With all of the progress that we’ve made since the beginning of 2015, I’ve been doing some reflecting about how we got into the hole we were in and what’s changed about our approach to expenses. Planning for our upcoming vacation put a few things in perspective as well.
I’m not saying we’re perfect and we’ve got it all figured out. There are still some challenges that we face on a weekly basis, but for major purchases (excluding things like houses and cars) it’s completely different.
We Really Need a…
Inevitably in life there comes a time when you really need (or want) a… something. Maybe it’s a new dining set, or a replacement laptop, or it’s just time to get the heck out of town and take a vacation. Whatever it is, it’s probably going to be an expense that you haven’t planned and don’t have a budget for.
The next part of the story is the bit that’s changed for me. Presented with the need (or want), we have to figure out if we can (or should) afford it.
How it Used to Go
Once upon a time, in the not too distant past, being faced with a new unexpected expense would result in a simple check of the credit card balance. It was simply a matter of whether we had the available free credit to handle the balance.
That was it.
It was a mistake.
There was never a thought for what that additional balance would mean to our finances. If the credit was available, it was easy to think that we could handle the expense and things would work themselves out in the long run. Oh how naive I was.
The New and Improved Way
Now we have several questions to consider when faced with a sudden expense. I like lists, so I’ll lay the process out like that (though a flowchart may be in forthcoming if I think about it).
Here we go:
- Do we have cash on hand in the savings (not the emergency fund) to deal with this?
- If not, do we have the free cash flow in the next month to absorb the cost of the expense?
- If not, is it acceptable to accrue interest on this purchase if we can’t pay it off in the grace period and how much interest would that be?
- I do want to say that I don’t plan to answer yes to this question ever again, but sometimes things happen (and that’s why we have an emergency fund)
If we get to point number three and i’m looking at an expense that’s more of a want than a need, then I have to say no. We can’t afford it.
Also, let’s face it, some expenses come with emotional attachment as we experienced last year with one of our pets. It was very difficult to say no because of the emotional impact to my wife. However, having the list of criteria to go through logically made us really take a look at the impact of the decision. In that case, we had extra money coming in soon enough that we could afford it.
It’s a Simple Exercise
If you have a handle on your monthly cash flow and budget, then this is a very easy exercise to do when faced with these kinds of decisions. It can help take the emotion out of the equation and help determine the course of action in a thoughtful way.
For us, emotional impulsive spending is how we dug ourselves into a hole. Getting out of that hole takes discipline and logic.