Controlling your spending is essential to gaining financial independence and long before that, staying out of debt. Unfortunately, there are all sorts of temptations out there ready to blow the budget. Many things seem like something you need at the time, or maybe a great deal that you just can’t pass up, but give into temptation too many times and you’ll find yourself with little money to invest.
Certainly the best way to control your spending is to only spend money from your paycheck on necessities – and maybe a small amount of no-questions-asked “blow” money – and then use only the money generated by assets to pay for luxuries. If you use money generated by your stock portfolio to take a nice vacation or get that new jet ski, you’ll still have your original funds plus you’ll also have the luxury. Spend your paycheck and the money you earned through your sweat will be gone forever. Budgeting this way, however, is nearly impossible when you’re just starting out, since you won’t have enough invested to make much money for the first several years.
Still, there needs to be some constraints and some thought put behind your spending. You need to learn to control your money rather than letting it simply flow as it does or you’ll end up with a lot of junk and never get anywhere. And that brings us to the next item on the list provided in 10 Dirt Simple Rules of Money Management. (Note, as always, you can find all of the posts in this series by choosing Dirt Simple from the category list in the sidebar or searching for Dirt Simple in the site.) Today we cover the ninth rule:
9. Don’t buy anything that costs more than $100 without thinking about it for at least a day. For every thousand dollars, add another day.
Most things you buy should be on your budget. Ideally, everything should, or at least fit into a category on your budget. And yet there are times when a deal or a special opportunity presents itself. While it is probably alright to buy that laundry detergent on sale or pick up those bananas at Wal-Mart (I really wonder how many bananas they sell by putting them out near the checkout rows. Lots, I’ll bet.), it isn’t OK to buy a time share or a sports car on a whim.
I like to put the limit where I won’t buy something without careful consideration somewhere around $100. Beyond that limit, I’ll go home and consider whether I really need the thing or if it just looked good in the store. Major purchases that cost several thousand dollars I’ll think about for a few weeks or even a month or more, research prices, and again think about whether it is the best place to put my money at this time. Normally, my wife and I pick maybe one big thing to get each year or two, depending on our income and budget. As time has passed and our income from investments has gotten larger, we can buy and do more things, but we still keep our spending under control and plan what we’ll do with luxury spending each year. We might take a big trip every few years, then do some home upgrades and smaller trips on other years. Replacing a car is another option for luxury spending.
Ideally before you make an off-budget purchase, you should go back to the budget and correct it before making the purchase. If you are married, you should be making budgets together and you should get together to discuss changes. This is especially true for purchases beyond a limit, and absolutely true if you are married since both partners should agree on big purchases before they are made. It is perfectly fine to make changes to the budget mid-month if there is a special opportunity. You just need to decide where the money will come from and reallocate it on paper. You may find that the purchase really isn’t that important compared to other things you were planning to spend your money on that month.
Note that one of the neat things about the budget process is that it gets you to talk with your spouse about money decisions, which are almost always directly related to the things that are important to you. A discussion about private school tuition underlies a more fundamental discussion of private versus public school and perhaps religious versus secular school. We spend money on things that matter to us, and if you have disagreements about money, it is often because you have different priorities. It is important to talk about those priorities before things get out of hand and you end up with one of the worst things for your finances and your life in general, a divorce.
Got an investing question? Write to me at VTSIoriginal@yahoo.com or leave a comment.
Follow on Twitter to get news about new articles. @SmallIvy_SI
Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.