When it comes to spending money, we are in a constant struggle between our wants and needs.
As Morningstar behavioral research expert Samantha Lamas explains in her article, The Power of Financial Habits, "In this classic want/should conflict, a 'want' is something that grants immediate pleasure, while a 'should' is something that offers benefits much later--such as healthy retirement savings."
Of course, it’s not always easy to resist impulse buying. Lamas explains that it’s hard to put the "should" aspect of spending into practice because we are all human, and planning for the future is much harder to do than spending now and receiving immediate gratification.
With that in mind, you can set yourself up for success now and in the future by planning and researching big purchases before taking the splurge.
Separating the Wants From the Needs
The first step is assessing where you are financially, and setting up some guardrails in the form of a budget. It is easy to let spending get out of control when you're not really sure how much you should actually be spending, or how much you may need set aside for the future.
A good place to start is determining which of your expenses are necessary--things like rent, food, and other necessities that you cannot live without. You should also include credit card bills or loan payments. Any form of savings should also be factored in as a necessary expense.
Write down a physical list of these expenses to more easily compare it against your income or money you have available, from a job, allowance, gifts, and so on. Subtracting your necessary expenses from your income or available funds paints a clear picture of where you stand financially and how much money you have left over to spend on "wants."
Making the Decision
Creating a budget is one thing, but the most important part is following it. Once you've created a budget, focus on sticking to it and avoid the temptation to finance purchases using credit cards or loans. Being cautious about borrowing helps you be more mindful of your financial goals and stay within your budget.
That said, circumstances may arise that necessitate taking out a loan (for example, buying a car or paying for school). Doing your research on a big purchase can help you manage spending. For example, there are many factors to consider when buying a car. How much you can afford to spend on a monthly payment will inform how much you can borrow and at what interest rate. The term of the loan also affects how much interest you ultimately will pay.
You should also factor in other long-term costs associated with the vehicle, such as maintenance and insurance. A luxury vehicle not only has a higher sticker price, it’s also going to have more expensive long-term costs than an economy car. As you narrow down your options for any large purchase, keep your budget in mind as you research both the immediate and future costs.
Staying on Track With Spending
Just like all other aspects in life, your budget should be everchanging. A good budget is adjusted over time as your lifestyle and circumstances change. For example, you may earn a higher income as you grow older, but your lifestyle may become more expensive as well. The key is recognizing these changes and making the necessary tweaks to continue to stay within your budget and on track with your financial goals.
Creating habits in your life that support a healthy financial standing can also help you stick to a budget and save more money. This can mean directing part of your paycheck to a savings account before you have a chance to spend it, or avoiding places or situations where impulse spending is too tempting, such as the mall or online shopping.
Finally, find discounted or free ways to reward yourself for sticking to your budget. Sticking to a budget isn’t easy, but good habits like investing early and avoiding debt are two extremely powerful factors in long-term financial success.