I have discussed how to borrow for college and graduate school previously. After my article about my quarter-life crisis, and my article about cash v.s. debt, it is implied that I have my own process for making purchasing decisions. That process is very straight forward, so I will share it here.
- Will the purchase make me money?
- Will the purchase save me money?
- Is the purchase tied to my deepest desires as a human being?
(For simplicity, I assume that I can afford the item – this is a separate analysis in itself, but must come after these steps.)
Will the purchase make me money?
This question is simple and straight forward, but I ask it everywhere. It is a long-term question, and a short-term question, but I mostly focus on the long-term aspects (5-10+ years). A good example of this is my professional wardrobe. I have a lot of work-appropriate clothing but next to no casual attire. Up till now, I have been of the opinion that jeans and the like will not make me any more money – therefore I am hesitant to buy them. Halloween is coming up, but I am also hesitant to do that because I don’t see myself getting rewarded financially for the cash outlays.
The best example of something that I believe will make me more money on a long-term basis is my professional knowledge. I buy a lot of books because as a CPA, my offering to the world is my professional expertise…I develop this feverishly and for the most part I do not restrict my spending for this cause. That also means that I will spend on related items (someday) such as shelves, and simple library software (my library grows rapidly).
Will the purchase save me money?
I am an active user of credit cards, so I constantly receive offers to buy grocery discount memberships from the credit-card companies or their affiliates. I still have not purchased one because I concluded that they are not for me. I buy groceries for one person; I almost never buy other items; I almost never eat out, etc. The customer service folks always try to convince me otherwise, but I stick to my guns.
Recently I bought an extended warranty for my car because while my car is absolutely essential to my revenue model (job, part-time consulting work), it would only take one major break-down go put a dent in my cash reserves. It is therefore my judgment that an extended warranty will likely save me money – you may disagree, but if you’re wrong you probably won’t be there to fix my car! Managing risk is by definition, saving money because if I am exposed to this risk, it’ll probably cost me.
Is the purchase tied to my deepest desires as a human being?
This is the most important question, but it is also the hardest. I can only answer this now – a few years ago, I couldn’t really say. The best example for this one is my piano, which resulted from my quarter-life crisis. I also have subscriptions to a few services which fall under this paradigm.
What’s the point?
Since I look at money with the perspective of a business, the first two types of purchases are my favorite. They are the best use of my money – from a financial perspective. However, even though I am a business, I am still human and my business model relies on recognition of that fact. There are things which help fuel my creativity, relax my soul, and otherwise improve my quality of life – and those things are important too. It’s not hard to apply the categories above; the true challenge is to block all others out. If something doesn’t fall in any of them, it probably shouldn’t be acquired unless it is completely FREE.
Think about it; what is your test for all your expenditures? Do you disagree with this one – if so, why? What else am I leaving out?