The Rules of Splurging
Ever since the recession began in late 2007, millions of consumers around the country have been forced to downsize their shopping habits in order to make do with less. For some, that has meant nearly four years of pinching pennies and devoting much of their money to paying down debts.
As a result, splurging on big purchases – even useful ones like new appliances and electronics – has been out of the question for many, but after years of living this way, some consumers may be giving in just a little bit. Sales on luxury goods increased last year after having declined in 2009, and are expected to have gone up in 2011 as well. Likewise, specialty food sales went up by more than 7% in 2010 and even tourism sales were up in the second quarter of this year.
While that doesn’t mean all consumers are suddenly eating gourmet foods and purchasing Prada bags, the sales data suggest that households are increasingly willing to splurge on certain upscale products even if the overall trend at the moment is still to buckle down and save as much as possible. As a personal finance site, MainStreet generally urges readers to practice smart spending and steer clear of unnecessary expenses, but we recognize that even the most responsible shoppers might experience frugal fatigue and feel the need to splurge from time to time, so we’ve put together a guide for how splurge responsibly.
MainStreet asked several shopping and financial experts to weigh in on the key questions you should ask yourself before going through with a big purchase to ensure that today’s splurge doesn’t turn into tomorrow’s regret. If you can answer yes to most of these, then congratulations: You can spend in good conscience.
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Is This More Than Just an Impulse Buy?
“There are two kinds of splurges,” says Erin Huffstetler, who writes the Frugal Living Guide for About.com. “There are the items that you know you are looking for and are just waiting for the right opportunity to jump, and then there are the items you have not seen before and get wrapped up in that moment where you want to buy it.”
It’s the latter case that Huffstetler and others urge consumers to be particularly cautious about because consumers have less time to think through the pros and cons of making an impulse buy than they do with a big purchase they have been pondering for months. This makes it all the more likely that you’ll end up overpaying for a product you don’t even need. Indeed, the question could be boiled down to something even simpler: Do you need it? Chances are, if it’s something you did need, you would have been searching for it already and it wouldn’t qualify as an impulse buy at all.
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Have I Paid Off My Other Bills?
In theory, there is nothing wrong with treating yourself to a big purchase once in a while – even one that’s an impulse buy – since it is your money. The problem is when you use money that you don’t actually have to make that purchase.
Some consumers, Huffstetler says, do not pay close enough attention to their finances to know what bills are coming up and what debts still need to be paid off. As a result, they might spend money in the heat of the moment that is needed to cover other expenses.
That said, Americans don’t necessarily need to be debt-free to justify making a big purchase. The kind of debt they carry matters.
“The thing you should try to pay down immediately is credit card debt because it’s expensive and multiplicative debt,” says Schwark Satyavolu, CEO of BillShrink.com, an online service that helps users analyze and reduce their spending. Paying down other forms of debt like payday and personal loans should also take precedent over most splurges, but if the only significant debt you carry is your mortgage, you are one step closer to being able to justify a big expense here and there. “Mortgage debt is the last thing you should pay down.”
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Do You Have Enough Saved Up In Emergency Funds?
Just because you’re debt free now doesn’t necessarily mean you’re financially sound enough to start splurging. Before making any major purchase, consumers should take a moment to assess the amount of money they have saved up for a rainy day.
“Maybe you can afford that purchase today, but will you be able to afford it if something unforeseen happens?” asks Huffstetler, who knows something about unforeseen events after a tree fell on her house over the summer.
Each household may have a different goal in mind for how much they need to have in savings, but as a general rule, financial planners recommend setting aside eneough to cover six to 12 months’ worth of expenses to see it through a prolonged period of unemployment or sudden health or repair costs.
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Is Now the Best Time to Buy It?
Even if you can afford to make the purchase, you might still save a significant amount of money by holding off until a later date.
“If you’re looking to buy a television, there are certain times of the year when you can get a better deal, like during Christmas and the back-to-school season,” Satyavolu says. “If waiting a month or two would get you a significant among of savings, that’s worthwhile.”
Along the same lines, Satyavolu and others recommend taking the time to do some comparison shopping and setting alerts for sales in your area so you can figure out the best time and place to purchase the product.
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Will I Be Able to Return It?
No matter how much you research a product and think it through, there is always the chance that you might just wake up the next day and realize you don’t want it, which is why Huffstetler recommends looking into the return policy before you swipe your credit card.
“It really stinks to change your mind about something, only to find out you’re stuck with it,” she says. “Be sure to inquire about restocking fees too.”
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Is This the Best Thing to Spend My Money On?
If the product you’re shopping for is an absolute necessity, then you can ignore this point, but if it’s not, Satyavolu suggests that consumers weigh any purchase against other investments they might make with that money instead.
“When you use your money to buy something, with very few exceptions it depreciates afterwards in value and usually very rapidly,” Satyavolu says, with the exceptions being products made from precious metals like gold and silver or limited-edition items whose value might increase over time. For any other purchase, consumers should ask themselves whether the money might serve them better by going towards investments like a 401(k) or 529 plan where it will multiply.
At the same time, he urges shoppers to use the declining return on investment in their favor. “Whatever you are trying to buy, buy it used because you will save a significant amount of money,” he says. “This way you can take advantage of the depreciation rather than become a victim of it.”
Of course, as anyone will tell you, there is more to be gained from a purchase than monetary rewards.
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Will It Make Me Happy?
This may be the single-most important question to ask yourself before making any purchase, however big. After all, what is the point of buying something that makes you unhappy? That said, it’s also the question that should come at the very end, after you’ve worked through all the other considerations so you have a better sense of how this purchase will really impact your financial and emotional well-being.
“If buying something will make you happy then go for it, that’s what money is for as long as it doesn’t upset your financial security or your family’s financial security,” says Frank Boucher, a certified financial planner with Boucher Financial Planning Services. “There is nothing wrong with splurging as long as you think about what you are doing.”
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