A man counts New Israeli Shekels..
(photo credit: REUTERS)
Have you ever just needed to buy those shoes or that new electronic gadget? Recently I met with a couple who needed to buy a car. They had about NIS 40,000 liquid 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 70,000. 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 in maintenance than the cheaper car. They went on and on why it makes sense to take a bank loan for the extra NIS 30,000 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 people get out of debt.
One of the exercises that we do is have each individual keep track 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, suddenly the ability to cut down on expenses becomes attainable.
Think twice When creating a budget, there are certain expenditures that you can’t avoid. Paying rent or a mortgage payments, utilities, tuition for school are fixed expenses.
Vacations, gym memberships and cable TV are wants.
Interestingly, I didn’t include food in either list. That’s because food has elements of both. Certain foods are staples and are vital, 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 there are certain things that we could never live without, yet I would define them as luxuries.
Paula Pant of 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.”
Be realistic I am not saying that 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, than go camping.
It’s time to be honest. You need to start analyzing each purchase by making sure that it’s something you truly need and can afford. If you can honestly differentiate between needs and wants, you will be in a much stronger financial situation and ultimately be able to indulge every now and then in a luxury.
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.
firstname.lastname@example.org Aaron Katsman is a licensed financial professional in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.