Navigating the world of personal finance can be tricky, to say the least. There’s no handy user guide that lays out what to do in every single scenario, and money-related issues are rarely black and white.
That’s definitely the case when it comes to figuring out when to save versus when to spend. You probably know that saving is a huge part of a healthy financial plan, but the spending part isn’t always so clear.
We can’t tell you when to save and when to buy, but we can equip you with tools to help you make your own decision. The next time you’re faced with a spend-or-save conundrum, consider the following questions.
Do you need it?
Take an honest look at the expense at hand and determine whether it is a true necessity. It’s OK if it’s not, but it’s important to distinguish between a need (such as groceries or a car repair that’s necessary to keep up with your job commute) and a want (concert tickets or a new dress for an upcoming event).
What is its utility?
Utility is an economic concept that attempts to measure the satisfaction experienced through a good or service. Imagine that happiness was measurable in units. Maybe a Boston cream donut brings you 10 “happiness points” because it’s your favorite food ever and it reminds you of when you were little. For your friend who hates sweets, a Boston cream donut derives zero happiness points. For your cousin who likes Boston creams but adores honey crullers, the former might result in three happiness points while the latter will bring eight happiness points. While this example is a bit arbitrary, it shows that the value of one item isn’t necessarily the same for everyone, and different items offer different values that don’t necessarily have to do with price.
You’re going to be constantly faced with buying decisions, and if you’re splurging on a “want item,” you should pick and choose the items that give you the highest utility over those that don’t give you as much satisfaction. It might take you longer to save $50 for a concert ticket, but if that concert brings you more happiness than 10 $5 lattes, it’s a worthier purchase.
Can you afford it?
Your bank account and budget should help guide your spending decisions. Ideally, your budget will identify opportunities to save and to spend. That $20 bill you just found on the floor may already be accounted for if you’ve overspent your food budget for the month. On the other hand, if you’re already exceeding your saving goals for this period, go ahead and treat yourself.
Are there other options?
You’ve determined that you either need the item in question or that you want it badly enough to justify its expense (and you can afford it). Before handing over the cash, think about alternatives that might make a little more financial sense. You may be able to afford a new dress for your cousin’s wedding, but it’s probably cheaper to rent one from an online dress rental service, and it’s definitely cheaper to borrow one from a friend. Some creative brainstorming can cut expenses, providing a compromise between saving and spending.
What will happen if you don’t get it?
If you find yourself getting a little carried away with a purchasing decision (“But two of my friends just got the latest smartphone!”), take a step back. Ground yourself by considering what your life will look like if you choose to save instead of spend. If your phone is broken and you’re having trouble maintaining your social life and tending to work emails, it’s probably time for an upgrade. If your phone is working just fine, then not buying a new phone just means you’ll end up exactly as you are right now, in a perfectly acceptable and functional state.
What else is going on?
Sometimes it does make sense to buy something; just not right now. Prioritize what else is going on in your life. You might have enough money saved up for a weekend getaway, but if you know you’ll have to buy new tires in a month or two, it makes more sense to set that money aside in your savings. Don’t consider your purchases in an isolated context; rather, see how they fit in the bigger financial picture.
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