A Federal Reserve survey of people from various demographics and pay ranges found that 47% are unable to afford a $400 emergency without borrowing money.
Let that sink in, because it’s a staggering statistic. That survey reveals that 47% of Americans don’t have enough money set aside to purchase the newest iPhone.
So What’s The Problem?
We live in one of the most affluent countries in the world. So why is a $400 emergency enough to capsize so many American families?
Most people assume the problem is a lack of income. But if you’re not managing a small- to- medium- size income well, then you certainly won’t manage a large income well.
So if income isn’t the issue, then what is? Nick and I believe that difficulty saving money stems from the neglect of one fundamental question… “What’s my why?”
The Step You Keep Skipping is Holding You Back
Most financial advice starts by telling you to set and stick to a budget. It’s simple, right? Just don’t spend more than you earn. But most people have about as much success sticking to a budget as they do a diet or exercise program.
The foundation for tackling all of these goals is to identify your why. Nobody else can do this for you. Heck, if you tell other people your why, they’ll probably think it’s ludicrous. But guess what! It doesn’t matter.
What does matter is that you establish why you want to get your finances under control. Then you need to keep that why at the forefront of your mind whenever it’s time to make a spending decision.
Write Down Your Why
When Nick and I last sat down to discuss our budget, we came up with this why: We want to manage our money so that we can continue to travel full-time with our pets while saving for our future, including a house downpayment, adoption, and long term wealth.
That why statement is a great start. But it doesn’t really give us a specific way to analyze our spending decisions. Which leads us to our next step…
Identify Your Top 5 Spending Priorities
Based on your why statement, identify your current top 5 spending priorities. And remember, these can change over time.
Here’s our top 5:
- Spending time with each other/ family/ friends
- Making our living/ work space relaxing and enjoyable
- Being able to take good care of our pets, including high-quality food
- Traveling and exploring the local scene
- Saving for the future and unexpected expenses to decrease stress (for more on emergency funds see this article)
So What Do These Priorities Actually Tell Me?
Now that we’ve got our priorities written down, how do they actually shape our decisions? Well, 99.9% of our purchases should contribute to at least one of those 5 priorities. If a purchase doesn’t contribute to one of those 5 priorities, then all it does is take away from money that could go toward our downpayment or retirement.
Seriously, the mental capacity that I spend keeping myself from making stupid purchases is alarming.
But we live in a world of consumerism. Most of us are blessed to have our “needs” well taken care of. But unfortunately, it makes us complacent about how we spend the remainder of our hard-earned money.
What Outcomes Are You Attributing To This Purchase?
We’re continuously bombarded by well-curated advertisements created to convince us to spend, spend, spend! And the default answer for most of us has become, “Yes! I do want that! How did they know?!”
Don’t let “Yes!” become your default. Most of the time, we’re quick to make a purchase because we subconsciously think it will bring a certain outcome (spoiler alert: it usually won’t).
Hanna Wants to be Carrie Underwood
For example, a few years ago I walked into a Dick’s Sporting Goods store and got sucked into Carrie Underwood’s section (AKA Calia brand). I went into a spending spree, buying a new pair of workout capris, a sports bra, and one of her inspirational tank tops. (If you’re thinking that doesn’t really sound like much of a spending spree, then you haven’t checked out Carrie’s prices… good for you haha).
A few weeks later, I realized that I really didn’t like how any of these items looked on me. I’m pretty short, and I felt totally overwhelmed by the wild pattern on the leggings. I already had 5 other sports bras. And I’m cold all the time, so I rarely wear tank tops.
I didn’t realize it at the time, but my main motivation for buying each of these items was, “Well, if I have Carrie Underwood’s gear, then I’m one step closer to looking as awesome as she does.”
But that’s a lie! Carrie Underwood looks awesome because she takes her health seriously. She eats well and works out all the time. And let’s be honest, airbrushing doesn’t hurt either.
I don’t need Carrie Underwood’s workout gear. I need her discipline. I need to wake up early, workout regularly, and cut back on my ice cream intake.
There are a billion other examples of things I’ve bought because I subconsciously attributed a false outcome to the purchase. Don’t make my mistakes!
Slow down, think about your why, and analyze whether that purchase actually lines up with any of your top 5 spending priorities. And be honest with yourself. Are you attributing an unrealistic outcome to this purchase?
If so, take the money and run!
What are the Trade-Offs?
The next thing you want to do is consider the trade-offs.
If Nick and I spend money going out to get Chik-fil-a tonight because I’m feeling lazy, that will use up most of our “eating out” budget for the month. Which means we won’t be able to try any local coffee shops or restaurants we come across the next few weeks.
And I know Nick will help me with dinner, especially if I tell him I’m just not really feelin’ it tonight. So I’d rather suck it up, have a simple dinner at home, and have money to spend on eating out another time.
Or maybe I’m considering getting some sort of decor item for the Airstream.
It’s only $35, but that’s $30 more than I have left in my “spending money” budget for the month. If I buy the item anyways, we’ll have to take $30 away from our savings to cover the cost. I like the decor item, and it does contribute to making our living and working environment more enjoyable.
But I already love how our Airstream looks. It’s much more important to me that we have money saved up for a downpayment in the future. So it just makes sense to put that item back.
I Promise, We’re Not Robots
Now, don’t get the wrong idea. Nick and I aren’t robots. (I’m especially not a robot… just ask Nick about my struggle with negative “spending money.”)
Sometimes we do decide that something is splurge-worthy. Check out this video to see one of the high-ticket items we used in the Airstream. We made sacrifices in other areas so it would fit into our budget. And we’re still really enjoying that purchase today. So we count it as money well spent!
If you consider the trade-offs you’ll have to make for this purchase and it’s still worth it, then you’re well on your way to making an informed buying decision.
Make the Decision
If you go through this process and you find that you still really want the item/ experience AND it’s within your budget… then GO FOR IT! You can now make a well-informed purchase GUILT-FREE!
You’ll inevitably find things later on that you wish you could buy but aren’t in the budget. Always remember to reflect back on your previous purchases. Express gratitude for the item or experience that you purchased previously, and think about the ways it added value to your life.
Then remind yourself that this newest purchase opportunity really isn’t a good one, because it doesn’t align with your why. (And it never will if it doesn’t fit in your budget). You wouldn’t be able to fully enjoy the purchase. It would make you feel guilty and interfere with you reaching your goals. And that’s just not a fun way to spend money.
What If the Answer is ALWAYS “No?”
Now, maybe you’re in an intense time of saving or paying down debt and you haven’t been able to say “yes” to any purchases lately. Apply gratitude in this situation as well! Be thankful for the money you’ve been able to save/ debt you’ve been able to pay off. Thank yourself for taking action today that will improve your situation in the future.
Your dedication and thoughtfulness will pay off. You won’t be among the 47% of people who can’t handle a $400 emergency. And when the right spending opportunity comes along at the right time, you’ll be able to make a well-informed, guilt-free purchase that fits perfectly within your budget.
Put It Into Practice
If you’d like to go through this exercise, we put a handy worksheet together just for you! It will guide you through identifying your spending priorities, considering the outcomes of a purchase, weighing the trade-offs required, and ultimately making a buying decision. Plus you’ll get a real-life example from me and Nick. So make sure to snag your copy below!