Afford Anything - PSA Thursday: To Buy or Not to Buy?

Episode Date: December 3, 2020

Many people in the personal finance / FIRE community have a complicated relationship with the concept of consumer spending. They may see family, friends and neighbors demonstrate one extreme -- they���re profligate spenders who will buy anything -- and, in an effort to be nothing like them, they may overcompensate by becoming extreme penny-pinchers. (I see this often at the start of a person’s FIRE journey, when the pendulum is swinging sharply in the other direction). The reality is that neither extreme is healthy. There’s a middle ground between being so gullible that you’ll buy anything vs. being so cynical that you build a wall that shuts real value out of your life and hampers your growth. In recognition of that balanced middle path, today’s PSA Thursday episode focuses on five questions that you should ask yourself before making a purchase. #1: Do I have high-interest debt or an inadequate emergency fund? #2: Is this a purchase or an investment? #3: How long have I been thinking about this? #4: Is this only serving an emotional need, or does it also have greater utility? #5: The five “ity’s” -- longevity, durability, applicability, versatility, utility. We elaborate on these five points in today’s PSA Thursday episode. Enjoy! For more information, visit the show notes at https://affordanything.com/psathursday Learn more about your ad choices. Visit podcastchoices.com/adchoices

Welcome to PSA Thursday. This is a weekly-ish bonus segment of the Afford Anything podcast in which we talk about how to handle life in 2020. If you are new to PSA Thursday, please know that these are nothing like our normal episodes. These episodes are much shorter than what we normally produce. There is no production value. There's no intro music, no outro music, no sound effects. We do minimal editing. These are straightforward bullet point episodes. Each one hyper-focused on one specific topic that relates to life in 2020. So in the past, we have covered how to set up a donor-advised fund if the events of 2020 have inspired you to make more charitable donations. We have covered how to manage your student loans in the context of changes to student loan repayment policies that happened in 2020. We covered how to teach your grandma and grandpa to use technology. We covered how to teach them, including teaching them from afar, how to be more well-versed

with technology. You can find all of these episodes and more in our PSA Thursday archives, which are available at Afford Anything.com slash PSA Thursday. We are releasing this episode on Thursday, December 3rd. It is currently the middle of Cyber Week. It's the week after Thanksgiving. It used to be Black Friday and Cyber Monday, but now it's Cyber Week. And truly Cyber Month. I mean, it's the holiday shopping season. There are stores everywhere inundating us with ads for everything from TVs to clothing to blenders, kitchenware, at-home sporting equipment, any type of consumer discretionary item that you can imagine you're going to be hearing about it this month. It is a major retail month. And so, in acknowledgement of that, the topic for today's

PSA Thursday episode is to buy or not to buy. Five questions that you should ask yourself or five topics that you should consider as you are making a decision about whether or not to make a consumer discretionary purchase. If you Google this question, you'll find a lot of online listicles with repetitive, cliched advice around how to make a decision as to whether or not to buy something. My hope is that what you hear in this episode goes beyond that. Getting to a level that is a bit deeper, a bit more nuanced, and that applies some of the principles of behavioral finance that we have covered in previous episodes of this podcast. So, with that introduction, let's talk about five issues that you should consider when deciding

whether to buy or not to buy. The first one is obvious, and we don't need to spend a lot of time on it, but it needs to be said, do you have credit card debt or do you have an inadequate emergency fund? If the answer to either of those two questions is yes, then this is simply not the time to be making discretionary purchases. This is the time to reduce your spending to only the bare necessities, pay off your high-interest credit card debt and make sure you have at least a three-month emergency fund. Those are your top two priorities. Now, this doesn't apply if you have lower interest loans like student loans,

a mortgage, a car loan. But if you're carrying credit card debt with a 18% or 22% interest rate, that is an emergency. That needs your primary attention. So I won't belabor that point. I think most people who listen to this podcast regularly already know that and already putting that into practice, but I would be remiss if I did not say it. That's number one. Number two, is this a purchase or is this an investment? These two words are often misused. So I'll give two examples, one in which something that is actually a purchase is misstated as an investment. That's going to be the first example, and the second example is vice versa.

Something that's really an investment is often thought of as a purchase when, in fact, it is more than just that. So to the first example, in the world of fashion, it is very common to hear, people refer to staple pieces in your wardrobe, like a blazer, a nice suit, a little black dress. People often refer to these as investment pieces. If you open any fashion magazine, they will say, invest in this blazer. Let's be clear, the only way to invest in a blazer is to own shares of the company that makes it. In this context, when they use the word investment, what they mean is it's a highly useful item. What they're saying is that the blazer is durable.

It will last for a long time. It is versatile. You can wear it with a lot of different items. You can pair it with many different things. And as a result of both durability and versatility, you are likely to wear it with a high degree of frequency, meaning that your cost per use will be low. Now, all of those factors combined may make this a highly utilitarian purchase,

but a utilitarian purchase is not an investment. It is simply a utilitarian purchase. It's a good idea from a consumer spending perspective, but consumer spending and investing are separate concepts. An investment is an outlay of money for which you have a reasonable likelihood, in a risk-appropriate reasonable likelihood, of ultimately generating additional money in the future as a result of this outlay in the present.

