To Save or Not to Save: A Simple Formula for Smarter Spending

Fifth Third Bank

 

Saving money is not just a good habit—it’s absolutely necessary for building a strong financial future. However, that doesn’t automatically mean that spending money is destructive. In some circumstances, like when a certain purchase will save you money over time or lead to a better quality of life, spending money can be even more powerful than saving it.

The key is to determine, in each circumstance, the likely effect of a purchase: Will it save you money over time or lead to a better quality of life? Or will it only satisfy a fleeting impulse?

If a certain result does not seem so clear cut, consider using this simple formula to make an informed purchasing decision:

Step 1: Assess Your Situation

Before moving forward with a major purchase, first establish a solid foundation of savings so you will be protected in case of unexpected expenses or life events.

One crucial—and too often overlooked—component of this foundation is an emergency fund. While 55 percent of respondents to a recent Fifth Third survey acknowledged the need for an emergency fund with six months’ worth of living expenses, almost 70 percent hadn’t saved that amount.

In addition to an emergency fund, you may want to meet other savings goals—say, for example, reaching a certain level of savings in your retirement account or children’s college fund—before undertaking a significant purchase. Take a close look at the savings benchmarks you have set for yourself and remember that a major purchase could delay your progress toward those aspirations. Rather than abandon or postpone your goals, prioritize your savings until you’ve attained a comfortable nest egg.

Step 2: Weigh Your Purchase

If you’re debating a purchase, consider whether it will contribute positively to your quality of life, financial plan, and/or community.

Here are four questions that may help you gain clarity on the potential side effects of your purchasing decisions:

  1. Will the purchase ultimately save you money in the long run? Sometimes spending money today can result in long-term future savings. Purchasing a home may require you to spend some of your savings up front, for example, but years down the road, when you’ve paid off your mortgage, you’ll save money and build equity for yourself—instead of a landlord—by avoiding rent payments.
  2. Could the purchase you’re considering actually be an investment that pays off financially or in other valuable ways? Spending money to learn a new marketable skill. Earning an advanced degree may translate into a higher-paying job. Ponying up for a nice vacation that helps you reenergize and become more productive at work for the rest of the year. All of these are examples of how a return on investment may take any number of forms under different scenarios. Try to look at the positive possibilities from many different angles. Think outside the box. Don’t put your thumb on the “positive” side of the scale simply to justify a purchase, but also be open to the idea that there is more than one way to quantify value.
  3. Does the purchase disrupt your financial plan? Hopefully you have a financial plan or at least a general understanding of your short- and long-term financial goals. Always strive to measure a large purchase against those goals. Do your due diligence to ensure you’re not sabotaging your own financial future or getting off track with your plan. If the purchase you have in mind doesn’t make sense when you compare it with your current financial situation and goals, that doesn’t necessarily mean you shouldn’t make a purchase; you may just need to strategize in a new way, look for a lower price, or wait awhile longer. For example, if the car of your dreams requires monthly payments that will prevent you from paying off your student loans, you may need to opt for a less expensive or used model.
  4. Will the expenditure improve the world around you? In addition to your own monetary goals and desires, the ability to give back to others and your community at-large can be a powerful and fulfilling way to spend your hard-earned money. Whether it's helping a local youth sports team cover the cost of supplies, sponsoring a new bench in your local park, funding a habitat clean-up effort, or any number of other outreach efforts, only you can measure the value of such an investment in others or the community—but, for many, it will be well worth the money.
     

When considering a large purchase, you may never answer “yes” to all four of the questions above. Ultimately, however, if you strive to make smarter spending decisions, you will likely increase your chances of attaining success when it comes to your specific goals, hopes and needs.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank.