On Saturday afternoon, my friend called me and told me that she was about to spend $1,500 on a 100% unplanned purchase for something she didn’t need. Then, she got mad at me when I wasn’t supportive! I was shocked that this friends, normally very fiscally responsibly, made such an impulsive buy.
How It Happened
This weekend was the big Pride Fest in downtown Denver. A group of my friends walked over to check out the happenings. Like any major festival, Pride has no lack of ways to spend money. You can buy plenty of food, drinks, and stuff to bring home.
One such “stuff” vendor caught my friends’ eyes. A local store had a booth selling their 50cc scooters for $1,500. When they told me how much it cost, I did a double take. I know that scooters are kind of cool, but that is a lot to spend on a purchase with zero planning.
What really concerned me was that the two friends decided to both spend $1,500 on an impulse purchase at the same time. I would guess that one of them was really into it and the other went along for peer pressure reasons, like wanting to fit in with a friend. (I am not sure which wanted it more, this is just a theory.)
In addition to the $1,500 one-time cost, there is a $35 per month cost indefinitely to park in the garage and $105 per year for insurance and registration. So even after the purchase, it is going to cost $525 per year to keep.
The Up Sides
These two friends both live about 2 miles from work. They live just outside of downtown and work in the middle of the central business district. It will be practical and easy to take a scooter from home to work from spring to fall. However, living in Denver they can’t use the scooters during most of the winter.
Driving roundtrip to work in a car uses gas, and going in a scooter uses less gas. Over time, the scooter could hypothetically pay for itself in gas savings. One friend has an SUV and the other has a sedan, so the one with the SUV will make up the savings a lot quicker. However, they have to save at least 1-2 tanks per month just to make up the cost to park it. They both get free parking downtown, so they are not saving anything taking the scooter instead of a car on that front.
The biggest upside I see is the fun factor. They can take the scooter to parks and social events around downtown easily for about nine months per year, if they are going alone. The scooters are not really big enough to hold two adults comfortably.
Let’s see. Umm… $1,500 plus $525 per year!
I don’t really need to say more than that. A planned purchase for something like this could make sense. Spending over $100 on a whim makes me a little apprehensive. The idea of spending over $1,000 on a whim makes me nauseous.
Also, they have to worry about safety. Like a motorcycle, they are exposed to whatever stupidity they cause along with the dangers of bad drivers. Once they get used to riding, I am more worried about other drivers than them, as they are both responsible and will ride safely.
Another downside is that they can only go around central Denver. The scooters only go about 30 miles per hour, so highways and long distances are not safe or practical.
How to Avoid Impulse Spending
First off, if you have to run your credit card for over $100, I suggest using the two week rule. If you see something you want, which means you don’t absolutely need to live, that costs over $100, you wait two weeks to decide if you really want it.
If you forget about it, you made the right choice. If you still want it, but can’t justify the cost, you know you made the right choice not to buy. If you still really want it, and can afford it, go ahead and buy it.
Another option, one that I like to use, is to impulse spend on investments. Each time I see something expensive that I want to impulse buy, I put that much into my stock brokerage account and spend it on something better for me, a stock or investment that will return more money than I put into it.
Just think about it. Over one year, that $1,500 could return $75 at a reasonable 5%. However, in 5 years (compounding monthly) that $1,500 is worth $1,925. Over 30 years it is worth $6,702. If you put it into a mortgage as an extra principle payment with a $200,000 balance at 4.25%, it could easily save about $3,700 in interest.
Opportunity cost is real, and it should be a motivator to avoid making stupid spending decisions.
Have you ever made a big purchase on a whim and regretted it later? Have you ever avoided an impulse spend and been happy about it? How did you do it?
Please share your thoughts, ideas, and stories in the comments.