Thursday, 15 May 2014
When to be frugal, when to pay full price. Six situations where you should be willing to overpay. A time might come when you will commit an important error. Critical problems, swift reactions
Frugality enables a better life by allowing you to choose. Instead of spending your resources on everyday consumption, you can decide when it is opportune to make extra expenditures. Normality seldom justifies extra expense, but sooner or later, everybody faces a difficult period that demands extraordinary exertions.
When to be frugal, when to pay full price
If you acquire sensible financial habits, you will be able to accumulate savings to cushion adversity and misfortune. However, a judicious management of your resources should not entail counter-productive economies. What you want is to apply your financial reserves to those areas where they are most needed.
In general terms, there are six situations where you should gladly overpay, namely, to acquire long-term assets that generate revenue, to solve serious health problems, to correct critical mistakes, to protect yourself and your possessions, to learn new skills at great speed, and to obtain performance guarantees. Let us review these points one by one.
Six situations where you should be willing to overpay
First, acquiring long-term assets that generate revenue. The principle applies equally to real estate, company shares, or annuities. Choose high quality even if you have to pay more. In the long-term, prime properties will earn you more money and spare you preoccupations.
When buying a house, be willing to increase your budget in exchange for a better location. When investing in the stock market, select shares of well-managed companies with a long history of profitable operations. In those cases, you will eventually be glad that you agreed to pay more initially.
Second, solving serious health problems. Any doctor can help you cure a common cold. You do not need to pay extra money to address a minor sickness whose treatment offers little difficulty. On the other hand, if you are severely ill, you should be willing to spend as much as necessary to recover your health.
If your insurance does not cover a vital treatment, figure out how you can pay for it yourself. If necessary, liquidate your investments and sell your house. Even if you have to cross the ocean, you should go to see the best doctors. The purpose of frugality in trivial purchases is to allow you to overspend when the need arises.
A time might come when you will commit an important error
Third, correcting critical mistakes. If you are in business or professional practice, a time might come when you will commit an important error. Those who take initiative inevitably make mistakes, since those constitute an essential ingredient of success.
Having committed a serious error represents the type of situation for which you want to keep sufficient financial reserves. Acknowledge the problem and find out how you can fix it. Be willing to overpay for a quick solution that puts an end to the story. That will be money well spent. Learn your lesson and move on to the next project.
Fourth, protecting yourself and your possessions. The principle applies to physical and digital protection. For instance, if your house is located in an isolated area, you should invest in a state-of-the-art security system. If you are going to place your savings on a bank account, you should select a financial institution that offers a high level of internet security.
Do not assume that someone else has your protection as first priority. If you can benefit from security provided by third parties, be thankful for it, but stay alert nonetheless. Saving money in the field of personal protection can be counter-productive. If necessary, be ready to overpay in this area.
Chances come and go, often requiring immediate action
Fifth, accelerated learning of new skills. Specialized expertise is expensive, in particular if you need to acquire it quickly. However, if you have the possibility to get your dream job on the condition that you learn a new language, you should be willing to invest a good part of your savings in accelerated learning.
Ideally, you should try to take your time for difficult learning projects, so that you can figure out an inexpensive way to carry them out. Nevertheless, sometimes you'll have no choice. Chances come and go, often requiring immediate action. If the opportunity is worth it, you should view your learning cost as an investment.
Sixth, obtaining performance guarantees. If you have never experienced the inconvenience of repairs on a big-ticket item like a car or a refrigerator, your might not be aware of the immense value of warranties and performance guarantees. The cost of spare parts and manpower to fix a problem can be staggering.
Quality manufacturers tend to offer longer warranties for their products. Do not hesitate to pay more if you can benefit of extended coverage for your new vehicle or washing machine. In the long term, those warranties may save you substantial sums, let alone headaches.
Critical problems demand swift reactions
Remain unwavering in your commitment to save money on unimportant purchases. Overpaying for everyday merchandise is unnecessary and wasteful. Instead, devote your savings to investing in your future and attaining peace of mind.
Critical problems demand swift reactions. Those are the kind of situations that justify paying more in exchange of quick service or extraordinary expertise. A discerning man knows how to separate normal purchases from pressing needs. Reduce your expenses on the former and build your financial strength to deal successfully with the latter.
For more information about rational living and personal development, I refer you to my book The 10 Principles of Rational Living
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