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Friday, November 28, 2014

There’s no wrong way to spend

Posted by Robert on December 10, 2012

I was teaching Junior Achievement to a class of 12 year olds this past week. I had a lot of fun, because we were talking about how to handle money, and the kids really responded well. Many of them seem to be quite responsible already, and it (somewhat) restored my faith that our nation isn’t going to hell in a handbasket because of adults who are all hopelessly in debt.

We had a number of discussions about how they decide to spend their money. Do they spend all the money they get, or do they save some? Most of them save at least some of their money. A few have goals of things they’re saving toward, such as a game console or a remote control car. One saves all his money and has over $500. Even the ones who spend all their money explained that they save their money until they have enough to buy what they want, then spend it. Do they buy new or used? Some of them prefer to buy new because of quality and durability. Some prefer to buy used in order to save money for other purchases.

What I explained to them is that there is no right or wrong way to spend their money. Other people may (and probably will) disagree with some of our purchasing decisions. Even among the group, there were differences in what they enjoy (gum or chips or pop, video games, a pet), but just because someone else would spend their money differently, doesn’t make it a wrong choice. There are three things to know, in my opinion, to make good spending decisions.

Know what makes you happy. In my case, I drive a minivan that’s almost 10 years old and isn’t pretty to look at. It’s not a car that I’m proud of. I could buy a new car, or a newer car, but would it make me happy? I bet for a few months it would be fun to drive something fancy, but I know myself and I know that the novelty would soon wear off. Having an expensive car, rather, would make me worry about my kids not scratching it or ruining the interior and about avoiding it being stolen. I don’t believe I would have an enduring feeling of happiness about a new car. A friend of mine, however, when he finally bought a nice one, loves his car and is very proud of it. My iPhone, on the other hand, is something that makes me happy for hours each day over the two years I’ve owned it (which is a good thing, since it’s on a three year contract).

Have priorities. In our class, we created a budget and looked at some of the many things the kids would like to spend money on. Fancy headphones, skis and a computer made the list. But they all came further down the list than shelter, food and pet care. In this example, they saw that they need to spend their money on the most important things first, then use money in the order of their priorities. Pet care, for example, came above the headphones. They also indicated that they would spend less, if possible, for a cheaper version of their fancy headphones so that they would have more money for skis. After that, however, they might need to save up for a few months to be able to buy a computer (with our example budget).

There is one wrong way to spend. It’s essential to spend less than you earn. Your spending choices are very much your own. And your priorities are personal. Using your money on your priorities is your choice, whether you use cash, debit or a credit card. However, once you incur debt, your choices are no longer entirely your own. If you use a credit card for purchases and pay it off entirely, there’s no change to your budget. But once you carry a balance (or get any other form of loan), your budget now needs to include interest payments. That shrinks the amount of money that’s left to spend on what you want. It also distorts your priorities, because interest payments must be met first, before even spending on essentials like food, shelter and clothing.

Your money is yours. You work hard for it. When you choose to spend it, you should consider getting something that’s going to bring you enduring pleasure. You have your own priorities, and what your friends think you should buy or what a commissioned salesperson is trying to sell shouldn’t enter into your choices. But it’s important to spend less than you earn so that you don’t accumulate debt, which robs you of your ability to set your own priorities and spend your own money as you wish.

What would you tell young people about how to be responsible in spending their money? What do you wish someone would have told you?

Comments

4 Responses to “There’s no wrong way to spend”
  1. Goldeneer says:

    Great post Robert. I agree that there is no wrong way to spend discretionary income. It makes no difference whether money is spent on travelling or electronics as that is a personal choice. You teach your class a very good point about prioritizing your planned expenses.

    On the other hand, I would argue that the total money saved every month should reflect one’s personal goals such as retirement or financial independence. There is a right answer and that is a personal one.

    The one thing I learned about increasing my discretionary expenses is that no matter how much money I get to spend, it is always a tradeoff of something else I could spend money on. Regardless of if I have $200 or $2000 to spend every month, I need to prioritize my desires.

  2. MW says:

    To save a portion because there will always be something down the road you may prefer more that will require money. Saved money = options & opportunities.

    Continual learning about yourself and what your personal enduring pleasures are is so valuable. Saves time, money and one from buying everything everyone else is just to find you don’t get the same kick out of it.

  3. Robert says:

    Goldeneer, MW, you both make very good points about saving for the future. We talked about that in the class, but honestly 12 year olds have no real concept of what that means. Once people are adults, however, they should be saving at least 10% of their income, more if they can manage it. If you have specific goals, you can move past this very rough rule of thumb and figure out exactly how much you should be saving.

  4. greg says:

    @goldeneer: “I agree that there is no wrong way to spend discretionary income” – the question then becomes “what does one consider discretionary”?

    If I invest 3 times my living expenses every year, surely I can consider much of that as possible discretionary spending by most people’s standards. But then something happens, I have insurance for neither my residence or my health because of my own decisions. After I blow through my few years of savings, should I be able to ask for money from others? What about take money from others by depending on government programs? Where do you draw the line between reasonable and “mooching”?

    It’s a huge problem. Of course, we know what all the hardcore Austrian economists say – let people make their own decisions and succeed or fail based on that. Not quite what Jesus taught, but I think there has to be some part of that, too, or we have a Denial of Service on responsibility.

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