Posted by By Rick McKinstry – Dallas South News Contributor
Wise Spending
As we continue our journey around the Financial Compass we now arrive at Wise Spending. The focus of this article will be 5 key concepts to consider when it comes to spending.
First, it is important that we learn to live below our means, or to put another way, learn to spend less than we earn. Living below your means will allow one to have money left over to accomplish several key financial objectives including paying down debt, building your emergency fund, and funding your retirement plans.
Additional benefits of living below your means include the reduction of financial pain associated with unemployment and income reduction, as well as provide the peace of mind that comes with the knowledge that not every dollar you earn has been committed to current or future expenses before you even receive it.
There are several warning signs that, instead of living below your means, you may instead be living beyond your means. Warning signs include:
- Credit score of 600 or below
- Saving less than 5% of your income
- Credit card balances that are increasing each month instead of declining
- Feeling stressed each month about your ability or lack thereof to meet all of your immediate financial obligations
The items above are not just signs; they are STOP signs, telling you to STOP spending money that you don’t have.
A second key to spending is an understanding of the difference between needs and wants. Far too often we identify a need but fill that need with a more expensive want. For example, given the lack of public of transportation serving many areas in the Dallas Metropolitan area, one could make a pretty compelling case that he/she needs a car to get them from point A to point B.
The question then becomes do you really need a $30,000 car when a $20,000 car will satisfy the real need just as well? Furthermore, the car which we’ve determined we need has to have rims in order to function, but does it really need thr fancy 24 inch variety?
A third key to spending involves the development of a cost versus a price mentality. When considering the purchase of an item, especially the cost of high ticket items, one should consider more than just the upfront price of that item and instead, take into account all of the costs that will be incurred over time that you own the item.
Back to the car example above, the cost of owning a car includes far more than its upfront price. If the car is financed, there will be finance charges that will have to be paid. Also, it is illegal to operate a car in most states without auto insurance so insurance costs also have to be considered.
Not too long ago, gasoline prices were at an all time high driving the cost of operating the car even higher. Lastly, as cars are mechanical, they do breakdown from time to time and therefore generate repair expense. It is not at all uncommon for the total costs of items just listed above to exceed the actual price of the car.
As the US economy continues to sputter, retailers are becoming increasingly more desperate to make sales, thus key number four. Now is the best time in recent memory to negotiate for a better price on virtually everything you buy. In an effort to make sales, retailers who in the past stood firm on their prices are much more open to negotiate.
In many instances it is not negotiation at all, it’s simply a matter of suggesting to the retailer what you are willing to pay for an item. In some cases the retailer will take what you offer, in many others, that suggestion opens the door for negotiation. Keep in mind that you have the money, therefore you have the power.
The fifth and final concept on spending is this, sometimes you simply have to say NO, no to your children, no to your spouse, and sometimes you even have to say no to yourself. If it’s not in the budget, just say no.
Next month, well discuss the fourth and final component of the financial compass, iNvesting.
Rick McKinstry is Personal Financial Planner (PFP) and owner of RLM Financial. He has an MBA from Indiana University and can be reached via email at rlmckin79@hotmail.com or at (972) 821-8948.
Edited by Shawn Williams
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