10 Questions to ask yourself before buying a product to trim your unnecessary expenditure

Are you spending more than you want? Then this blog is specially for you. Many Indians live from paycheck to paycheck and don’t have much money to save. Sometimes, this is due to low income but in majority cases it is because you earn little and spend more.

Figuring out how to cut spending is not as easy as it sounds. Here are 10 questions that you should ask yourself before making any expenditure.

 

Question 1: How happy will the product make me?

When most people buy something, they look at the price of the product and consider whether they can afford it or not. But, in reality before buying a product consider how much happiness will the product provide you. Your focus should be on long term happiness, since next month you can regret what you bought today. Our aim should be to maximise happiness per rupee spent. Nowadays, humans do not buy a product for happiness, but they buy a product just because their colleagues/friends have purchased it.

For example: When a child sees his friends with a new cycle, he forces his parents to buy a new product. He enjoys ridding cycle for 2-3 months and after that he rarely use his cycle.

In order to reduce our expense, we should first cut down such impulsive buying that fails to provide us long-term happiness. The key to reduce such impulsive buying is to wait for a month before buying a product. This rule will help to you to cut your expense by a significant percentage.

 

Question 2: How much money do I have to make to afford this product?

Do you know price of the product is much more than you pay for it? Yes, you read it right. This is because, you pay taxes on your income. Suppose, your annual income is 10 lakhs and you are in 20% tax slab. It means that your disposable income is only 8 lakhs. In order to calculate real price of the product use this formula:

Real price of product = Price you are paying/ (1- Tax Rate)

So, next time whenever you buy a new product calculate the real price of the product.

 

Question 3: How many hours of my day am I trading off for this product

Money is infinite but time is limited. So, it is necessary to consider how much time you are trading to buy a product. To calculate how many hours you are trading off to buy a product, use this formula:

Hours trade off = Price you are paying/ After tax hour rate

Divide hours trade off by number of hours you work daily to arrive at number of days required. In order to calculate your after tax hour rate, divide your monthly salary by number of hours you work monthly plus your daily travelling time (as you are travelling for the purpose of earning). This will indicate number of extra hours you have to work to compensate this deal.

 

Question 4: Can I afford it?

This seems like an obvious question but many people fall into EMI trap and spend more than they afford. Credit card gave people facility to buy now and pay later and many people felt into this trap and started spending more than their income. As a thumb rule is that you should not spend more than 2-3% of your net worth on any purchase like vacation or car.  Your net worth can be calculated by subtracting all your liabilities like loans, EMI from your assets.

 

Question 5: Compare prices of alternative products in terms of percentage and not rupees term

Next time when ever you are buying a product compare the price of the product across multiples stores and multiple brands. Compare the difference in price in terms of percentage and not rupees. Some price difference may look small in rupees term, but it can be huge in percentage terms. Suppose you can buy a packet of biscuit for Rs 10 and you can get the same biscuits for Rs 7.5 for some other store. This seems like Rs2.5 but it is 25%. This is equivalent to getting 25% return on investment on your investment.

 

Question 6: Can I get it for less or for trade off?

This is a simple question that must be consider before purchasing. Obviously, purchasing for free is always the best way. If you can’t find it for free try to find for a discount. There are various websites that provide you coupon code for discount on your online purchase. Another option to consider is if you can barter or trade it against something. For example, you can let your friend use your car in exchange of a lunch.

 

Question 7: How much am I spending on Convenience charge?

How much does it cost to make a cup of tea at home? We all end up paying high premium for convenience. Compare the cost of making a product with the cost of purchasing it to find convenience charge. Cost of making the product should income cost of raw material as well as cost of labor time required to make the product. Cost of labor time is equal to time required to make the product multiplied by after tax hourly rate. If the cost of making the product is more than cost of buying the product then you should buy the product. But, if the cost of buying is more then you should consider making the product.

 

Question 8: How much will it cost me for rest of my life? (in case of recurring expense)

No matter how small the expense is, but in long run it will add up to become a huge number. So, in case of recurring expense, you should consider cost of that habit for the rest of the life. Suppose you have a habit of drinking tea twice a day. So Rs20 a day i.e 7300rs a year and Rs219,000 in 30 years. We have let gone inflation in this calculation. If we consider average inflation of 6% then this figure will be close to 6 lakhs.

 

Question 9: What is per cost use of this time? (In case of long term products)

If you buy something that you are going to use frequently, then its worth estimating per use cost of that product. Suppose you buy a car for Rs5 lakhs. And you will use it twice a week for next 5 years i.e around 520 times. Which come to Rs961 per use and Rs1 lakh per year which seems quite expensive. On contrary, you can either use a rent car when you need it or book an Ola/Uber to cut down your expense.

 

Question 10: How much will this cost in future

If you’ve made it so far then you would have definitely started thinking different about your expenditures. Asking these questions can change your life. But there is still one more question that you must consider. Ready to know it?

Every money spend could have been invested if you hadn't purchased that product, so you should try to analyze what the future value of money could be if you invested it instead.  When you buy something today you are sacrificing an opportunity to invest and grow that money.  Assuming you invest at 7% pa. Rs5 lakh car that you were thinking to purchase would have been 10 lakhs in 10 years and 40 lakhs in 30 years. By asking yourself, “Is this money worth to me today or in future?” you will find yourself more willing to invest than to buy.

 

Cutting expenditure doesn’t have to be hard

Chances are good that at least some of these questions on this list will help you to cut your expenditure. By reducing your outflow and investing it appropriately you can grow your net worth and build wealth over time. It is worth the effort.

Happy Saving!