In 2013 my wife and I went through Dave Ramsey’s Financial Peace University. For those of you not familiar with FPU, it’s a 9 week course that you can take online, at home or in a group setting, usually at a church. The course walks you through Dave’s Baby Steps and has other lessons on focused on areas like budgeting or insurance. At one point in the course (this might be part of the course or our group may have gone on a tangent) we discussed having a specific dollar amount that you could comfortably purchase without discussing with your spouse. We were mostly focused on spending blow money, but I believe this applies to any household purchase.
From that lesson I developed my own set of guidelines for spending. First, you must decide what dollar amount defines “significant” for your individual situation. A lot of that definition comes from your income. But what stage of your debt free/wealth building journey you are in is also a factor. If you are making six figures and are debt free, then a $200 purchase doesn’t really change the future for you. But if you’re still working on your debt snowball and living paycheck to paycheck, then $200 could definitely be more effectively spent on a credit card payment.
I’ve gradually come to settle on $100 as my “number”. It’s a nice, even number that is enough to make me pause for a bit. It doesn’t make or break me yet it’s still a significant sum of money.
While $100 is significant, it doesn’t really change my situation. But whatever your number is, if you find yourself needing or wanting to spend MORE than that number, it’s time to do a little evaluating. Again, depending on your situation you need to figure out what dollar amount does or doesn’t really affect you. I think that regardless of your income or situation (unless you are earning mid six figures or higher) $300 is a nice round number to use. It might not make or break you, but it’s definitely not insignificant. Before I spend $300 on anything from technology, home improvement or entertainment, I ask myself 3 questions.
- Will I have buyer’s remorse? 3 or 6 months from now am I going to regret this purchase? This usually relates to the more impulsive buys us “gottahaveits” are subject to. Make sure that if you spend this money, you will look back on the purchase and know you made a wise decision.
- Is this impulsive? I’ve said no to more purchases by realizing that my impulsive tendencies took over my brain. We live in a culture so focused on materialism and self-rewarding that we can often get caught up in impulsive “feel good now” buying habits. I walked into a store not long ago and saw a brand new Stihl chainsaw. I immediately had visions of my inner lumberjack, clad in red plaid shredding away at logs, wood chips flying into my beard. I soon remembered that I had a chainsaw (admittedly smaller and less powerful) that hadn’t been used in a good 12 months. And my wood burning stove is old and seriously inefficient. My better judgement forced me to the leave the store empty-handed. Also, don’t be afraid to pass up on a “good deal” if you hadn’t budgeted for the purchase or if you know you are being impulsive.
- What’s the opportunity cost? Put simply, opportunity cost is losing a future benefit or profit in order to acquire something now. If you spend $300 on a purse today, you lose the ability to spend that same money on something that might bring you more joy or satisfaction in the future. When we vacationed to Hawaii for our 5 year anniversary we had a garage sale to raise close to $200 for a nice dinner on our last night. Had we spent that money on something before we vacationed, we would have had to sacrifice elsewhere or lose that chance to enjoy a nice restaurant. That’s opportunity cost.
These rules aren’t designed to stop you from spending or enjoying money. They are just those annoying little rumble strips on the highway for when you start to veer off course. So what’s your number? Do you use the same guidelines I do or do you utilize a different strategy?