11/15/2012 3:45 PM ET|
5 questions to ask before you spend
You want that shiny object, and you want it now. But take a deep breath and ask yourself these questions before you open your wallet.
Even in an age of belt-tightening and economic hardship, overspending is still as American as apple pie and infomercials.
Americans owe $870 billion in revolving debt, according to the Federal Reserve. Even worse, much of that debt is on credit cards, which charge an average of 14.5% in annual interest, according to Bankrate data from early August.
Still, it's not as if chronic overspenders don't know they have a problem. Every year, millions of Americans buy personal finance books, tune in to personal finance gurus and make grand plans to put overspending in check. Some even take real steps such as establishing a budget.
But often, the battle against overspending is actually fought in the retail aisles, says Michael Goldman, a financial adviser and the founder of Wealth Gathering, an online community for personal finance.
"It's often those little impulse buys that add up and tend to go on credit cards," he says. "Many of my clients are surprised when they discover how much they spend on eating out on the run, or (racking up) those $200 bills at Target when they just went in to buy one thing."
Learning to ask a few simple questions before making every purchase may help you control impulse buying and win the battle against overspending over the long term.
Can I afford this?
It may seem obvious that people should ask themselves whether they can afford something before buying it.
But answering that question is more complicated than simply knowing whether you have room on your credit card or a balance in your checking account to cover it, says Cynthia Freedman, the founder of Freedman Financial Planning in San Jose, Calif."You might have a nice bank balance, but if all of your money is obligated to other bills, then that does not mean that you can afford to make that purchase," Freedman says. "You really, really need to live on a budget and know how much you can afford to spend on a given category in a given month."
Freedman recommends setting limits for categories of spending, such as clothing and entertainment, and tracking how much you have left to spend in each category on a daily basis. Whether you do that by stuffing your cash in envelopes or putting together a spreadsheet, the goal should be the same: knowing what you can spend before you go shopping.
What am I getting out of it?
Affordability shouldn't be the only factor when you're deciding on a purchase. Lots of people who bought a Shake Weight or GLH9 spray-on hair can tell you it's entirely possible to make a stupid or regrettable purchase you can easily afford.
The trick to avoiding a regrettable purchase is taking a second to really think about how much satisfaction you would get out it, Goldman says.
"Ultimately, I think there is no good purchase or bad purchase in an absolute sense," he says. He suggests finding a small comfort that you particularly enjoy, such as a massage or a bottle of wine, and using it as a measuring stick for other purchases.
"One of the things I can do is say, 'Hey, am I going to get more satisfaction out of spending this $10 on this lunch, or would I get more satisfaction out of spending that $10 on my small pleasure?'" Goldman says.
Ultimately, if the only satisfaction you get from an item comes from the act of buying it, it's probably not a good purchase, says Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling.
"Is it really going to bring me long-term pleasure, or is it going to be a short-lived high?" she says.
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this is simple for me, I just ask myself do I want the crap that my money will buy! Or do I want the money, It's always the money Duh!
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