Whoever said money can’t buy happiness simply didn’t know where to go shopping. – Gertrude Stein
Have you ever just needed to buy a dress or that new electronic gadget? Recently, I met with a couple who needed to buy a car. They had about NIS 50,000 available for the purchase, but they heard about a car that was only three years old with low mileage that was on the market for NIS 90,000.
I had recently done a few searches on the Yad2 website and knew the price range of the type of car they were looking at. They wanted me to give them the stamp of approval to go ahead and purchase the more expensive car. They tried convincing me that due to the low mileage, the car will retain more value if and when they sell it in a few years. It will also require less maintenance than the cheaper car. They went on and on about why it made sense to take a bank loan for the extra NIS 40,000 to buy the more expensive car.
Needless to say, I gave them the stamp of approval – for the cheaper car. You are not going to convince me that it pays to go into debt for a car. How many times have I written, “If you can’t afford it, don’t buy it”?
As I have written before, I do a lot of volunteer work for an organization that helps get people out of debt. One of the exercises we do is have each individual keep track of all of their expenses. Not only do they need to write down each and everything they spend money on, but they also need to rank the expenses. We have four levels of expenses: vital, important, not so important, and luxury. This turns out to be quite eye-opening.
When people have to be accountable to themselves and their spouse about how and where they are spending money, changes start to occur. When one sees in black and white how much money is being spent on things that are not so necessary, the ability to cut down on expenses suddenly becomes attainable.
Think twice
When creating a budget, there are certain expenditures that you can’t avoid. Paying rent, a mortgage payment, utilities, and tuition for school are all fixed expenses. Vacations, gym memberships, and cable TV subscriptions are things you want.
Interestingly, I didn’t include food in either list. That’s because food has elements of both. Certain foods are vital staples, whereas the cookies on sale are not. Even certain things that are usually luxuries may be vital on occasion. For example, I tell couples that in the middle of the summer, on a hot day, a parent who is out with three screaming kids who want ice cream can buy them ice cream. Or if it’s pouring outside, sometimes a taxi is warranted. Use common sense and don’t fool yourself, because at the end of the day, you’ll end up paying the price.
We tend to think that there are certain things we could never live without, yet I would define them as luxuries. As I have written previously, Paula Pant of the Balance.com writes about how Ron Lieber, a money writer for The New York Times, once interviewed Elmo about the difference between needs and wants. “Lieber asked: ‘If Cookie Monster is really hungry for a cookie, does that mean he needs it or he wants it?’ Elmo didn’t miss a beat. ‘He wants it,’ Elmo replied, ‘but if you ask Cookie Monster, he (thinks he) needs it.’ “‘That says it all,’ says Pant. ‘Sometimes, our wants are so powerful that we can’t imagine living without that item. We’d feel like Cookie Monster without a cookie. But – sorry to break the news, Cookie Monster – a cookie is a want, not a need, no matter how much you love it.’”
This deliberation between wants and needs often plays itself out in our home. Our youngest child will often tell her mother she plans on buying something. I then make a face, and she says she “needs” to make the purchase, knowing that maybe I will be happy she used the correct term and approve the purchase. Except that usually after a tiny amount of probing, it becomes clear that it’s a want. Being the youngest, she gets it anyway.
Be realistic
I am not at all saying you should go without luxuries. If you budget and have the money for certain “luxuries,” then go ahead and treat yourself. But if you can’t afford to take the family to France for a week of skiing in the winter, and maybe a three- or four day camping trip in August fits your financial situation, then go camping.
It’s time to be honest. You need to start analyzing each purchase by making sure it’s something you truly need and can afford. If you can honestly differentiate between needs and wants, you’ll be in a much stronger financial situation and ultimately be able to indulge every now and then in a luxury item.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
aaron@lighthousecapital. co.il
The writer is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing