FINANCIAL advisors often focus so much on investing, tax reduction and so on they neglect an equally important part of financial planning: spending.
After all, the whole aim of organizing your finances well is to provide money to spend now and in the future.
To help you get the most for your money, answer the following three questions. Then use that information to decide whether you can afford the item, plus where it fits into your overall priorities compared with paying off debt, investing for the future and spending the money on something else.
. Do you need or want the item or service? Needs trump wants, which can help you decide how high on your priority list this expense should be.
. Does the cost represent good value for your money? To help you make this decision, consider point
number three. . How long did (or will) it take you to earn the money to pay for this expense?
For this calculation, you need to know how much you earn(ed) per hour after all deductions - income tax, retirement savings, and everything else. That's the amount you have available to spend today.
For small spending amounts, use your hourly earning rate. For larger items, you'll need to calculate how much you earn(ed) per day, week, month or even year. And if you aren't paying cash, remember to include the cost of borrowing.
Example: Would you work for two days to pay for an extravagant two-hour meal out? Would you work for a month to pay for a fancy new entertainment system? Would you work an extra four months to pay for a holiday abroad instead of one at home?
Obviously you aren't going to run through these steps for every small expense. But when it comes to larger items, or spending that needs some thought and discussion, then the answers to the preceding questions can help you make the best decision.
Mike Grenby is a columnist and independent personal financial advisor; he'll answer questions in this column as space allows but cannot reply personally. Email [email protected]