In other words, spend some money now to increase the likelihood that you'll make more money later. So in the world of fashion, buying a blazer or a dress or a suit that is durable and classic and versatile, that purchase increases the likelihood that you won't replace it soon. That purchase increases the likelihood that you won't spend more in the future. But there's a distinction between not spending more in the future versus earning more. more in the future. So let's switch our attention and go to computers. Computers are often referenced as a purchase when they're bought for home use. But whether it is a purchase or an investment depends on how you use it. If you buy a computer and use it to build your side hustle,

that computer is an investment because its application is business purposes for the business that you are newly starting. If you buy that same computer and use it to play video games, then it's a purchase. So same item, same you, but its use determines whether it's a purchase or an investment. And so those two examples, the Blazor versus the computer, both illustrate the need to step back before you make a purchase and ask yourself, is this consumer spending or is this an investment? Does it have an income generating application? So that is point number two. Number three, how long have you been thinking about it? If this is something that's been on your mind for a while, and by a while, I mean a minimum of several days, but ideally a few weeks,

then it's likely to be useful and beneficial. It's likely to be a purchase that will enhance your quality of life. If, on the other hand, it's a fleeting impulse, then it may not be something that you'll use. And notice I use the word use rather than need. We need very few things. I mean, you can survive living in a tent at a campsite, eating rice with lentils and washing your clothes in the river. I mean, lots of people do. So there's not a whole lot that we genuinely need, but what will we find useful and what will we find beneficial?

What will get us closer to the best version of our life? If there's something that you've been thinking about for a few weeks, then it's probably something that aligns with what you want to love. let into your space, whether that's your mental space, your digital space, your physical space. You want to be careful about what you let in. And if something has been on your mind for a while, then your mind has thought that through and has enjoyed the idea of letting that thing in. And so the question, how long have you been thinking about it? That itself will offer a lot of insight into whether or not you should go forward with a purchase. So that's number three. Number four, is this only serving an emotional need or does it do something more? Does it have greater

utility? Now, let's be clear, as we have learned through many of the interviews that we've done in previous episodes on this podcast, virtually every purchase serves some type of emotional need. But there are some purchases that do only that while others fulfill an emotional need while simultaneously fulfilling a utilitarian need. So, for example, There are a lot of internet memes right now in 2020, joking with an element of truth about how many people have been drinking a lot of wine and beer while quarantined at home. Nobody needs this. Beer is not critical to your survival, but a lot of people unwind at the end of a stressful

day with a glass of wine. Or in the fire community, craft beer is very popular. The thing is, it doesn't provide any utility beyond just that, which is not. to say that you shouldn't buy it. But it is important to recognize that there's a distinction between items that only provide that emotional balm versus items that also add utility. So wine and beer is only an emotional bomb. Buying candles, scented candles, only an emotional balm. Buying plants that you put around your home. Sure, there's some like air purifying qualities to it, but for the most part, most people who buy plants buy it because of the

emotional joy that they experience from being surrounded by plants. That's why I do. I have a home full of plants. Indoor plants are my thing. So I want to be clear that I'm absolutely not saying that you should avoid these purchases. But when I buy plants, which I do often, or when I buy candles, which I also do often, I recognize that the value that I'm getting from it is purely emotional value. And I still buy it because emotional value does have value, lots of it. But I recognize it for what it is. By contrast, let's take a purchase like books. Books, certainly there's emotional value to that as well. Buying books allows me to fuel my perception of myself as the type of person who reads. And so as a recent podcast guest, Seth Godin would describe, it tells me a story about myself that I like to hear. And so there is that emotional component to the purchase of books, particularly nonfiction books. But at the same time, there's also a very practical application for it.

So it holds that dual function. The same goes with when I buy sunscreen or moisturizer. Certainly, there's an emotional component to that. To the extent to which I want to feel beautiful or to the extent to which I fear aging and want to feel some type of sense of control over the aging process, that desire and that fear both play. into the buying decision, the ultimate buying decision, to purchase sunscreen or to purchase moisturizer. So yes, absolutely there's an emotional component there. But these are also highly practical items for reasons that are so obvious they don't require elaboration. To be clear,

I'm not telling you to avoid purchases that are solely emotional, but I am encouraging you to recognize prior to when you make that purchase, recognize whether it is solely emotional or whether it is both emotional and also utilitarian. So that is number four. And finally, number five in deciding whether to buy or not to buy is to weigh what I call the five itties, ITY. The five ities, longevity, durability, applicability, versatility, and utility. If you're considering making a purchase, think about how that purchase measures on all of those scales. So, to summarize, the five things to think about when you're weighing whether to buy or not to buy, number one is, do you have high-interest credit card debt or do you have an inadequate emergency fund?

That's first and foremost. Assuming that you are in a good financial position to be able to make discretionary purchases, then number two, is it a purchase or is it an investment? Number three, how long have you been thinking about it? Number four, does it only serve an emotional need or does it also hold a utilitarian purpose? And number five, the five itties, longevity, durability, applicability, versatility, and utility. But that is today's episode. Thank you so much for tuning in. My name is Paula Pant. This is the Afford Anything podcast, and I will catch you in the next episode.