I have observed that people have a habit of impulse spending that muddles their spending priorities. I am guilty of that sometimes. One example, I would opt for a less expensive ink pen at the office supply aisle to save $1 and then grab a $1.59 soft drink at check-out while in fact I would probably trade the soft drink for a more expensive ink pen.
That was an example of me failing to prioritize correctly on a very small level. Failing to prioritize correctly on a larger scale can put people in financial crisis. That’s why you should think about alternatives before making a purchase.
Small Scale: Ribeye Steak Dinner Vs. McDonalds
For our family of four, a trip to McDonalds costs us about $20 for two adult combos and two happy meals. For the same amount of money, there is another alternative. We could also easily pick up three 8-oz ribeye steaks ($12.00 @ $7.99/lb), some fresh vegetables ($1.59 for a bunch of broccoli or $3.99 for a bag of pre-packaged salad), a loaf of fresh bread ($1.99), and a bottle of inexpensive wine (Gato Negro @ $4.00 a bottle). Is the convenience of fast food worth the cost versus a steak dinner? I must admit, every once in a while I am guilty of putting down ribeye steaks thinking they are too expensive, only to spend more money at McDonalds for cheeseburgers.
Medium Scale: Vacations Vs. Energy Drinks
How many of us dream of a 7 days cruise in the Caribbean sun frolicking on tropical beaches? Do you often consider it to be way out of your budget? It may surprise you but a 7 day cruise for a family of 4 can cost as little as $2,100 including port charges, taxes and mandatory gratuity (check Expedia for November and December departures). That’s about $175 a month! How many of you have car payments higher than that amount? If you eat out instead of bringing a lunch to work, your lunches might cost more than the cruise. Another expense that many of us would trade are soft drinks and energy drinks. By cutting back on those drinks you might be able to reach this medium scale goal.
I know someone who drinks three Monster energy drinks a day. I am not here to discuss the health benefits or consequences of that habit. From a financial perspective, at an average of $2.50 a drink, this purchase alone for one person in the family could send the whole family of four to enjoy 7 days of sun and fun. Would it surprise you to learn that this person has complained about not being able to afford a nice vacation in over a decade?
Large Scale: Income Property Vs. New Car
Yes, we live in a world that an income property that produces a steady stream of rental income can be as cheap as a brand new car. More interestingly, the income property mortgage can be spread out over 30 years making the payment as small or smaller than some car payments. Today’s mortgage rate is a little less than 4% on a 30 year loan. At this rate, a lazy person’s quick calculation on the mortgage payment is roughly 0.5% of the loan value, i.e., the mortgage payment on a 30 year loan of $100,000 is roughly $500/month. The actual number is $477.42, but the 0.5% rule gives you a good estimate. A good rule of thumb for rental property where I live is to get a monthly income of 1% of your home value. You may not actually get that number depending on your location. Other expenses such as property tax and insurance also depend on your location. Property tax may be as high as 4% in some states. That’s 4% gone from your rental revenue and is definitely a detractor from being a landlord, but I’d bet rentals in the area make up for the difference in price.
Let’s use the numbers I outlined above. At $477/month the mortgage payment is less than a car payment of a vehicle that costs over $30,000 with 0% interest rate, or $26,000 with 2.99% interest rate.
If you delayed purchasing a new car for a few months, and purchased an income property instead, you should be able to rent the property to respectable tenants, giving you an income property and possibly a new car too!
The next time you make a purchase, whether it’s something as insignificant as a bottle of soda or as big as a new car, think about what else you could do with that money. I keep a mental list of wants, from a new pair of shoes to a new kitchen to remind myself of the financial goals I would like to achieve. It keeps me in check, so when I reach out to grab the newest fashion hand bag or iPhone, I ask myself “would I rather have this or take that 7 days cruise later this year?”