First things first, let’s do a little exercise. Take a look around whatever room in your house that you’re sitting in right now. Look at all the stuff sitting everywhere. Then, try to reduce it to only the things that you really needed to buy. Did you really need to buy that Tom Brady bobblehead? Probably not. So, take that away. How about that electric guitar that you’re dad bought as part of his mid-life crisis? Definitely don’t need that. So, forget that too.
When you’re all done with this exercise, I’ll bet that you only have a handful of items left in the room that you really needed to buy. Listen, the United States is the land of capitalism, it’s what’s made the U.S. a great place. But, if there’s one thing that Americans are good at, it’s buying stuff that we don’t need.
The Motley Fool conducted an experiment back in 2019 that they called, “The Most Wasteful Spending Habits Among Americans” about the top categories that Americans participated in that they considered wastes of money.
Number one was throwing out leftover or expired food, which is something you can avoid by planning out your meals ahead of time and grocery shopping smarter. Number two was eating at fast food restaurants. Number three was buying overpriced beverages, which is probably referring to $10 Starbucks lattes or craft beers.
But, for this article, I really want to talk about number four: impulse buying. So many of us buy things on an impulse that we end up not ever using or even getting buyer’s remorse about. And all of those split-second purchases can add up to a lot of money if you aren’t careful.
So, in this article, I’m going to talk about ways that you can train yourself not to make these sorts of impulse purchases. There are a few tricks that I’ve learned throughout my life, a few questions that I ask myself before making any purchase, that can help you decide whether you should buy something or whether that money would be better off staying in your wallet.
These are the 5 questions you should ask yourself so that you can start making smarter purchases and saving money. Let’s go!
#1: Will I Still Want This Tomorrow?
The best way to tell if something is an impulse buy or something that you actually need is to wait to buy it until the next day. If you’re the kind of person that walks into a store, sees something that you like, and then immediately buys it, you’re just setting yourself up for buyer’s remorse.
So, sleep on that decision. Let’s say you walk into a home appliances store (or, more likely, you’re browsing online) and see one of those sick Ninja blenders that can blend literally anything in a matter of seconds. Those things are sweet. So, you just go ahead and buy it.
Then, seconds after you click the “Complete Order” button or pay the cashier, you realize that you have another blender at home that works fairly well. And you really only make smoothies once a week at most. That’s called “buyer’s remorse.” So, how do you avoid that?
Well, instead of buying that blender on an impulse, you walk out of the store or bookmark that webpage and exit your browser. Then, you go home and get a good night’s rest and you reconsider whether you actually need to buy that blender tomorrow. Chances are you’ll wake up and think, Well, I already have a blender that works and I really don’t use my current blender all that much. I probably don’t need to buy that $130 blender.
And, there you go. You just freed up another $130 that you can put into your savings instead of spending on something you don’t need.
#2: Would You Rather Have the Cash?
Another way to think about whether or not you need to buy something is to imagine that you just won a sweepstakes. In our imaginary sweepstakes, you have two options for the prize you can claim. You can get an off-road e-bike, the top-of-the-line product from outdoor sports company Aventon, or you can get $2,000 in cash.
Well, when you hear this offer, you might start imagining yourself riding through your local trails at 30 miles per hour and having a blast. But, which one would you really rather have? The bike or the cash? Most of the time, the smart answer is going to be to take the cash.
30% of Americans have between $1,000 and $5,000 in credit card debt. So, if you’re in that 30%, then you should definitely take the cash and use it to pay off your credit balance. And about 13.5% of Americans currently have outstanding student debt. So, if Joe Biden’s student loan forgiveness plan didn’t pay off your loans for you, then you should definitely take the cash and pay off your loan by yourself.
Do you need money to pay for a car? To put food on the table for your family? To take buy an upcoming flight to your best friend’s wedding? Well, all of these things are probably more important than speeding through the forest on a new e-bike. So, take the cash.
And you should go through this thought process every time you’re about to make a purchase. Would I rather have this item that I’m about to buy? Or would I rather have someone hand me whatever it costs in cash? If the answer is cash, don’t buy that thing.
If you think that the enjoyment and utility you can get out of that item is worth more to you than the cash it costs, then it’s a good purchase.
#3: How Many Hours Does It Cost?
According to the Bureau of Labor Statistics, the average hourly wage for an American worker was $32.27. So, let’s use that wage for our example here and think about the costs of purchases in terms of hours worked.
Alright, so, you’re shopping on Google or on the Neimann Marcus website and you stumble across a Versace t-shirt. And, you’re like, Whoa, that is the coolest t-shirt ever! You see that this t-shirt costs $275. Let’s look at what that t-shirt is going to cost the average American in terms of hours worked.
If we divide the cost of the shirt by the hourly wage, we get the cost in terms of hours worked. And that comes out to about 8.5 hours, which means that this shirt costs 8 and a half hours of work. Now, before you go and buy that shirt, you need to think to yourself, Would I rather have that shirt or would I rather have those 8 hours and 30 minutes of my life back?
