It’s OK to Spend Money on Yourself — Really (But Be Smart About It)

in First Person: Our Blog, Personal Finance

People who spend too much outnumber, by far, those who spend too little. But the methods that therapists and financial planners use to help “underspenders” can guide the rest of us about when it’s OK to splurge and when we should resist.

Chronic underspenders can become so terrified about running out of money that they put off healthcare, ignore needed home repairs or descend into hoarding. Framing certain expenditures as an investment and creating a plan that can help illustrate how much money can be spent without causing financial ruin can ease distress.

Planning also helps those who are trying to handle money better by paying off debt, building savings and investing for retirement. High-quality experiences or purchases that give lasting pleasure can stave off burnout and “frugal fatigue” that might otherwise cause people to abandon their money goals.
Here’s how to walk the line:

Follow your budget (and create one if you don’t already have one)

You don’t want to splurge one month and wind up short on rent or your mortgage payment the next. A budget helps you identify where your money is going and what upcoming bills you need to cover. Your just-for-fun spending will come out of the income that’s not already spoken for.

Decide how to invest in yourself

Experiences tend to give us more lasting pleasure than things, but the right purchases also can be an investment in happiness, and possibly your health. If you’re new to running and training for a race, for example, upgrading your running shoes will make runs more enjoyable on your feet and body. If you feel guilty spending on pleasurable yet worthwhile things, you may need some practice.

Don’t wait until you’ve “arrived”

Paying off credit card debt and building emergency savings can take months or even years, and investing enough for retirement will take decades…but should still be top priority. As long as you’re on track with your goals, you should be able to afford the occasional — but reasonable — splurge.

Keep yourself on track

What does it mean to be on track? Generally, it means that you’re saving enough to replace roughly 70 percent of your income in retirement and that you’re scheduled to pay off all your toxic debt, such as credit cards and payday loans within the next five years, while making all required payments on any mortgages, auto loans and student loans.

If you’re not on track, your splurges should be on the smaller side — like a cup of coffee with friends —  until you have a better handle on your money. Not sure? Consider a consultation with a trusted financial planner who can give you an objective assessment.

Save the full amount before you spend on fun

This one habit can stave off a world of regret. If it helps, you can set up a dedicated “fun” savings account. Online banks and some credit unions often allow multiple savings sub-accounts that you can name, so you can have buckets for vacations, a guitar, updating your wardrobe or whatever else you desire. [Shameless plug: Get a jump on your savings by opening a First Internet Bank free savings account with as little as $25.]

Use financing carefully

Even if you know better than to finance the fun stuff, you can still find yourself overspending when borrowing for big purchases like cars or homes. Borrowed money can feel “less real” than cash in your wallet, so you may be more tempted to spend on luxury add-ons. For example, you wouldn’t pay $2,000 cash for a DVD player, yet people often shell out that much for rear-seat entertainment systems in a new car.

If you will be financing, add the expected payment to all of your current “must have” expenses: shelter, food, utilities, transportation, insurance, child care and other minimum loan payments. If the expected total is 50 percent or less of your after-tax income, you can probably afford the new payment.

You’ve heard it many times before, but it bears repeating again and again (we’re a bank — we know a thing or two about this topic!), make sure you can really afford what you want to buy. Like the title of this article, it’s OK to spend money…but be smart about it.

As always, we’re here to help. Contact a First Internet Bank Relationship Banker with any questions about our personal savings products and budgeting tools.

Guest author, NerdWallet
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