Does this purchase make my life better?

If you want one powerful, burning question to cut through your financial situation like a hot knife through butter, this is the one. Read more.

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If you want one powerful, burning question to cut through your financial situation like a hot knife through butter, this is the one:

Does this purchase make my life better?

In other words, if you were to exchange an amount of money equal to the price of that item, does your life end up better than if you kept that money in your pocket?

It's a question I use all the time when it comes to the non-essential purchases in my life, things from meals eaten at restaurants, gadgets, beverages, entertainment items, and so on, and using that question seriously is a valuable part of my financial arsenal.

I find this question valuable because it helps you to quickly separate needs, important wants, and trivial or momentary wants. Needs almost make the question seem silly. Important wants make the question seem worthwhile but you begin to see how this item actually is important to you. Trivial wants—which is what most wants really are—begin to look terrible.

For example, "short term" expenditures look terrible. Things that provide a quick burst of pleasure and then are quickly forgotten, like a latte at the coffee shop or a massage or a movie at the theater end up completely missing the boat when it comes to whether it makes your life better.

"Competitive" purchases look terrible, too. When you buy something solely to "keep up with the Joneses," it doesn't benefit your life at all. It just makes your life have a visual appearance of being more comparable to your neighbor, which brings essentially no life value to the table.

Purchases of things you could have borrowed look terrible. While the item itself might actually benefit your life in some real way, the fact that you didn't borrow it means that you threw money out the window, which is a negative against your life almost any way you slice it.

Unnecessary items that you didn't shop for patiently look terrible. As with the example above, if you're buying something that you didn't strictly need right now and then discover it for a lower price in the near future, it's a big negative because of the money you lost. (Over a longer period, that matters less because you paid more for the time you got to use it.)

So what looks good in this light?

Things that you actually need look quite good in this light. Basic food staples, basic household staples, maintenance on the things you rely on every day—those things look absolutely amazing in this context. Those are the things you actually need each day, so when you think of a day without them, it becomes really clear how important they are.

Quality, reliable versions of things that you use a lot also tend to look really good. This doesn't mean expensive versions, but well-researched versions that are actually high-performance "bang-for-the-buck" versions, like a Victorinox chef's knife and paring knife if you cook a lot. Anything that you use frequently that registers as a "best buy" in Consumer Reports or another highly respected magazine (like Cooks Illustrated) that is used to actually fulfill a need (like cooking at home) usually qualifies here.

Self-improvement usually registers well provided you follow through with it. Items that provide genuine lasting improvement to your career or your life are almost always cost-effective, but you have to follow through with the purchase. All of the books and exercise gear in the world is worthless if you don't use it to improve your career outcomes or your physical health.

If you're going to buy a self-improvement item, buy the least expensive version, the "trial" version, and use that first. For example, a gym membership is a great expense if you use it several times a week, but it's a terrible expense if you don't use it. So, one approach you can take is to ask about a short-term gym membership and ask whether or not you can use that as a discount toward a longer membership if you find yourself sticking with it over a few months. Don't buy the expensive, long-term membership before you're sure that you're going to stick with it or else that smart purchase becomes a terrible one.

Time savers can be a good expense provided that you use the time well. For example, if you hire someone to take on some household chores for you, that can actually be a beneficial use of your money provided that you do something with that time that returns a benefit to you that's greater than the expense.

Even things that you want can end up being good expenses here, provided they're well-considered and you've made the effort to find the best value for your dollar on that item. If you spend some time really figuring out whether this item would give you a net benefit in your life compared to the cost (which you can do during downtime, such as during a car trip) and then spend some time researching it and finding the best bargain (which directly pays you back for the time invested), a "want" can often be a worthwhile purchase.

Here are a few more things to keep in mind.

First of all, the "opportunity cost" of the money you spend is really important. Whenever you spend a dollar, you're actually losing all of the other things you could have potentially done with that dollar. If you spend $15 on a book, that's $15 you could have spent elsewhere or saved for the future.

In other words, it's really worth your while to maximize the value you get from every dollar you spend, both through bargain hunting and through thinking through that purchase. Does that purchase you're considering really make your life better? Or is it just something you want in the moment, something that actually has a heavy opportunity cost?

Second, it is really easy to convince yourself that something will make your life better in the moment, so you're usually well advised to think about small and common purchases in advance.

Let me give you a clear example. When Sarah and I lived in this little apartment right after college, it was placed right next to a convenience store. It was literally less than 100 steps from the front door of our apartment to this convenience store.

Because it was so convenient, I used to go there all the time to buy beverages and other odds and ends. It became a crutch of sorts; I'd walk over there after work and buy a beverage, or I'd go there when I had the munchies.

The convenience of the store meant that I never really thought about it too much, and it was all for small purchases anyway. I never really thought of it as a big deal until one day when we were just beginning our financial turnaround and I started to look at the sheer number of transactions that took place at that grocery store.

Every single one was a small transaction, for a bottle of Gatorade or a roll of paper towels or a chocolate bar or something similar. Yet, each one was an overpriced transaction and most of them were utterly unnecessary. Those purchases most decidedly did not make my life better. Not only were they non-essential and completely forgettable, they were much more expensive than if I had made the same purchase at a grocery store.

I would not have reached this realization during my convenience store visits. It wasn't until I really thought about those purchases elsewhere that I came to the realization that it was very wasteful.

So, spend some time when you're not close to your purchases thinking about whether those purchases really make your life better. You'll often find that your perspective on whether things improve your life is very different when you're not caught up in the moment.

Finally, recognize that saving money for the future makes your life better and is a level of quality that other purchases should overcome. Taking that $20 and putting it in your savings account makes your life better than before. It reduces the stress of an emergency. It makes retirement easier.

This should be your baseline to compare purchases to, the improvement that your life undergoes when saving money. Does spending that money cause a bigger improvement in your life than that? If not, you should think very carefully before spending.

Make this question a repeating theme in your head.

Does this purchase make my life better?
Does this purchase make my life better?
Does this purchase make my life better?

You'll find that the more naturally that question comes to the surface and the more accurate your answers become, the better your life becomes because the average quality of your money use is going to go up.

Topics:
  • Saving and Spending
  • Starting Out
  • Saving and Spending
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This article was written by Trent Hamm from The Simple Dollar and was licensed as an article reprint from July 8, 2016. Article copyright 2016 by The Simple Dollar.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third-party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
The images, graphs, tools, and videos are for illustrative purposes only.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917.
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