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The budgeting battle is often won on the field of “wants,” not “needs.”
Housing, transportation, utilities, food…these are non-negotiable in any budget.
And while you can undoubtedly make economies here (the line between need and want is not always bright!), you cannot completely eliminate these budget line items.
On the other hand, as much as 50% of your spending is likely flexible if you subscribe to the popular “50/30/20” budget wisdom. (50% of your income goes to fixed expenses, with the remainder allocated to variable spending and savings.)
You could buy a new sofa, but unless you're truly without a place to sit, you are not required to do so.
You would like a new coat, but if you're not in actual danger of hypothermia, this is an optional purchase.
You certainly must eat, but you don’t have to eat every meal in a white tablecloth restaurant.
If we start with the assumption that as much as half of your spending is to some extent discretionary, how can we use this knowledge to rein in our spending?
What's Driving Your Desire to Spend?
For starters, know your why. If a purchase is not to meet a basic living need, what is it for?
- Is it tied to a core value?
- Does it align with your financial mission statement?
- Will it fulfill a goal?
- Or are you hoping some retail therapy will distract you or make you feel better?
The question to ask whenever you’re facing an optional purchase decision is: “What is the opportunity cost of this item?”
It will be up to you to decide the dollar threshold that warrants this level of analysis; this level of thought is probably not applicable to a cup of coffee.
Conversely, the sticker price of a typical smartphone is $1000. What could you accomplish with that sum if you forgo the purchase?
Yes, we are talking about your goals. If your goal is to pay off your student loan, buy a house or travel the world, how much will that $1000 purchase delay achievement of that goal?
Actually do the calculation! There are a number of good online tools such as this Savings Goal Calculator that can help you make smarter financial decisions.
If you judge that the delay is worth it, by all means, have at it. My suspicion, however, is that this slight pause in your thought pattern will often lead you to put the phone back on the shelf.
How can you create the time and mental space for this pause to occur?
The key is to add a bit of friction to a transaction or even a delay when you’re presented with a spending opportunity.
Then have at the ready a firm set of rules through which you filter every meaningful purchasing decision. (Not every rule works for every type of purchase.)
5 Guidelines to Help Control Spending
Here are a few delaying tactics/spending rules that I like:
1. The In & Out Rule. (No, not a hamburger!) You can only buy X if it is a replacement for Y. Not only does this force you to examine what you really need, but it also cuts down on clutter. Marie Kondo would be proud!
2. The No Credit Rule. You cannot buy anything you cannot pay for immediately in cash or with a debit card. This is a particularly useful guideline for discretionary “service” purchases such as restaurant meals, entertainment events, and vacations.
If for reasons of convenience or safety, you do use your credit card, you must be fully prepared to go online and pay off the new charge immediately. Don’t even wait for the monthly statement to cycle.
3. The Amazon Shopping List Rule. This is a variation of the well-established “24 Hour Rule.” If you identify something online that you want, put it on the internet shopping or favorites list, not in the shopping cart.
If you're still thinking about it a day later, keep thinking about it for another day. In fact, I believe that the 24 Hour Rule should be the One Week Rule. Should you still be obsessed with the idea of having it a week later, fine, go for it…but very often, you won’t.
Believe it or not, “window shopping” (even an online window!) may have fulfilled some need you had more than purchasing the actual item.
4. The Save Up Rule. If you have done the mental homework of evaluating the opportunity cost of a significant purchase and decided to proceed, stop right there, and ask this next question: “Does this need to happen right now?”
If this is not a matter of health, safety, or the ability to earn a living, the answer is likely “no.”
Embrace the wait if you do not have the cash on hand.
If your bank allows for it, set up a dedicated savings sub-account (such as Ally bank’s “buckets”) just for this future purchase.
This can be a terrific motivator that enables you to see progress to your goal and leaves your regular rainy day savings balance intact.
But if you must borrow for an essential expense, you have nothing to apologize for. And for that reason, you shouldn’t hide from the reality of the debt and pretend that it will go away quickly if, realistically, it won’t.
Use an online calculator to see exactly how long, with interest, you will need to pay for this purchase.
*Related Reading: What Are Sinking Funds and Why Are They Important to Have
5. The Have Your Cake and Eat it Too Rule. Can you borrow the item from a friend or family member?
Is there a social media group that you belong to that routinely matches borrowers with lenders in your local community?
This can be an excellent option for everyday items such as tools, specialized cooking utensils or appliances, books (including the library, obviously), camping gear, or lawn maintenance equipment.
Can you rent it?
You can also extend this rule to big ticket items such as cars (Do you need to own a car 365 days a year, or can you use a vehicle share and/or conventional auto rental for your occasional needs?), formal wear, and even homes (Do you need to buy a vacation home when Airbnb and similar is widely available?).
The act of saving money does not make you morally superior. It is neither realistic nor necessary to live a life where none of your wants are met.
When you use the “rules” and tactics above, you gain an opportunity to practice mindfulness in your spending decisions.
The only lousy purchase decision? One that does not align with your values and goals.
Article written by Lisa Whitley, AFC®, CRPC®.
Lisa enjoys having money conversations every day with people from all backgrounds. After a long career in international development, she brings a cross-cultural dynamic to her current work to help individuals and families achieve financial wellness.