Spending and Lifestyle Decisions

The most important factor in managing our personal finances is our control over where our money is going. Before we can establish financial goals or move forward with a financial plan, we need to be honest with ourselves about our spending habits. And our spending habits are most often driven by the lifestyle decisions that we make. For instance, I need to eat, but I don’t need to eat at expensive restaurants twice a week. I need a car, but I don’t need an expensive new car every two years and the payments that come along with it. These are just two examples of lifestyle choices that will have serious financial consequences. We’ve all heard of the latte’ savings plan where we do without our favorite expensive coffee each morning (oh no!), save the money instead, and watch it grow.

$3.00 at 5 days per week for 52 weeks per year = $780.00 each year.

But this is a single lifestyle choice. When we understand where all of our money is going, we may decide that certain choices need to be revisited. We see that we’ll never be out of debt and saving for our future needs if we’re living beyond our means by consistently making expensive lifestyle/spending choices. It just doesn’t work. When we make buying decisions, we need to discern between what we really need and what we may simply want. Does this mean that I should never have any of the things that I want? Not at all, but it does mean that I should realize the financial trade-off involved in the decision. A one-time decision to buy a more expensive product or to purchase something that I simply want may be fine (even a morning coffee), but typically our buying habits are consistent. If we’re frugal, then we’re frugal about most of our spending. If we’re extravagant, then we tend to be extravagant consumers most of the time.

Impulse Buying

Another enemy of control over spending is impulse buying. We visit a website or we’re in a store and we see something and the impulse to buy strikes. We weren’t looking to buy anything in particular, but now that we‘ve seen the item we have to have it and make the purchase. Advertisers rely on impulse buying to sell a lot of merchandise.

According to Psychology Today, the five main reasons for impulse buying are: the joy of shopping (some people simply love to shop), the fear of missing out on a deal, making quick decisions are easier than researching and comparing, the desire to store-up just in case, and lack of hind-sight (thinking that if we buy something, that this time it will change us for the better).

If we let ourselves indulge in everything (or even most things) that we want, then the things that we need will have to wait. There is also the tendency to accumulate debt. What often happens is that our wants and impulsive spending crowd out our needs, and eventually we’re in financial trouble.

Financial Trade-offs

For most of us, there is a trade-off in every financial decision that we make. If we buy this, then we can’t buy (or pay for) something else. As an example, I need an emergency savings account to see me through hard times, and I need a car. If I choose an expensive car that will require a car loan with large payments, then I trade off saving the money that will go to the car payments. I might rationalize that I can sell the car if I hit hard times. But when a financial setback comes along, my emergency fund will be inadequate because I didn’t save, and selling the car isn’t an option because I need it to get to work (and I don’t hold the title because of the car loan). Now I’m stuck and I’ll need to use credit to handle the setback which just increases my debt.

Accumulating

If we ask ourselves before we buy something, “Do I really want it, and will I really use it?” most likely, we’ll buy a lot less. Spur-of-the-moment and emotional purchases are very often regretted, and a lot of these items end up just being stored somewhere because we really didn’t think before we bought them. Many of our drawers, closets, basements, attics, and garages contain a lot of stuff that at one time we thought we wanted or needed. This isn’t practical or healthy, and the accumulation and storage of things that we don’t use or need isn’t sensible. If you visit a few yard sales one Saturday morning, you’ll see a lot of items that were bought and never opened, or were used only once or twice, and now they’re for sale at a huge discount.

Before we establish financial goals or start out with a financial plan, we need to have a firm control of spending, and understanding our buying habits is a great place to start. Asking ourselves a few questions before a purchase can help with our shopping decisions, often change our minds about a purchase, and help us to see if we’re buying driven by lifestyle or impulse. A minor change for the better can often have a major impact on our financial health. The chart below shows the accumulation of weekly savings of $15.00, $25.00, and $35.00 earning 1% interest in a savings account over a one-year period.