WHENEVER you tell yourself, "That's affordable," be it for a RM100 book, RM1,000 watch, RM10,000 stereo system or, perhaps, a RM100,000 newish second-hand car, what is it that initially runs through your mind?
Is it that you can afford the relevant monthly payments if your purchase of the book or watch is charged to a credit card that is NOT paid off in full each month, or — for the sound system or set of wheels — that you can manage the monthly hire purchase repayments?
Or is your internal monologue focused on the relevant depletion of your store of liquid assets because you more wisely plan to pay off your purchase in full?
Take heed: Because of the ubiquitous Law of the Excluded Alternative, the cash flow or cash lump sum that is expended on our illustrative book, watch, stereo or car is gone (forever) and, therefore, can't be used for some other consumptive expense such as, perhaps, a pair of sports shoes or a holiday, or a productive allocation into growth-targeted savings and investments.
I'm NOT advocating never spending money on nice stuff and experiences for our loved ones and ourselves. What I recommend, though, is for us to nurture the discipline of delayed gratification.
And I do not mean permanently denied gratification, which makes no rational sense because money on its own has no intrinsic value. (Money is our species' ingenious invention of a technology, so to speak, which capacitor-like allows us to crystallise a portion of the time, energy, and talent we expend in economic exchanges.)
What I am advocating is temporarily deferred gratification to allow wealth to compound over time.
PURCHASING DECISION GUIDELINES
Remember, money has the potential to make life better for others and for ourselves because of its stored-value attribute. Unsurprisingly, though, we can't enjoy such benefits past our prime working years if we don't actually store (and, better yet, grow) some of our money.
So, circling back to my opening query about your usual purchasing patterns for "stuff" of all prices, I sadly can't give you specific advice on your next one, three or even 10 buying decisions.
However, I can give you three purchasing decision guidelines:
1. Do you need it, like it, or want it?
2. If you make a current purchase, you will then have less money for something else you might want more down the road. In that light, is today's potential purchase wise?
3. If it is wise, please happily spend your money. But if you think doing so would be foolish or at least not smart, then don't squander your cash.
Should you decide to wait, then by virtue of not spending money that you have, you will be saving it.
Note: Saving money is a vital life skill.
SMART SAVING
In their book Rich Forever — What They DIDN'T Teach You about Money, Finance & Investments in School, wealthy authors Bianca Miller-Cole and Dr Byron Cole point out:
"The plus side of saving is that it does create a pot of money that is available when required. The cash is there when the time comes to buy a house. Or, if you're planning a dream holiday, you won't have to max out on the credit card to pay for it, because you've diligently saved."
The Coles have given rock-solid advice that aligns with the views of 20th century philanthropist and insurance magnate, W. Clement Stone. As I've written before, Stone issued what I consider the best observation of savers and non-savers:
"If you cannot save money, the seeds of greatness are not in you."
In that vein, here are three intentionally linked strands of advice — in strict sequence — that I often give my clients and financial planning workshop audiences:
1. Save first to build up an Emergency Buffer Fund, or EBF, of between three and 12 months' expenses;
2. Build up a savings and investment portfolio, or SIP, that is logically diversified across various asset classes, different geographic regions, and a lengthy multi-year timeline;
3. Create specific sinking funds for lumpy future expenses.
If you heed all three pieces of advice, then when faced with the all-important affordability question regarding any small or large future purchase, you should make your decisions in these ways:
1. For small items, pay cash, or if you use a credit card, pay that balance off in full before interest charges kick in; and
2. For large items, also pay in full, when possible, BUT do not deplete your EBF to do so. Instead, tap into appropriate sinking funds, if these are in place. If they aren't in place, though, pick the shortest viable instalment option to minimise interest-related wastage.
In general, you will do better avoiding as many instalments plans as possible and, instead, using the unutilised cash flow to proactively channel into your ever-growing SIP.
That steady, probably monthly, inflow to your vital SIP can be structured to allow you to enjoy long-term potential profits stemming from volatile but generally rising capital markets through the proven power of the phenomenally effective dollar-cost averaging, or DCA, investment strategy.
© 2024 Rajen Devadason
Rajen Devadason, CFP, is a securities commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; he may be connected with on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You may also follow him on Twitter @Rajen Devadason and on YouTube (Rajen Devadason).