Determining the difference between the two is one of the hardest financial decisions everyone has to make. It’s also the key to staying on budget and being financially responsible. This will also keep you from going broke. So many of us smear the lines between the two that we end up not knowing up from down. Then we end up spending $120k on a Benz when we only have $300k to our name and live in the heart of the hood with no job. Yes…. I had a client actually do this EXACT thing. Needless to say, it resulted in financial ruins.
So to help you determine the difference and not to repeat the mistakes of my client, I’ve provided you with 3 important questions to always ask yourself when trying to determine between the two.
1) Is it a necessity of life?
Food, water, clothing, and shelter are the bare necessities we need to survive. Now I’m not recommending that you only stick to those, but when you’re broke or running low on funds you need to stick to the basics. Better yet, you need to plan out the purchasing of these items on a paycheck to paycheck basis.
Designate a certain portion of funds, we usually designate $100-$150 per paycheck, to make one huge shopping trip at your local grocery store. As far as clothing goes, as long as you have several tops, bottoms, under garments, and shoes in your closet already then you really don’t need to go purchase a new wardrobe every single weekend.
Save your money and let it grow.
2) Is the item worth the price paid?
Is going out and buying a $1,000 suit worth it when you can purchase the same quality of suit for $400 at a different store? The answer is no! I know I had some yes answers out there. You may be the ones who need this advice the most.
Now don’t get me wrong, some things are just worth the price paid for them. But most things aren’t. So there’s no need to go out and buy 5 shirts when you only need 1 and already have 50 of them in your closet. Same goes for eating out every meal instead of cooking some meals at home. Cut the trans fats out and learn to be Chef Boyardee with them raviolis from the can. I know that’s not much better than McDonalds, but at least it’s cheaper and will potentially last 2 meals.
Yeah, kind of got side tracked there… Back to the regularly scheduled program.
The point is that you need to review your budget and determine if you have enough surplus cash to support these habits. If you’re budgeting correctly then you should have your answer within a minute. Also, plan out your spending limits for these luxury type items and stick to it.
It’s ok to plan for these type of purchases. Don’t push off paying your light bill because you want a new outfit to go out in that night. If you don’t have lights then how everyone going to see your fly fit in the dark? You going to use a candle?
3) How much money will remain after this purchase?
The answer to this question will determine if you need to create a plan to save for these items or not. If you need to plan out these purchases on a normal basis, then you most likely don’t need it, can’t afford it, or both. So be humble and sit down, at least until you have the excess funds to make the purchase.
What you need to do is look for alternatives, off brands, or just reconsider the purchase all together. Clearance racks are your friends, I know they’re mine. Nothing wrong with getting last season’s fashion for a quarter of the price. Don’t stay in the poor house because you want everything right now. Practice some patience and discipline, it will pay off exponentially in the long run.
Having wealth is not about the size of your paycheck. Wealth is determined by how much money you have in the bank, investments, and assets. It ‘s also determined by how long your money can sustain your current lifestyle without any drastic changes.
Spending all of your money till you’re on $0 will never make you wealthy.
I Truly believe that if you ask yourself these 3 questions before making a purchase, especially a big one, then you’ll be on the right path to becoming financially secure.
If you can’t afford it, don’t buy it.
Stay tuned for more financial tips.