Alternatively, you could think about it like this: Would I rather have this shirt or would I rather work 8 and a half more hours next week? A lot of the time, you’re probably going to choose the time over the t-shirt. And this doesn’t just apply to ridiculously overpriced designer t-shirts. This idea can be applied to any purchase.
Want to get the new Elden Ring game for Xbox? That’s going to cost you about 1.85 hours of work because it costs $59.95.
But, the point is that you should always ask yourself whether you’d rather have the item that you’re looking at purchasing or whether you’d rather have the time that you had to work to purchase that item.
An ancient Greek philosopher once said, “Time is the most valuable thing a man can spend.” And he was right. There’s always going to be new shirts or new video games, but you only get one life. So, value your time and consider what your purchases are costing you in terms of hours of your life.
#4: Why Do I Want This?
Almost everyone has heard the phrase “keeping up with the Joneses,” which basically means that you’re spending money to show other people that you have lots of money rather than because you actually want to. And, in today’s day and age, we might as well replace this phrase with “keeping up with the Kardashians” because social media stars like the Kardashians have made this more of a thing than ever.
Anyone with an Instagram or Tik Tok account can go online and see people living extravagant lifestyles, wearing fancy clothes, going on fancy trips, and all that high-life kind of stuff. And then they start to believe that they need those fancy things too. So, they start spending way above their means in order to portray to other people that they’re living this extravagant lifestyle.
And, meanwhile, they aren’t saving any money or, worse, getting themselves into debt. And they’re not setting themselves up for a good financial future.
I remember back in the day when Patagonia jackets first became super popular. And, suddenly, everyone had to have a Patagonia jacket. Then, I found myself wanting a Patagonia jacket but I couldn’t really figure out why. I didn’t think they looked all that great. And I read some reviews and I found several other jackets that were just as warm and durable that were $100 dollars cheaper.
But, still, I wanted a Patagonia jacket because they were “cool.” Well, I ended up getting one and that decision cost me $100 that I didn’t need to spend. So, my point here is: think about why you want something in the first place before you buy it.
Is it really going to make you happier? Or are you just buying it because you’re worried about what other people will think if you don’t? And people make this mistake with everything from $200 jackets to multi-million dollar homes.
Some people get caught in a circle where all of their friends (who make way more money than them) are buying nice houses in nice neighborhoods. And, suddenly, they’re buying an apartment in Manhattan, the most expensive place to live in the entire U.S., and they’re up to their neck in debt trying to pay off their mortgage.
That’s called keeping up with the Joneses. And, if you aren’t careful, it can ruin you financially. If you’re looking to buy a home, buy something that’s well within your budget and make sure that you’re going to have at least 20% of your income left over after your mortgage payments to put into your savings.
The same thing goes for anything else. Buy only the things that you can actually afford and that are actually going to improve your life. Don’t buy things because you’re worried about what other people think of you.
#5: What Is the Future Value?
If you’ve seen any of my other videos, you probably knew we were going to end up here because I talk about the power of compound interest in nearly every video on our channel. But that’s because it’s very much the backbone of wealth-building and financial freedom.
So, before you make a purchase, consider what the future value of that money could be if you saved it, invested it, and let compound interest do its thing instead.
Let’s do an example. Your buddy has been hosting all the boys over for Monday Night Football every week and he’s got this huge flatscreen plasma TV. You already have a TV, but you want a really big one like your buddy’s so that you can host the boys on Mondays too. So, you go online and you find this T: a Samsung D8000 that costs about $3,350. It’s massive, it’s got great picture quality, and the reviews are fantastic.
Don’t buy it! Let me tell you why. Let’s say that, instead of spending that money on a TV, you put it into a brokerage account and invested it in an S&P 500 index fund, which is always where I recommend people put their savings. Whereas a normal savings account with a bank is around 0.13%, which might as well be nothing, the average annual return for the S&P 500 for the last 60 or so years has been 11.88%.
So, you’re way better off putting your savings in one of these S&P 500 index funds. And let me show you just how much better off you’ll be. Let’s say that instead of buying that TV for $3,350, you put it in one of these funds and let that money sit there for 20 years. Assuming that the S&P averages a return of 10% per year, that money is going to turn into over $22,000 dollars by the end of 20 years. And all you have to do is hold off on buying that TV,
Put that money away in one of these index funds and forget about it for 20 years. If you want to leave it in there for 30 years, that $3,350 could turn into over $58,000! How insane is that? Well, that’s the power of compound interest and that’s why saving is so important, especially when you’re young.
So, before you go out and make any purchase, think to yourself: Would I rather have this thing right now or would I rather have a whole hell of a lot more money when I’m older? If you want some extra motivation, find an online investment calculator and do the calculation yourself. See just how much your money could grow over the course of 20 or 30 years.