If you are financially responsible, you should know the financial consequences of every purchase. This takes time, so it is good to start young. But it is irresponsible to buy something before you really need it.
Financial controllers are people who have to be constantly aware of the money they have, and the money they owe. Financial controllers are not just accountants or bookkeepers.
Their job is to remember how much money is coming in, and how much is going out, so that they can make decisions about what to buy with what. This obviously requires them to manage their own money, which requires them to know where it is, so that they can know where it is going out.
But because financial controllers are also constantly reminded of their debts, they need to keep track of how much stuff they own as well. And since financial controllers are accountants and bookkeepers too, this means that every purchase decision must include an analysis of how much money will be needed for what.
Financial controllers may not all be necessarily are necessarily high-powered executives. But if you are an executive, you should probably take all your purchases through a financial controller anyway.
This is one of the most important things you can do. If you are not financially literate, you are not in control. That’s an important lesson to learn early.
The financial controller is supposed to know what he or she is doing, but many people are not sure. They say they are good at money, but they don’t know how much money they have. Or how much debt they have. Or how much income they have coming in each month. They don’t know what assets they have, or what their debts are or what their retirement plan is or even whether they have a retirement plan.
Your financial controller needs to be able to answer those questions accurately and regularly. This should be part of your regular budgeting process, so that it becomes part of your daily routine to think about all these things regularly.
For example, if you are paying off debt, you need to know how much money it costs you each month just to keep making the minimum payments on the debt. That will tell you how much money could go toward other goals if it weren’t for debt payments.
If you have a job where your income is flexible — say, as a freelancer — then you need to know what that income will be each month so that you can
Just because something is expensive doesn’t mean it will be good value. You need to understand what your money is doing before you buy it.
Let’s say you invest $1,00,000 to buy a house. For many people that’s a big deal: if you can afford that kind of money, you’re in the 1% or 2%. That means that 1% or 2% of all people who bought houses made that much money.
But let’s look at the math the other way round. The cost of dwelling units in Canada is about $200,000 on average, and people spend about 25 years buying one. So most people end up spending about half their life paying for this house, plus another 25 years paying for maintenance and upkeep.
So you are not buying a house for yourself alone; most likely you are buying it with someone else in mind, most likely your family. And this house is not the only thing they are buying with your money; most likely they are also paying for food, shelter, healthcare, education, transportation, entertainment, charities and so on.
You have to look at all those things too when you figure out how much money it takes to buy a house.
Most important of all is to have a clear picture of the financial position of the household. A basic database on income and expenses, updated regularly, is vital.
Wealthier households have more money to spend. But you can only spend what you have. An analysis of monthly spending shows if you cut back, or add on more savings. In some cases, there are major expenses involved in maintaining current lifestyles: housing mortgage payments, car payments, student loan payments for children, day care fees.
In middle-class households, there is a danger that a family may be living beyond its means if its fixed monthly expenses exceed its fixed monthly income – that is, unless they can increase their incomes.
Write down your spending for the last month, and count back the money. Is the amount right? If it’s not, cancel what you’re buying. Write down what you’re doing so far, and how much you think it will cost.
Afterwards, every time you are tempted to buy something, ask yourself if there are cheaper ways to achieve your goal. If so, use those instead.
For example, people say they are going to buy a new car because they have too many old ones. The problem is that it is cheaper to get rid of cars than keep them around for parts or transport around the city. So if you have too many old ones, selling them will be cheaper than buying new ones. And selling old cars is not just easier than buying new ones; it’s also more profitable.
It is always best to know what you are buying. And it is always best to know what you are spending. It can’t always be done, but it’s worth trying.
A common error is to assume that you have enough money now, so you can buy anything. The more money you have, the more stuff you can afford to buy. But if all the money available to pay for it is taken up by your next paycheck, then you don’t have any money left to buy anything else. You need to find a way of knowing how much money your next paycheck will bring in, before deciding what to spend it on.
It’s not always easy to make sure you are making good financial decisions. If you are planning a vacation, the prices of everything are quoted in terms of how much they cost with or without tax and tip included. But if you arrive at the airport after the weekend when no sales tax or tip was charged, you think: “Ah, I guess I needn’t worry about tipping”. Then when the bill comes, the price seems to have doubled.
You should never trust a first impression of prices without checking first what they would look like if taxed and tipped.
How does this apply to Kickstarter? You can’t get a $300 computer without taking out a loan or borrowing money for depreciation on your current computer. And even if you don’t need the cash, you will probably never get that computer back. Your best bet is to just earn enough money over time to pay for the $300 plus taxes and shipping and other costs.
If that feels like too much work, consider that just about everyone who has ever bought an Apple product has done exactly the same thing – bought an iPhone with their credit card, paid it off with their credit card, paid for the first year of phone service with their credit card, and spent some more on accessories with their credit card. It’s true that there are people who do things differently (I buy my Apple stuff on Amazon), but most people follow this pattern.
Emil is a contributor at Accountant Log. We are committed to providing well-researched, accurate, and valuable content to our readers.
