According to David Bach’s web site, the latte factor is based on the idea that “putting aside as little as a few dollars a day for your future rather than spending it on little purchases such as lattes, bottled water, fast food, cigarettes, magazines and so on, can really make a difference between accumulating wealth and living paycheck to paycheck”.

He’s completely right, but like Aloysa, I think that you should spend money on the things that you enjoy.

Mindless spending vs. purposeful spending

Mindless spending on things is different from purposeful spending in a couple of ways. The typical little things listed by David Bach all have a couple of things in common: they’re not super-expensive in one shot, and they’re easy to make a habit — which of course means they add up. Habits are things that you do without really thinking about. You just do them because you’re used to doing them. (Or in some cases, because you’re addicted to them.)

Where’s the joy in that?

I think spending should be about getting what you really want — whether that’s travel, an expensive handbag, or a Lotus Elise — while making sure your financial needs are met. In my book, making sure your financial needs are met includes being out of debt, having a fully-funded emergency fund and setting aside money each month for retirement.

Get what you really want

So I think my husband should go right ahead and get the Lotus Elise that he wants. (Plus, it’s a very cool car. My car might even get jealous.)

He was obsessing over the Elise awhile back, and then started talking to me about how maybe he shouldn’t get it because it’s a lot of money to spend on a car. (Probably $28,000 for a used one, which is what he would get.) I immediately said, “Hey, I fully intend to go to Antarctica at $10,000 a person, at least you’ll have a car when you get done spending the money. Get what you want.”

Spend joyfully and responsibly

If he’d told me he wanted to go out and buy the Elise today, before we’d finished paying off our house and before he’d saved up the money, I’d be singing a different tune. But I firmly believe that a big bonus to getting your financial house in order is the ability to spend without guilt. (Along with the ability to do good and help others, and the huge reduction in stress.)

So that’s why I think my husband should go ahead and get that Lotus if he really wants it, and why you should enjoy your latte if you’re not just drinking it down out of habit.

But if you’re not enjoying the things you’re buying (or can’t afford them, even if they’re “only” a little bit) put that money to better use elsewhere.

P.S. MoneyCrush was in two carnivals recently: the Carnival of Personal Finance and the very first Carnival of Retirement. Check out the many great articles in each of those if you have the chance.

Retailers spend a lot of money, time and effort getting you to spend more money in their stores. Some methods used are so skeevy it might be more ethical to simply rip the wallet out of your hands. While these practices go on year round, they really get kicked up a notch during the holidays.

England’s BBC pounded the pavement to investigate misleading tactics. Check out their conclusions, and a few of our own, before you hit the mall again.

1. Bigger Isn’t Always Better
We tend to assume bulk purchases provide better prices, but a careful examination of the unit-price fine print may reveal you’re actually paying more for a large-size container. For example, the BBC found a “big value” sized stain remover cost roughly $5 more than three of the smaller containers totaling the same weight.

2. The Amazing Product Shrink Ray
Consumerist.com invented their shrink ray theory after receiving a nearly endless stream of complaints that containers stayed the same size but the contents kept shrinking. Also, a box, bag or bottle might still be labeled “large,” while the contents have shrunk. For example, one Consumerist reader recently noted the shrink ray zapped away 20 percent of Quaker Granola Bars while charging the same price.

3. Buy NOW!
Ever see signs crowing a product is “now” offered at a certain price? What they don’t say is the previous price might actually have been cheaper. Such labels create a sense of urgency that impels shoppers to grab up “sale” items.

4. Comparing Apples to Apples
Loose produce is priced per pound or ounce, so you know exactly what you’re getting. But those weight measurements are steadily disappearing from bagged and boxed portions. The BBC found a bag of unlabeled apples cost roughly $1 more than if purchased individually. Hoist one of those babies on the weight scale to make sure you’re not paying extra for the container.

5. Free Shipping Come-ons
Online shoppers now demand free shipping offers or they’ll take their business elsewhere. As a result, some retailers display huge website banners advertising free shipping, when actually the minimum purchase required is buried deep within the small print. Or you might reach the final checkout page only to find your item doesn’t qualify for free shipping. The merchant’s goal is to lure you through the whole process until you’ve reached “input fatigue” (to coin a phrase), and will simply go ahead and make the purchase.

The advantage of shopping on Free Shipping Day this Dec. 16 is that each participating e-retailer clearly lists their deals, many of which come with additional savings. This one-day event allows you to shop from more than 2,000 merchants offering free shipping by Christmas Eve.

5. New/Old Low Prices
“Price establishing” is the practice of boosting the cost of a product for a short period, so the retailer can then advertise a return to the original price as a big sale. Unless you have a photographic memory for original costs, you’re best off comparing prices between stores. The app PriceGrabber makes this a snap.

