last year’s model, whether that be a car, smartphone or other device. You might feel a little disappointment in the first few weeks, but that will quickly fade, while the additional savings will keep you smiling.
These two questions are simple, and although they are not always easy to grapple with and be honest about, following through on them can save you a lot of money and stress.
Chris Kuiper, CFA is currently a student and researcher at George Mason University, pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.