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Buying Stuff Intelligently
2005 December 14
© 2005, Libertiny Financial LLC
Although no one enjoys economic downturns, they can be beneficial. Since your home is really just a small business, a downturn provides us with the motivation to re-examine our income trends and spending habits.
Revenue
Most of us have income (revenue) from one or more of the following source:
Salary
Pensions
Retirement plans
Investments
Just as when we analyze a company's performance during a stock evaluation, the most important number for us is net income. This is income that you receive after all taxes and automatic withdrawals have been subtracted from your gross income. It's what is available for us to spend on taking care of our family, maintaining our homes, taking vacations, and deciding if we really need a new car or plasma TV.
Good businesses strive two achieve things:
Increase gross revenue
Increase net revenue
And these two issues apply to us, as individuals and families, as well.
Amongst a variety of methods, we can increase our gross revenue by:
Negotiating higher salaries
Changing jobs
Increasing the risk/return level of our investments.
Although none of these items are easy to do, they are available options for each of us. To help us make the decision, we need to do a simple cost/benefit analysis.
Examples: "Is taking the risk of changing jobs during an economic downturn worth the (presumed) increase in salary?"
"Am I really comfortable (able to sleep at night) increasing the risk/return level of my investments?" These are some of the questions that you need to ask yourself and your family before taking the next step
Expenses
The other side of the equation involves what we purchase with our net income.
We all have mandatory expenses such as mortgages, retirement savings, children's expenses, and car payments. (Note: A sample budget is available in my upcoming book on budgeting)
In this day and age of low interest rates, it is worthwhile to look at refinancing outstanding loans at lower rates. However, we’re finding that the amount of time that we spend on refinancing is producing diminishing returns on the amount that we save. Interest rates can only drop to a certain point.
Discretionary Spending
Now comes the challenging part. What discretionary spending can you cut while still enjoying your life?
Why is this an important question? We all increase our discretionary spending during good economic times. Salaries increase, overtime pay is plentiful, and investment values increase.
We had nearly a decade of good economic times during the 1990's. Many of us have increased our discretionary spending to the point where our discretionary expenses are a significant percentage of our budget.
The categories that have typically become bloated:
Travel
Entertainment
Telecommunications
It's really amazing how much we spend on telecommunications alone: Phone service, cell phones, cable TV, and the internet. Filling in those spaces on your monthly budget worksheet for actual telecommunication costs is usually an eye-opening experience.
Buying Stuff Intelligently
What do we do about it? Making intelligent buying decisions requires us to focus on two areas:
Gathering data
Overcoming our emotional buying habits
Gather data can be as simple as writing down key discretionary categories and tracking the total spent in each month. Within six months, you’ll see where the challenges are with your spending habits.
Overcoming our emotional buying habits is more of a challenge, but it is surmountable. Contrary to popular belief, men and women both make large purchasing decisions based on emotions. Does this scenario sound familiar? "I went to the car dealer to purchase a nice family sedan, test drove the SUV, and purchased the sports car."
What can we do about? Once you've decided on a price range for major and minor purchases, stick to your budget. Research through magazines and the internet what your available funds will buy and then walk into the store (or internet) and make that exact purchase. Then leave immediately.
A tip:
Browsing in a store is identical to playing Black Jack in Las Vegas: If you stay long enough, the "house" will always win.
A method that I've found to be useful in helping me to overcome emotional decision making: Make your purchase decisions right after you’ve paid your monthly bills and have updated your monthly budget. The reality of doing these two chores has helped me to stick with my budget.
Another tip:
At the very top of your budget should be your top five goals for the year. They could include investing more for retirement. Paying off a loan faster. Going on one large vacation instead of more frequent (and costly) smaller vacations.
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