(BLOOMBERG) - I am not a fan of bold pronunciations about spending, like: Never buy a boat! Stop drinking lattes! Don't buy a new car!
They seem designed more to attract attention than impart wisdom. I prefer rational guidelines that help consumers make better spending decisions.
No, you do not need to be a millionaire or make almost half a million dollars per year to purchase a new mid-sized sedan or small sport utility vehicle (SUV). What is more important is what makes people happy and how people often make financial decisions unconsciously.
With that in mind, consider this as a better approach to big-ticket purchase decisions.
It is surprising how often people do not operate with a written monthly budget. Consumers need to understand their own balance sheets to be able to make intelligent financial decisions.
Nothing is more basic than putting your financial life on a spreadsheet, including income and monthly expenses. Keeping track of annual costs such as travel or vacation, and the occasional irregular spending on items such as weddings or home repairs is a smart idea.
You need to know what you can afford before you can even get to the question of whether you should buy it or not. If you do not know what you can afford, how can you possibly make an intelligent financial decision? This is as true for those shopping for a Hyundai as it is for a Bentley.
Every purchase made is a trade-off against some other use of that capital. If you spend money on this, you have less cash available to spend on that. This is especially true for homes, cars or any big-ticket item.
Figure out your priorities and decide what is important to you and your family and what matters less. And there are trade-offs even within purchases. Do you want speed or efficiency? Style, quality, room, utility, comfort or safety? All vehicles are a blend of these qualities, with different emphasis depending upon the audience the manufacture is targeting.
Don't engage in mindless consumerism
Beyond the simple question of what you can afford is the underlying reason why you are making purchases. There is much to be said for having an awareness of what you consume and why. I am not a finger-wagging nag telling people NOT to buy things, but I want those decisions to be purposeful, bringing life satisfaction and happiness.
If you really want a manual gearstick, high horsepower convertible because it puts a grin on your face every time you drive it, that's fine. But if you are purchasing an expensive, unreliable luxury British SUV because your neighbours did, that raises problematic issues.
Consumerism of this sort has got so bad my colleague Ben Carlson recently wondered if expensive and (for many, unnecessary) pickup trucks are partially responsible for the pending retirement crisis.
Do you need a new car? Today's cars are extremely well made, reliable and long-lasting. Used cars built in the past five to 10 years should deliver 100,000 trouble-free miles. Brands with reputations for reliability can easily double that amount. While cars made today have safety features not available 10 years ago, the 2010 model cars are much safer than the cars from the 1990s.
Understand what will and will not bring you joy
We know a lot about what makes people happy and brings life satisfaction. Experiences beat consumer goods, and creating memories is better than accumulating stuff.
But we also know we are very bad at predicting what will actually make us happy. I can say without reservation that fast, beautiful cars bring me joy. I have owned lots of them, and each one has brought me pleasure until they were eventually replaced with something faster and prettier (but not necessarily newer). But I'm a car guy, and what makes me happy may not make you happy.
Find out what you really want to do with your time and money, what brings you life satisfaction. And whatever you do, stop making purchases to show off to neighbours.