You probably know that saving is a huge part of a healthy financial plan, but the spending part isn’t always so clear. There are times when spending money now can help you save down the road—and other times when saving now might cost you later.
We can’t tell you when to save and when to spend, but we can equip you with tools to help you make the right decisions for your unique situation. The next time you’re faced with a spend-or-save conundrum, consider the following questions.
Do you need it?
You know, you know: There’s a difference between wants and needs. Medication that keeps you alive? Need. Tickets to a concert in a few months? Want (even if you want it quite a lot).
But most of our daily purchases fall somewhere in between the two: Do you need those slightly-more-expensive-per-pound honeycrisp apples? Maybe not—but you consider fresh fruits and veggies to be a need. Do you need the clinical strength deodorant? Depends on who you ask—you might say no, but your significant other might feel otherwise.
Your first question will always be: Is this a want or a need? For the purchases that fall obviously into the ‘want’ category, try this approach: Save up for it over a period of time in a Goal. This way you aren’t dipping into money you need for your needs in order to buy it.
For your true needs (like the life-saving medication mentioned above), use Expenses to set aside the money you need for them each month, and prioritize funding those Expenses over others. For other, less-urgent needs (like those deliciously crispy apples), figure out a realistic monthly budget that you can stick to, and make smaller adjustments within that budget to help you stay on track. To stick with the grocery example, maybe you can go meatless a few times a week or intentionally only buy seasonal produce to create space in your budget for your honeycrisps.
What is its utility?
When you hear ‘utility’, you might think of a pocket knife with 100 gizmos attached or a pair of pants with a pocket for everything.
But when it comes to money, utility is an economic concept that attempts to measure the satisfaction experienced through a good or service.
The utility of certain purchases—like paying for a necessary car repair—is easier to measure than others—like a more professional-looking winter coat.
Instead of just looking at the sticker price of something, it can be helpful to assign a dollar value to its utility by figuring out its cost-per-use: Sure, spending $200 on a professional-looking winter coat might feel like a splurge—but if you’re going to wear it daily for 4-5 months in the year,you’ll probably get your money’s worth. Extra points if its quality ensures it lasts several years.
However, if you decide to spend $200 on an outfit you’ll only wear once—that might be more of a true ‘splurge.’ Thinking about cost-per-use can help you determine when to spend or save, because it can help you understand the purchase in terms of its utility.
Can you (actually) afford it?
Your bank account and budget should help guide your spending decisions. Ideally, your budget will be set up to help you live within your means. 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, go ahead and treat yourself.
What are your alternatives?
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.
Let’s say you want to learn how to play the acoustic guitar. Sure, you could save up to buy a brand-new Taylor—but what if you end up realizing you’re not that into playing after all? We’d bet money that you have a friend who has a perfectly good guitar collecting dust in a closet.
Maybe you’re feeling puppy fever, but aren’t sure if you can afford to pay to care for a dog right now. Could you volunteer at the local shelter to get your fix, or sign up to foster dogs that need temporary homes?
Is there a coupon you can use? Can you wait for a sale?
With a little creative brainstorming (and sometimes some patience), there are almost always compromises between spending and saving.
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. Yes, the new camera in the latest phone might be amazing: But will your life be drastically different if you get it now, or a few months from now when you’ve had a chance to save up for it?
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.
You’ll probably feel better about your purchase if you save up for it over time, and then take the plunge when you know you can afford to pay for it in full without accruing debt or cutting into the “need” part of your budget.
What else is going on?
Sometimes it does make sense to buy something; just not right now. Even if you have the cash for something on hand (or in your Simple account), you might realize you need that money for some other, higher-priority expenses on the horizon.
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 might make more sense to set that money aside in your savings. If you don’t yet have money saved in an emergency fund or an account buffer, you might want to do that first before making any unnecessary purchases.
Whenever you’re deciding whether to spend or save, don’t consider your purchases in an isolated context; rather, see how they fit in the bigger financial picture to make sure you’re setting yourself up to achieve both your short term and long term financial goals.
For more budgeting tips, check out the Budgeting section of our blog!
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