In business and life generally, you have to make a buying decision for certain things. While some come easy, some do not. 60 It is also not a smart money move to make purchases when the thought occurs to you or every time something looks attractive, even if you have enough money to buy as much as you want. There are a few things to consider to ensure that you are making smart money moves.
Here are a few questions to ask when making purchases below:
1. Do I need this?
This is a simple concept of need vs want. The economic definition of a need is something required to survive. The concept of survival in economics is real, meaning someone or something would die without the needs being met. This includes things like food, water, business infrastructure, working staff or a piece of important equipment needed to run a business. In economics, a want is something that people crave or desire to have, that they may or may not be able to acquire.
There are must-haves and nice to have; focus on the must-haves. A simple way to recognize this is that without the must-haves, your business would not survive.
A want is not necessarily needed to keep a business alive. For instance, a food processing company will need a food processor to survive, but will want a vacuum cleaner to clean up. In this case, the need will gain priority over the want, and should be attended to first especially where there is a shortage of money.
This question should also be asked when applying for a business loan. Make sure it is a loan that is critical to the business needs (for growth, survival, and so on) and not just something that you want or desire.
2. Can I pay this back?
Before taking out a business loan, ask yourself if you are in the capacity to repay the loan, how long it will take to pay it back and if it is a decision that will benefit your business.
3. What is the return on investment?
Return on investment is the financial benefit acquired from an investment. Basically, it is a result of what you get back compared to what you spend. To determine your ROI, your goal is to receive the maximum return on minimal investment i.e. you want to get more back than what you spend. Before making a purchase, ask yourself; What will I earn by spending this money on my business? Is this going to increase my profit?
For example, if you outsource work to save time and increase efficiency, is the money spent going to reduce cost, thereby increasing profits and improving the quality of work done? If so, what is the return on that decision?
4. What is the better alternative?
Can I borrow or rent this item for a lower price instead of buying it at the full price? Can I outsource this instead of hiring for a full-time position? These are good questions to ask when considering the purchase of potential one-use items or services. Do you need to purchase a speaker for an event or you can rent one at a reduced price compared to the price of buying one?
5. Is it budgeted for?
The importance of budgeting cannot be overemphasized. If you are considering a purchase that is not budgeted for, do not buy it instantly. Make a plan to buy it later, and budget the expense properly. It is important to not only create and set a budget, but firmly stick to it. Creating a budget helps you track your spending.
Adopt a habit of only purchasing items that are on your list, and this will help you decrease the likelihood of wasting money on things that you do not really need.
6. Do I need it right now?
Try holding out on a purchase for a few days or even a few months, if you can delay an expense for a while without needing to purchase immediately, you probably do not need the item. Often, you would discover that you no longer want or need the item after a little time has passed. If you do not need it right this instant, consider adding it to a “purchase pause list.”
In conclusion, you don’t have to ask yourself all these questions every time you make a purchase, or a buying decision. Simply have them at the back of your mind and make sure that your purchases are for the right reasons, as well as affordable, to ensure that you are not buying impulsively and you are making smart money decisions.