by David Miller
“Got it. Spend it.” That describes how most children approach money. As principal of an elementary school, I observed this behavior on a daily basis. Many children bring several dollars with them to school each day. Most just can’t wait to spend it wherever, on whatever, and for whomever they can. They run to the school store to buy sparkle pens for all their friends, soft drinks from the vending machines, ice cream in the cafeteria, or all of the above. They act like they just can’t wait to get rid of it. You can almost see the smoke rising from their pockets.
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Now, as a financial educator, I talk with adults about their spending behaviors and find that many have not put aside those childish ways. And with so much credit readily available to us as adults, we frequently spend it even when we don’t have it. The result is out of control debt and the personal stress that accompanies it.
When will we begin to grow up? Changing one’s attitude towards spending is no easy task with so many external forces telling you to buy now, you deserve it, you can’t live without it, and spending is good for the economy. And there just aren’t many good examples of restrained spending. Certainly don’t look to the federal government as a model for balancing a budget.
As we put away our childish spending ways, with what do we replace them? The answer is planned, disciplined, controlled spending. Any spending choice is an opportunity to make a good decision or a bad one. Smart people follow the same process to make important decisions and, thereby, minimize their chances of making a mistake.
We can use a basic model for any spending consideration, whether it involves buying an article of clothing, a car, a house, cell phone service, a bank loan, or even a college education. The more costly the item, the more detailed, involved, careful, and time-consuming the decision-making process should be. If you make a bad choice, you may be paying for it in a big way and for a long time to come. Occasionally, impulsive decisions work out. Most of the time, they do not.
The best thing about using this process is that it requires us to slow down, think it through, and reconsider at several steps along the way. How many times have you regretted a spending decision? How many times have you been thankful that you did not buy something you thought you really wanted and had to have?
Basically, there are nine steps in the decision-making process.
1. Is this something you want or need? A majority of the time we buy things we want and not necessarily need. Even for essentials, we should still follow the process to get exactly what meets our precise need, from the best supplier, and at the best price. If it is an essential item, jump ahead to step five.
2. How badly do you want the item? A major part of putting away those childish spending behaviors is accepting the fact that you cannot expect to get whatever you want whenever you want it. Depending on the item, you may need to wait and save for a long period of time before making the purchase. Ask yourself several questions to assess how badly you want the item. Where does it fall on my wish list? Am I willing to forego or delay other things on my list to get this one item? Am I willing to make the sacrifices necessary?
3. Estimate its cost. A “ballpark” estimate of the basic cost will do as a starting point for now. This initial cost consideration is part of the process of evaluating how badly you want or need the item. You may want it, but not at the price you will have to pay. Are you ready to forget it now? If not, move on.
4. Consider other related costs. With many purchases, the related costs are much more than the initial investment. For example, the purchase price is just the start when it comes to owning and operating a vehicle. You’ll need to include the cost of insurance, taxes, licensing, maintenance, repair, and fuel. This is especially true for many of our grown up “toys” and sports equipment. How many sets of golf clubs or pairs of skis are sitting in garages because the related costs were not considered in advance? How many boats stay on trailers because the owner doesn’t have an extra hundred dollars in gas money for the weekend?
5. Decide if you can afford it, considering the total cost of purchasing, owning, and using the item. If not, then forget it, wait, or scale down. Paying with cash, not plastic, helps us better realize the pain and sacrifice required. Remember the sage advice, “If you can’t afford it, you don’t need it.” Delaying or nixing the purchase is often the best decision. Seldom will you regret the decision not to buy something. Often you will be disappointed with a purchase you’ve made.
6. Determine how you will pay for it. If the purchase will need to be financed, determine how long it will take to pay it off. Too many times we underestimate the total cost, APR, payment amount, and number of payments. Recalculate the full cost again including finance charges. There are a number of resources on the internet that will perform these calculations. Is the gain truly worth the pain? How will you feel a year or two from now, when you are still paying on the item?
7. Determine which make, model, or type is best for your intended use. You must clearly identify what you want and need from the purchase. This decision is based on your situation, not what the advertisers say you should have. This is where you do your homework by reading, researching, and discussing options, using as many resources as you can locate. These include consumer ratings, reliability reports, feedback from “experts,” input from knowledgeable friends, etc. Now, you can clearly identify what item is best suited to your needs. Do you really need the top of the line or will a lesser model meet your needs just as well? Will the usable life of the most expensive product make it more cost efficient than the lower priced ones? Does a four thousand dollar commercial range add that much more value to your house than the one you currently have?
8. List various sources and compare prices. The last thing you want is to pay too much for what you need. Comparison shopping starts with identifying possible sources and determining their best prices. Price, however, should not be the only basis for deciding where to buy. You need to consider any and all appropriate factors, such as shipping costs, return policies, the company’s record for resolving consumer complaints, convenience, and service after the sale. You may also factor in any other criteria important to you, such as a preference to buy American or support small, local businesses.
9. Determine the best place to buy the item, and the best price, that is right for you. After carefully following this process, the odds that you will make the right decision are definitely in your favor. The regrets and remorse often experienced after making a purchasing decision will be eliminated. You will be happy with your purchase and happy with yourself now and in the future.
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Copyright © 2005 by David Miller. All rights reserved.
