It’s a good idea to talk to yourself a bit before spending the money for anything other than essentials.
the main points
- There is no such thing as “spontaneous spending”. We all have at least a moment to think about what we are doing.
- Each of us is responsible for protecting our own financial interests.
My husband laughed this morning when I told him that I sometimes find myself planning an earthquake. We live in Missouri. It’s not like it couldn’t have happened or hadn’t happened before. It’s not something everyone I know spends time thinking about.
I’m not trying to convince you to add an earthquake rider to your homeowners insurance policy (although it might be a good idea). I’m telling you because it’s only fair that you know I tend to plan for the worst. I’m not specifically pessimistic, but I like to get my ducks in a row in case things go south.
It’s how I approach life, and how I make personal finance decisions. My habit of overthinking things may be one of my least attractive characteristics, but it has become useful more often than I can count.
It all starts with an internal dialogue, questions I ask myself before making a personal finance decision. Here are my top six questions:
1. Do I understand what I’m subscribed to?
I cringe every time I think of all the contracts I’ve signed without reading the exact texts. The fees can eat us alive if we’re not careful, and you’ll find the true cost of the loan buried in the nitty-gritty.
But it’s not just loans. If you invest in your corporate 401k, IRA, or any other type of investment, you pay a brokerage fee. Do you know how much to pay? I know I didn’t bother checking out our early days of investing. I thought one broker was a lot like another. I was wrong. The higher the fee, the less money you get.
Today, I’m that annoying person who makes sure I know what I’m getting into before I commit to anything. This includes reading the contract and asking questions before signing.
2. Why do I want this?
Motivation is a big deal when it comes to money. I used to ask myself why I’m about to make a purchase. Do I want a bigger house because I’m trying to impress others? Do I need new decor in the guest bedroom because I’m feeling sad and think it will lift my spirits? Honestly, of all the things I ask myself before spending money, this question probably stopped me in my tracks more than any other.
3. Am I willing to wait until tomorrow?
“Waiting until tomorrow” to make an investment or purchase means that I have 24 hours to think about whether what I am doing is wise or not. Let’s say the local auto dealership has 0% financing on my dream car and I You have to buy that car. If I’m unwilling to think things through for 24 hours, I know right away that I’m making a mistake.
4. What do I do with the money if I don’t buy this?
I have a friend who loves $700 handbags. Other than a trip to the grocery store, I can no longer make a $100 purchase without asking myself what I might do with the money instead. For example, if I was with my friend when she bought a $700 wallet, my brain would immediately try to calculate how much $700 would be in 10 years. Suppose she invested it instead? At an annual rate of 7%, your $700 would roughly double in 10 years, all thanks to compound interest. If you left her for another five years, her $700 investment would be more than $1,900.
My answer to “What would I do with the money if I didn’t buy this?” It is not always related to investment. Sometimes I think of something like taking a fun weekend getaway with my husband or setting up an obstacle course in my backyard for dogs.
The point is, before making a purchase, I’m used to thinking about other ways the money could be better used.
5. How many hours did you work to make this purchase?
Several years ago, I heard someone say that they routinely calculate how much of their life they trade for anything they want to buy. I remember thinking he was a freak at the time, but darn it if he wasn’t stuck with me. Today, I do it all the time.
No matter how much you earn, you can get paid almost every hour. Let’s say you earn $60,000 annually. Divide this number by 2,080 (the average number of hours worked in a typical job per year). This means that you earn $28.84 per hour. This means that if you buy party tickets worth $500, you are trading more than 17 hours of working time for those tickets.
Let’s face it, sometimes it’s worth it and sometimes it isn’t. For example, I would gladly trade 17 hours of work for a chance to see Bob Dylan, Billy Joel, or Bob Seger in concert. However, I wouldn’t trade 17 hours of my life for a new jacket or pair of shoes.
6. Am I trying to please someone else?
For as long as I can remember, I’ve spent money to make others happy. Friends, family and kid selling wrapping paper at my door – I just want them to smile. I admit that I have not completely overcome this problem. Simply walk up to my garage to find two cases of Girl Scout cookies. My husband and I don’t care about Girl Scout cookies, but we do care a lot about the little girls in our lives to sell them.
Truth be told, spending money to make others happy is a work in progress. Maybe that’s the point. When it comes to the way we handle money, it’s always a work in progress.
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