So What?

Is it so bad to treat yourself or your family to something nice every once in a while? The obvious answer to this is no - as long as you can afford to pay off that indulgence within a few months. No matter how many times you are tempted to rationalize your spending by repeating to yourself that, "It's only money," remind yourself that spending recklessly in the short term will hurt you over the long term. For example:

  • If you use credit to purchase something beyond your budget, you must calculate the interest that you'll pay for the privilege of borrowing someone else's money. Let's say you charged $1,000 on your credit card. At 15% interest and making only minimum payments, you would repay $1,758. That's an additional $758 that you paid in interest that could have been used for other things.
  • If you use your savings to make the same purchase, you'll have to calculate the loss of potential wealth you could have built by leaving these funds in savings. Let's say you take $1,000 out of your savings to purchase the item. Earning 2% interest from the bank, you would have $1,456 over 20 years. Not great, but not bad, either.

As you can see, the cost of trying to obtain something we believe will make us happy is jeopardizing a portion of our financial future. Perhaps one reason these decisions seem logical to us is that for the vast majority of our lives, we're inundated with reasons to spend our money. Eventually, our resistance is worn down, and we adopt some of these reasons as valid - without thinking. This may be why it's so hard for many of us to picture ourselves saving. We've been taught and conditioned to spend. Saving is the exact opposite of spending, so it seems difficult and often feels uncomfortable. It simply doesn't come naturally to us.

Saving / Piggy Bank / Learn About Yourself image

The point of all this is that you need to learn about yourself when establishing a financial plan. It's important to examine your spending habits, to evaluate not just what you're spending your money on, but why you're spending money on these items. This process will allow you to understand the difference between your individual wants and needs. This is not to say you should never buy things that you simply want but don't need. It's simply a reminder to be sensible about your spending. Many of us could eliminate a significant portion of our unwarranted spending if we'd just take the time to ask ourselves, "Is this something I truly need or something I simply want?"