Most of the talk about money management usually centers around saving and investing. I’d like to talk about spending for a bit. Actually I’m going to encourage spending. We are always buying and with the festive season upon us we have a lot of purchase considerations to make. What I’m going to discuss in this article extends beyond holiday gift purchases of course. Let’s look at the various ways to decide if a purchase is worth it.
90 day rule
Impulse buying is one of the greatest plagues. It’s been known to crash many potential millionaire empires. I use the 90 day rule of purchases. If you want to buy something write it down and place the date of writing down next to it. Wait 90 days before buying. In that 90 day period you will investigate and interrogate your purchase decision. If you still want it after 90 days you should go and get it. This rule does 3 things; assesses if you really want the item, gives you an opportunity to look for alternatives and probably helps you find a better deal. Unless of course you live in a hyper-inflationary environment. 90 days may be too long for some things but if you must shorten the period, never make it shorter than 30 days.
Consider the job; Christensen job theory
According to Christensen’s jobs theory customers don’t buy products they buy the job the product will do. A customer doesn’t want to buy a drill, what the customer actually wants is the hole the drill makes; the job. So assuming a $1500 drill has the capacity to make 1000 holes that’s $1 per hole. Are the holes worth $1 each to you?
There are two very important considerations that this opens us up to; the value of the job our purchase will fill and the possibility of substitutes to do the job.
Direct and indirect substitutes
Thinking further in terms of the jobs theory, detaching our minds from the item to be purchased and rather thinking of the job to be done opens us up to substitutes. If I wanted to buy a calculator I’d have choices between what my mathematics called an adding machine (basic calculator), a scientific calculator and a programmable scientific calculator. But what do I want to do with the calculator? If the intention is financial modeling then the first two are not good ideas. There are also indirect substitutes for the job, such as using a spreadsheets app on my computer or tablet. So instead of spending extra money on the calculator I might be better off downloading the app.
Just because you can pay for it doesn’t mean you can afford it
If there were a better way to say it I would’ve shortened the paragraph heading but there just isn’t! Many a times the ability to make a payment is mistaken for the ability to afford. Look at how the purchase impacts your finances overall. Are there ongoing costs? Are there additional costs as a result of your purchase? Buying a car is not just about forking out the purchase price. Vehicle licensing, insurance, maintenance & repair costs and even the radio license fees. Your purchase decision should include all these. There’s a book called the Automatic Millionaire I included in 10 personal finance books you must read, it covers this subject better than any other book I’ve read on personal finance.
Consider after sales service and support
One would think this applies to more long term purchases. I’ve seen cases where even short term one off purchases were ruined by the lack of after sales support. Sometimes the greatest expenses involved with a product come after purchase. One thing you want to be sure of is that you’ve given your money to someone who will make the process of handling after sales issues easier. If you’re in the market for a modem it would be nice to know that the supplier has good customer support lest you have to pay someone else to help you with technical problems going forward. Just as much as you assess the product, assess the supplier. And never feel like you’re asking too many questions. One of the things any good salesperson has been taught is that the most difficult prospects make the best customers. So they will appreciate your never ending questions.
The takeaway from this can be summed up as 5 questions
- Should I buy it?
- What do I actually need?
- Can something else do the job?
- What are the ongoing costs associated with?
- Am I buying from the right person?
Follow this framework when making your purchase decisions and you will find yourself happier; if you determine you should buy the thing in the first place.