6. Layaway Isn’t Always Better
Layaway plans have made a big comeback this year, as consumers try to avoid charging purchases to their credit cards. Unless you read the fine print, however, you may be blindsided by start-up fees, unexpected interest rates, and payment deadlines that negate all your previous purchases. As with any contract, it’s important to know what you’re signing.

7. Watch Out for BOGOs.
“Buy two sweaters and get one free!” How many times have you seen such ads. You have to question if the price of those two sweaters isn’t actually paying for the third. These deals are often irresistible, but you should resist them until doing a bit of price comparing.

8. Keep an Eye on Clothing Quality
Have you noticed the shrinking-fabric phenomenon this year? Cropped sweaters with half sleeves are advertised as the hot new look, when actually they’re priced the same as the old full-size articles but with one-third less fabric. You’ll also want to consider clothing details before you buy, including finished hems, quality of snaps or buttons, and thickness of the cloth.

9. Fake-out Prices
A pet peeve is the computer printer vs. ink cartridge debacle. You may pay $30 for a printer, only to find the ink costs $25 per cartridge. How is that a deal? Consumer electronics are particularly suspect in this area. Make sure the supplemental products you’ll need don’t outweigh the cost of the original item.

No, I feel guilty because we replaced our existing dishwasher (which is probably 20 years old) before it had completely failed.

Use it up

You see, I have this thing about using things up before getting rid of them. I don’t know why, but it just feels so wasteful to me to do otherwise. I guess I just have “reduce, reuse, recycle” ingrained into my brain.

We’d had problems with it back in August of 2009, and ended up just replacing one of the racks then for less than $50. Since then, it’s chugged along just fine until a few weeks ago, when the spring on the door broke.

I’d been toying with getting that fixed too, but hadn’t gotten around to it. Mainly because it still worked — you just had to let the door down gently instead of allowing it to open on its own.

The last straw

The only thing was, it decided to hold our dishes hostage on Thanksgiving Day. Not nice. And that, combined with my (hopefully irrational) fear that it was going short out and start a fire someday, caused me to say, hey, you know, if we’re going to replace our dishwasher anyway, this would probably be a good time to do so.

Even though our dishwasher still washed and dried dishes just fine, once we were able to pry the door open.

So we went off to Lowes, Home Depot, Best Buy, Fry’s Electronics, and Sears, and then checked online for good measure. We ended up getting a KitchenAid model from Lowes, and got a good price on it. We were also able to use a 10% off coupon on top of their sale price, so that helped too.

I sure hope it will give us as good a service as our last dishwasher did.

Different perspectives

I had to laugh at the differences in my reaction to the purchase vs. my son’s though. I told him we’d ordered a new dishwasher, and he said “Hallelujah!”. I think he’s got the right point of view in this case; I just need to adopt it.

So I’m looking forward to getting over my guilt and just enjoying the shiny and new.

What about you? Do you have “use it up”-itis like me and a few others? Or are you into shiny & new, or maybe a mix of the two? (Moderation? What’s that?)

And that’s why you should care

When you don’t know where your money is going, chances are you’re missing out on some great opportunities to buy and do some interesting things — especially if you’re living paycheck to paycheck.

In other words, you may be trading the things you really want for the things you want right now. But once you know where your money is going, you can redirect it to where you actually want it to go. You can do fun things. You can save for your future. You can get ahead.

The past

Before I started tracking my spending and budgeting, I’d “try” to save up money for things like trips and gifts, but would constantly come up short. I blamed that on unusual things that just seemed to happen each month, instead of acknowledging that I had no idea what all I was really buying.

If you’d asked me what I spent my money on at the time, I would have answered “bills, gas, and a little food”. In reality, it was probably more like car payments, car repairs, gas, insurance, a lot of food, and who knows what. (That was back in my early 20s, when I still lived at home, so I didn’t have that many expenses.)

Bills vs. spending

Which brings me to bills vs. spending. I felt like I had a lot of bills, when what I really had was one bill (car insurance) and some debt (a car payment). The rest was all just me spending money on whatever. When you can’t even remember what you bought, it probably wasn’t that important.

Also, it may seem strange, but I didn’t realize that bills are recurring monthly expenses that I had agreed to pay, and that spending was everything else I did with my money. (Yeah, I know, savings and investing could have been in there too, but they weren’t.)

Knowing where your money goes

There are some definite advantages to knowing where your money goes. Think of something you’ve been wanting to buy or do, and imagine being able to go right ahead without guilt — because you’ve planned on it and have the money available. Imagine getting a bill in the mail and not being stressed, because you were expecting it and already had the money set aside. Tracking your spending can be a giant leap forward toward getting there.

If you haven’t tried it before, give it a shot for one day and see what you think. Just write down everything you spend money on, and how much it was. It’s a few seconds that can change your life.

If you track spending regularly, what benefits have I missed? What has it allowed you to do? Leave a note in the comments — I’d love to hear your experience.

