Where does most of your income go? If you are interested in saving more money (and who isn’t?), then one of the first steps to take is to consider where most of your money is going. Less money going out of your pocket means more money saved toward your goals. Expenses fall under two big, ambiguous categories: Necessities and Luxuries. Though it might be intuitive to simply say, “Well, to save money, cut down on the amount you spend on luxuries”, there is more to consider than that. While self-discipline is important to saving money, there is much more value to be had in the power of Distinction. The ability to look at a product or service and know how valuable it is to you is a level of fiscal awareness that sets the “investor” apart from the average “consumer”. It’s a bit vague to talk about Distinction as a concept, so this step-by-step method should make the idea behind it clear. Whenever you find yourself about to buy something, anything, practice asking yourself these questions, in order:
1) Do I NEED to buy this?
This straightforward question is meant to help you decide whether something is a necessity or a luxury. Think about what it would mean if you did not buy this EXACT product. What would the consequences be if you did not buy this? Is it still worth it? If you are still on the fence about buying it after asking yourself this question, that brings us to…
2) WHY do I need/want to buy this?
Thinking about why we spend money on the things we spend it on can give a lot of insight into where our money goes. You may just find that some products lose their appeal, or their appearance as a “necessity”, if you ask yourself this. It’s important to think about why you buy the things you buy; there may be a way to eliminate your need for a product in the future, saving you money in the long run. After this question, if you are still considering the product, ask yourself:
3) Is there a CHEAPER product or service that would work just as well?
A friend of mine had an architect father who illegally made hundreds of thousands of dollars off the government because his employers failed to ask themselves this question (before he got caught and indicted; do not attempt to fool Uncle Sam, kids.) Whenever he was given a project, he submitted a “materials list” for approval, listing everything he’d need and how much it would cost. He would deliberately select over-priced products and brands, then receive money from his friends in those industries when the government bought those grossly-overpriced products. Because the people checking the list didn’t notice they were spending 50 dollars on a toilet plunger, they lost a ton of money before they caught up with what was happening. The point here is that deciding what you’re going to buy is not just a matter of the laundry list of things itself, but a matter of the cheapest, most efficient item/service for the job. Pay attention to how much you spend on a product, what you need it for, and do your research to find out how much that product should reasonably cost. An online search is great for comparing prices. Often times, spending the extra dollar on quality can go a long way toward your satisfaction of a product, and it’s up to you to decide when to spring for quality, but ALWAYS make sure that you’re getting what you pay for, and that you don’t buy products/features that you won’t use.
4) Should I be spending this money on something else?
At one point, it’s essential to sit down and write out your financial needs and goals. Money is a means to an end, so make sure you know exactly what your “end” is. Commit to your goals, and don’t let a short-sighted purchase come in the way of your long-term success. If impulse-spending is a problem for you, consider keeping a written note of your financial goals paper-clipped to your money whenever you go out. Tacky, yes, but it’s a lot easier to be tacky than to be broke. At this point, there is one more question to ask yourself:
5) Would I still want to buy this thing if I came back a week later? A month? A year?
How many things do we buy that only get used once, then sit around collecting dust until the yard sale? Advertisers are getting better and better at their game, and a product that seems infinitely-useful and awesome on the shelf may not be all it’s cracked up to be, and its usefulness may never outlive its price. Think about WHEN you’ll use this product/service, and for how long. Think about how long you’ll need this; is it something you’ll need again and again, or is its use fleeting? The idea of stretching a dollar extends to time, as well. Nobody plans on buying a multi-use item, using it once, then forgetting about it. This is called an “impulse buy”, and it’s the number-one bad spending habit of consumers. Being a smart investor, having the power of Distinction when you buy, protects you from these financial sand-traps.
These questions will protect you from impulse-buying; spending money when you wouldn’t otherwise need or want to. Obviously, it’s not practical to run through these questions EVERY time you spend money. It’d be a bit silly to spend 15 minutes weighing the consequences of buying that pack of gum, but getting in the habit of paying attention to where your money goes and analyzing where it should go is tantamount to maintaining personal financial control and saving money. Practice paying attention, using Distinction, and you will see results. At least, you’ll learn a thing or two about your spending habits and motivations; at most, you’ll find ways to save money based on what you learn about yourself. Be smart, and think.