If you want to make the most of your money you’ll want to follow these three simple steps for spending money wisely. They are easy to follow and as you continue to use them they will become easier and easier to do.
A New Computer and a Dilemma
Let’s say you really wanted to buy a new computer for $1,500, and you want to make sure it’s the right thing to do. After all your current computer isn’t that old, and your funds are limited.
What do you do? Do you spend the $1,500 or do you wait for another day somewhere down the road?
How do you know when to spend money and on what? It turns out there are three simple steps for spending money wisely, and they’re very straightforward.
Three Simple Steps for Spending Money Wisely
When you have something you want to buy, and you want to be wise about how you spend money, there are three simple steps you can go through to make sure you are doing the right thing.
Simply check for these three things:
- Funds: Do I have the money? People often see something on sale and they want to “save money” so they put it on credit. They end up paying several times the original price in interest to “get a deal”. If you don’t have the funds, don’t get it. It’s challenging to be successful in life when you are paying large chunks of money to a bank as an “I couldn’t wait until I had the money for it” fee.
- Value: Will this item bring value equal to the money? Is there a better value? Many people think this means that they have to find something cheaper. Actually, sometimes this works the other way. I would rather spend $3,000 on a computer that works for 5 years without maintenance than $2,000 on one that I replace in 3 years and is nothing but headaches (for more information, check out Why Value Has a Price and Bob and Joe Learn that Things are not Things). Regardless of what route you go, make sure that the item has value equal or greater than what you are paying. The best way to do that is to weigh the opportunity costs.
- Opportunity: Is there something else I could use this money for that would bring more value? In the law of finance there is something called opportunity costs. Say you’re at an amusement park and you have $5 of spending money. You see a nice souvenir that you could could buy. As you’re about to pay for it, you catch the whiff of waffle cones and you see an ice cream shop in the back of the store. Suddenly you realize you can either buy the souvenir or you can buy the ice cream. That’s an opportunity cost. When you buy one item, you’ve removed the opportunity to buy the other. Which one is more important is up to you, but in either case, you can only have one. If your computer were broken, spending the money now probably makes sense. However, if it’s still good, what else could you buy for $1,500? Is there something more valuable you could spend the money on?
Of course if you hold off on the computer, the wise thing to do is to think about when you want to buy it, say in 12 months. Then set aside enough each month ($125) to have the money by the time that rolls around. If you do that and follow the three simple steps for spending money wisely, you will find yourself in a powerful financial position.
Bonus: For Those Who Want to Be Rich
If you want to take it to the next level and be rich*, there is one other bonus step in addition to the three simple steps for spending money wisely.
Use freed up money to buy assets. Let assets fund fun things.
Instead of spending all your disposable income on luxuries and never seeing that money again, spend it on assets. Maybe you see things on clearance that you know go for a mint on eBay. Perhaps you know you could make some great items for Etsy that will only cost a few dollars each, but you need a sewing machine.
Instead of spending hard earned money on a night out or a new TV, spend it on assets. When those assets bring in money, use that money for a night out or a new TV.
If you use these three simple steps for spending money wisely and add this bonus idea you will find money to be more of a tool to use for success than something you never have enough of. It’s great to spend money, but when you spend money wisely, you have a lot more to spend on the things that matter.
* The idea of being rich should never involve having more money than you need or having a wealth of money while others suffer. Those of us who have financial security shouldn’t hoard our success; we should do what we can to help others learn and have opportunities for success as well. “Rich” should not mean living in the lap of luxury. Billions of people live in poverty and lack access to food, clean drinking water, and sanitation. We should not live extravagantly when there are millions upon millions of people who would love to improve their lives but don’t have the same opportunities. Rich should simply imply that someone has the means to accomplish what they want in life and can help others do the same.