Understanding What to Buy and When to Buy It

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Understanding What to Buy and When to Buy It

One important aspect of creating disciplined spending habits is to understand the difference between needs and wants and how to make decisions about spending that are rational rather than emotional. For example, you need to buy food every week to feed your family. But you may want to buy a new purse. If you already have a purse in good condition, you don’t need a new purse today.

It’s that simple, but can also be more complicated. Within the category of buying food, which is a need, there can also be wants. For example, you may feel too tired to cook many nights after a hard day on the job and want to go out to eat instead.

Both cooking at home and going out to eat are ways to satisfy the need to feed your family. However, consistently making the choice to eat out makes meeting the need to feed your family more expensive than it would otherwise be, especially if you’ve already bought food at the store to prepare meals at home.

Cost-Benefit Analysis

One way to make a decision on spending money on something you want to buy or do is to use a cost-benefit analysis. Under a cost-benefit analysis, you examine the potential costs and benefits of that purchase.

For example, if you’d really like to buy a new car or a new-to-you used car, but you currently have a car now, you can determine the costs of the new car you want to buy in terms of a down payment and monthly payment for a certain number of years. Then you can compare those costs to what expenses are involved in maintaining your current vehicle.

Here’s how that could work:

By this cost-benefit analysis, it is clearly more expensive to get a new car than to keep your current car. However, as your car ages and needs more repairs, the cost-benefit analysis will shift at some point, and it may be worth it to get a new car. If your car breaks down at some point and it costs more to fix than a down payment on a new car, then it most likely makes sense to go ahead and get the new car.

Appreciable vs. Non-Appreciable Assets

It’s more worthwhile to spend money on assets that are likely to appreciate versus those that aren’t. For example, a home is likely to appreciate, though you can’t count on it making a lot of money for you, as real estate prices are unpredictable and real estate isn’t an easy asset to liquidate.

Other examples of appreciable assets are investments. Mutual funds, which you may invest in through your workplace 401(k) plan, are likely to appreciate over time and be worth more than when you originally invested in them. Stock mutual funds, especially, have potential for appreciation and can help fund your retirement and other long-term goals.

Many other assets don’t carry the same appreciation potential as a home or investments. Cars, for example, tend to depreciate quickly, especially new cars. Depreciation means that an asset will become less valuable over time.