Hopefully I don’t throw things off too much though, because both my monthly income and expenses fluctuate wildly. I looked back over the past year of income and expenses, and there weren’t two months in a row that were remotely similar. To flatten things out a little — since the data is supposed to be for an average month that I just don’t have — I averaged out the expenses and income for July-September and so am using those numbers as the basis for what’s shown below. Here’s where I spend my dollar:

Housing: 15.2 cents

15.2 cents out of every dollar went toward housing — which is our higher, “new” normal since we’re working on getting our mortgage paid off. That portion includes the mortgage itself, property taxes, pest control, water, and yard cleanup — with the vast majority being the mortgage itself.

Transportation: 1.7 cents

This is just gas for my car + a little bit toward my son’s truck. I did not have any car repairs during those three months, or need to do any maintenance.

Food: 4.4 cents

Mmm, food. This is groceries and eating out. I’ve cut back significantly on eating out so it’s a smaller portion of my dollar than it used to be.

Insurance: 2.5 cents

This includes car insurance for my car & my son’s truck, life insurance, and the health & dental insurance premiums deducted from my paycheck.

Personal care: 4.9 cents

Apparently I’m a big believer in personal care, because 4.9 cents out of my dollar went to things like haircuts, massages, a health club membership, clothes, and medication. Medication is the only one I absolutely get every month though.

Entertainment: 3.2 cents

I’m surprised this number wasn’t higher, but there really isn’t an “average” amount that I spend on entertainment, since that includes traveling in my mind — and my trips vary greatly in cost from year to year. So I guess this average will have to do.

Entertainment includes Netflix, going to see movies in the theatre (+ snacks for those movies), travel, hobbies, gardening, going to concerts and plays, and DSL (since I couldn’t quite figure out which category that belonged in, and “Other” was pretty full.)

Savings: 19.6 cents

And this one came back lower than I’d expected, but I’ve cut back a bit here in order to send more to the mortgage. This is basically just contributing to my 401K and my Roth 401K.

Other: 48.5 cents

48.5 cents of every dollar going to “Other” ought to tell you why I have my own spending categories broken down much, much smaller than the ones given for this challenge.

“Other” for me includes the categories of household items, gifts, a small allowance for my son, school expenses, business expenses, quarterly estimated taxes, taxes deducted from my paycheck, and our pets. By far the biggest expenses in the other category are the taxes, followed by business expenses and school expenses.

So what about you? How does your dollar break down? Take the challenge and share.

Two ways to look at it

One of the definitions of justify is “to show a satisfactory reason or excuse for something done.” — which means there are two main ways to look at the idea of justifying a purchase.

A satisfactory reason

On the one hand, I think it’s good to at least make sure you’ve got good reason for buying the things you buy. That reason could be anything from deciding to replace a worn out item that’s used regularly, to just plain old buying something (or spending money on something) because you think you’ll enjoy it.

And I don’t think that the amount of money you have available, or how good you are at money management ought to play into whether or not you take the time to think about a purchase rationally. To me, making sure to justify a purchase in that manner is just common sense.

After all, why buy things that won’t suit your needs, that will just clutter up your house, or that you’ll regret?

Maybe it’s just that I hear my mom saying “Where will you put it?” and “What will you wear it with?” in my head many times, but I do think it makes sense to make sure what you’re spending your money on is likely to be worthwhile.

An excuse

The flip side of that though, is when you justify a purchase to yourself or someone else by rationalizing. Basically, you want what you want and are determined to get it no matter what. So instead of just saying “hey, I want it!” you list out all kinds of “reasons” why doing what you intend to do anyway is the best decision. It’s coming up with excuses, instead of actually thinking about what’s best for your situation — and what might not be.

When the reasons you come up with to justify a purchase all point to “yes”, chances are you’re making excuses.

This often comes into play when you “need” something expensive that you can’t quite afford. You might tell yourself that you need to buy a new SUV, because you’ve got a baby on the way and you’ll need the room. Also, you want the baby to be safe, and sometimes you like to take your dog with you or go to garage sales, and you won’t be able to do that with the baby in your current, smaller car that would carry you and the baby OR the dog just fine.

Because naturally you couldn’t leave the baby or dog home with dad, or rent a truck for those garage sales, buy a used SUV, or try it for awhile to see just how much trouble it really is with your current car. You may not always like the alternatives, but they are there. And if you’re not considering them, chances are you’re just making excuses to do what you want.

The critical difference

The critical difference is that when you justify a purchase in order to see how (and if!) it actually fits in with your life, money and goals, you’re more satisfied with the purchases you do decide to go ahead with — and you waste less money on things that aren’t really that important to you. When you justify a purchase by coming up with reason after reason why it’s the right decision, you’re just trying to fool yourself, and the resulting purchases never feel as good.

I know this, of course, because I’ve done some of both.

What about you? Have there been purchases you rationalized and then regretted — either because they didn’t work out, or because their purchase caused you to struggle financially? And ones you thought through and were really happy with?