At face value, a good purchase is a simple trade of money for a service or good. Unfortunately, making the right purchase is never as simple.
Purchasing is a display of the complex human decision-making process, involving the logical and emotional sides that will often be in harmony with each other (“I feel tired… I will buy that latte”) but at times may be at war with each other (“I have just enough for rent and food…THAT TELEVISION IS ON SALE, I’LL GET IT!).
With the battles going on in the mind, out of control purchases have the potential to cause overspending.
On the other hand, viewing money as a scarce object that has to be scavenged and saved can play havoc with your sanity as well.
From this, I want to empower you with some thought processes that can make you happier with your money by the purchases that you make. We will cover when to go into debt when purchasing, making purchases that do not result in guilt and we will end with some anecdotes.
These are simply ideas and not set rules. Personal finance is personal, so take this on board as ideas to think about and adapt it to you situation.
As a disclaimer, I am not a financial advisor, and this is just educational material based on personal experience. This post does contain Amazon Inc. affiliate links.
When is it acceptable to go in to Debt
Looming debt repayments can cost you more financially in the long run, and even more importantly, psychologically1. So, entering debt should be treated like stepping into the gates of the underworld.
However, there will be instances where you will have to get into a contract with Hades and entering debt is necessary. Robert Kiyosaki’s idea of the asset and the liability in Rich Dad, Poor Dad explains why this is the case.
An example would be an investment property, where the rent earned from the tenants can increase your cash in hand. Cash itself is an asset because it increases your total net worth, and cash can be used to make investments that can further increase your net worth.
On the other hand, liabilities reduce your net worth. This can be, for example, debt, which has to be paid back. This reduces the amount of cash you have as well as your net worth. The cynics amongst us believe their children and spouse are good examples of liabilities as well.
Kiyosaki’s idea of asset and liability holds similar to the traditional meaning in accounting. The only difference is Kiyosaki determines some assets to be a form of a hidden liability.
For example, a flash car is an asset in the traditional accounting sense. It’s sale can result in more cash in hand. However, as soon as that set of wheels leaves the dealership, its resale value has dropped significantly compared to its original purchase price. This drop is represented as an expense and a reduction in net worth.
The value will continue to decline as time goes on; this is known as depreciation.
In addition to this decline in value, it will start to lose its ‘flash’ and ‘new’ adjectives very quickly and gain new ones like ‘expensive’ and ‘panic-inducing’. Service maintenance, insurance, warrant of fitness and vehicle registration is what is responsible for adding up to the financial tally.
We can see that a car can appear as an asset but hides as a liability with its no-so-obvious hidden costs.
A true asset, in Kiyosaki’s definition, continues to increase one’s net worth. For instance, the land of a house in the long term will continue to increase in value over a long period of time. The future sale is far greater than the original purchase, and this difference is represented as income.
Coming back to the idea of purchasing, we are going to adapt principles from Kiyosaki’s asset and liability idea as a common theme.
There are three main reasons to go into the debt to purchase:
Students are at the ridicule of others with how much debt they accumulate early in their lives. That is understandable; University degrees can’t exactly be purchased at the two-dollar store. Also, not to mention the lost potential income-earning years traded in for books and stationery.
On the flip side, your prized watch can be stolen; your car can be completely flattened by a falling tree; your possessions can be destroyed in a household fire. Nothing can take away what you have learnt and the skills you have obtained through study.
What is your biggest asset? It’s not your watch, your car or even everything you own in your home. It’s you! (That is also why it is important to get health insurance).
Education is a very powerful investment in yourself. You are increasing your ability to learn, allowing you to access a higher income as well as provide satisfaction in life.
Becoming a homeowner involves a lot of sacrifices. A considerable amount of income is diverted to saving up for a large deposit and a major part of life is spent paying down the mortgage for a house.
Sacrifice is not made in vain with lots to be gained. The land your home is built on may go up and down in price but, over a long period of time, it will increase in value in most cases.
You will still have to consider expenses such as the interest of the mortgage, maintenance of the household, rates, as well as recouping costs in obtaining the household like the builder’s report and lawyer fees.
However in most cases, the increase in value will outweigh these expenses given enough time.
In addition to the monetary advantages, psychologically “home is where the heart is”, providing safety and security.
Finally, there is a limit to how much you can save, but as to how much you can earn? Name your price… which will depend on how hard you are willing to work for it.
Buying into a business or working for yourself can provide you freedom and flexibility. The amount of income that you earn really depends on your level of productivity.
If you are able to combine your passion with a viable product or service that is useful to the public as well as having the guts to action through, then the business will definitely pay back in money to live with, excellent learning opportunities, and a life of fulfillment.
When to stay away from Debt
There are some things that did not make the list. This is not an exclusion, but more has to be weighed in when making these decisions.
One of these is a vehicle. A vehicle is necessary for transport to and from work, which is your source of income.
As mentioned before, a car over time decreases in value, unlike a house, which has the ability to increase in value through its land value, generally.
However, a car may be necessary for travel to work. But we must not get caught up in nice heated seating or any luxuries when making a car purchase in order to minimise debt and optimise getting from point A to point B reliably.
Travel is another item that did not make the list.
Travelling can be an eye-opening experience and like education it stays with you until you take your last breath. However, it simply sits as a luxury.
