How To Make Tough Money Decisions
If you’re new to budgeting or have tried and failed in the past, you’re likely to face some tricky situations that leave you wondering “Is this expense a want or a need?” or “How do I know if I can afford this?”
Below, we answer some of the most pressing questions related to personal budgeting, to help you address those tricky issues.
How To Determine Wants Versus Needs When Budgeting
Some things are a good investment even though they quickly lose monetary value.
For example, buying a cozy new couch that lets your family snuggle up while watching a movie, or encourages your friends to relax and share a few laughs — is an excellent investment.
However, just because something’s a good investment doesn’t mean it’s a smart choice for your financial well being.
Some of the toughest budgeting decisions you’ll make will revolve around the gut-wrenching question of “Do I need it or do I want it.”
Determining your needs versus wants is a critical aspect of budgeting. Every time you make this decision, you’re building the healthy habit of prioritizing needs over wants.
Budgeting doesn’t mean that you can’t buy things that you “want,” even if they’re luxury items!
However, budgeting does require you to make those “want” purchases only after you’ve covered all your responsibilities. This means you’ll frequently have to save for items that you want instead of purchasing them spontaneously.
Some of the things that always fall into the “need” category include:
- Rent, electricity, food, and clothes
- Bills, including any debts you owe
- Health-related medical expenses
- Emergency savings account
- A running car and working phone (not a fancy car or the latest iPhone)
- Reasonable clothing budget
Outside of the basics, you can determine whether a purchase falls into the “need” or “want” category by asking yourself one simple question:
“What’s going to happen to me if I don’t buy it?”
This easy question will often have you laughing at your own logic.
For example, if you can’t buy that new couch you want, nothing bad will happen to you.
Your family will still cozy up for movies or storytime, and your friends will still be your friends – whether they’re on cushions, a couch, or folding metal chairs.
The next time you’re tempted to classify something as a “need” in your life, ask yourself what will happen if you don’t buy it.
How To Determine Whether You Can Afford Something
When your budget is running smoothly and you’re able to adhere to it over time, you’ll eventually fund your emergency savings account and pay off all your debt.
At that point, you’ll have more freedom to spend money on the things or activities you’ve been wanting to do for a long time — but how will you know where to draw the line?
For example, maybe you’ve been eyeing the latest electric bike for some time, imagining all the trips you can take, the fun you can have, and the weight you can lose if you purchase one.
The bike you’re looking at sells for $1,500, and you’ve got a $2,000 bonus check coming soon — does that mean you can afford the bike?
Not really.
A good rule of thumb to help you determine whether you can afford to purchase something is The Rule of Five:
“Can I afford to buy five of them?”
If you can’t afford to buy five of them, in cash, without dipping into your savings, bills, or expense money, then you can’t afford to buy even one of the items.
Following the rule of five will help you determine when to buy something and when to hold off until you save up for it.
The good news is that there are so many ways to bring down the price of nearly anything you might want to purchase:
- Looking for an e-bike? Check out last year’s models on eBay or Facebook Marketplace.
- Dying to do some travel? Check out Trustedhousesitters or Nomador, where you can find free places to stay in exchange for pet-sitting, or Couchsurfing, where you can stay on someone’s sofa for a fraction of the cost of a hotel.
- Wanting to take your date somewhere special? Check out local colleges and universities for quality concerts and shows, or attend an afternoon matinee instead of a prime-time movie.
Setting clear boundaries on how you’ll determine what you can and can’t afford is an excellent step toward financial success.
We recommend The Rule of Five, which requires you to have enough extra cash to purchase five of something before you buy one.
How To Budget When Living Paycheck To Paycheck
Trying to pull together, and stick by, a budget when you’re barely making enough money to live is HARD.
Rather than allow yourself to continue living so close to the financial edge, consider how you might change your situation.
If you’re having difficulty covering your bills and setting aside money for savings and investing, start by reviewing the entire spending portion of your budget:
- Are there spending habits, such as take-out food or Starbucks coffee, that you can cut to save money?
- Is there a way you can eat healthy while spending less on groceries, perhaps by cooking from scratch?
- Can you find insurance discounts that may lower your car, home, or health insurance rates?
- Are you paying too much in fees for services such as banking, news, or music & movie streaming?
If cutting back on your spending doesn’t make reasonable budgeting possible, then there’s only one solution: you need to earn more money.
Sometimes, there’s just no way to gain financial stability without earning more money.
The good news is that there are many ways to make extra money and plenty of side hustles that allow you to work from home (where you don’t need to pay for childcare, transportation, or wardrobe).
Earning extra money, especially while building your emergency savings account, is always a good idea.
If you’re living paycheck to paycheck, you are exceptionally vulnerable to financial emergencies. This type of financial stress puts you at high risk of landing yourself in a crisis situation and usually has a negative effect on your health.
To successfully budget for your future and protect yourself and your family, consider cutting your expenses or picking up a side hustle to enhance your income.