You would be in a better position to save for a trip, rather than worrying about making repayments after you return, also, while suffering from the after-holiday blues.
There will be a situation where taking a loan is inevitable. I am writing this post during the COVID-19 outbreak. It is difficult at times with people losing their jobs and their income.
On television, I’m starting to see the loan advertisements pop up.
For some, taking that loan offer is unavoidable.
There is no shame being in that position. Please make a promise to me and yourself. When you get back on your feet, make sure you get rid of that debt as fast as you can and continue to follow this up by putting money away for an emergency fund. So, you can avoid getting into a situation like this again.
Buyer’s remorse is the guilt felt after making a significant purchase2, and they usually result after making a purchase out of impulse.
But what causes us to make these regretful purchases?
Dopamine is a neurotransmitter – a chemical messenger of the brain – which is responsible for a few functions like mood, motivation, sleep – but most relevant is its ability to form habits through its ability to induce pleasure.
Behaviour that causes an increase in dopamine results in that behaviour being reinforced – a feedback loop.
Looking at an example of a cocaine addict, the spike in dopamine comes just before taking the hit3. It is the anticipation of the high that gets us all excited.
Maybe not in the case of cocaine but in the case of shopping, where the dopamine rises just before you swipe the magnetic strip. In other words, the anticipation of that sweet purchase generally overwhelms all logical sense.
Once the purchase has been made, the dopamine level drops down to normal again, leaving you to deal with the guilt.
Couple this with advertisements of impending sales deadlines; there is also a strong urgency to spend rather than save.
You can see that the rush of purchasing can quickly lead to a downward spiral of overspending.
Using a credit card or other forms of loaning money can be a recipe for disaster as you will feel the amount you have to spend is limitless.
By having the rule to save up for a big purchase rather than open a line of credit, you are able to delay your gratification. The dopamine surge can subside allowing your logical mind to weigh up if that seventh pair of shoes is really worth the spend.
Also, your satisfaction for a purchase will improve. You are training that mental muscle of restraint and you gain a real appreciation for what you have right now. When you do make a purchase you are buying a service or a product that is necessary while setting goals and building good saving habits.
Spending for Life and Passion
A good purchase is deemed if it is able to remove some kind of inconvenience in your life, or it is something that you are passionate about or enjoy. Oppose this to buying something that only adds to your life or to please and impress other people.
Imagine your smartphone is very slow and the battery dies at the most inconvenient time. Rather than struggle with an unreliable phone that might die when you are stranded out in the middle, a new phone will decrease your stress, fear, and frustration that a dying phone would bring.
In this case, I might keep my dying phone because I am too averse to spending money and getting a new phone. But is saving money really worth the frustration?
On the contrary, if you had the flagship model phone last year, getting the flagship model phone for this to impress your friends at your next brush catchup will not add much in reducing any inconvenience in your life.
In this situation, you have spent a lot of money to only increase your happiness by a little bit. Compare this to your dying phone, where you have spent a similar amount to get from anger and frustration to an acceptable level of tolerance.
However, to use Ramit Sethi’s idea of spending graciously on things you love and mercilessly cut costs on things you don’t, if you always require the latest phone and this is something you can finance without going into debt, then this would be an exception. This is what you are passionate about and will increase your overall happiness.
I am grateful for friends. From their actions, they supply you with an endless amount of content. They support you by subscribing to your newsletter and blog, but thankfully they never read your content… I hope.
Example 1: A car… again
My friend, who already has a functioning car, wants to purchase a new car with a bank loan. But they do really need this car?
A new car means less anxiety, there is less chance of breaking down and this is a big plus.
In contrast, we need to look at the risks. A situation may come up when you are unable to finance the loan. This will result in a desperate sale – and you can lose quite a lot in desperate sales – recouping the costs will be significantly less than the original purchase price.
The question to think about is: do the benefits of a reliable car outweigh the risk of the money lost in case of selling the car when a desperate situation unfolds?
Example 2: T-shirts
I think my friend is very talented at coming up with T-shirt designs. The only thing limiting them is the software that they use. An online course will also help in refinding their ability as well as getting comfortable with the software.
I can see that some people would be reluctant to spend money on these things since it is not immediately rewarding like food delivered straight to the front door.
In the long run, the software and course are investments in yourself. T-shirt design can work as another income stream, but you also learn creative skills that last with you forever.
Example 3: Where’s the cheapest petrol station?
I recall a time with my friend where I was on a short holiday with a group of friends. After a long drive, one of my friends insisted that we find the cheapest petrol station to fill up.
After driving for a few hours, we did find the ‘cheapest’ station around.
On holiday, time is precious. Is it worth driving around on holiday for such a small win on saving on petrol?
As humans, decision-making when it comes to purchases can be very difficult.
It is important that when we do decide to go into debt that we do so with the intention of making back the deficit, whether it be financially or through some lifelong skill and perceived value.
By delaying gratification, we are able to make more satisfying and suitable purchasing choices.
Finally, reducing life’s frustrations goes a long way rather than trying to impress others and adding unnecessary things to your life.
In the end, I hope that this helps you so you don’t overspend or over-save, making you happier with your money. Use these as tips to help you thinking and not as a strict set of rules as personal finance is personal.