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It’s the time of year to reflect on the past and plan for the new year. It is a great time to reflect on your values and priorities and see if your spending habits still support or detract from those cornerstones. As we have also been experiencing a rise in inflation, if you have not already adjusted spending, now might be a good time to review expenses and identify which are no longer a priority.
It is also interesting to see economic concepts at work. Quick economics lesson on price elasticity of demand (with a little help from Investopedia): “Price elasticity of demand is a measurement of the change in the demand for a product as a result of a change in its price.” In addition to price and income, elasticity is also affected by income level and substitute availability.
For example, I am a reader, and a good substitute for buying books is to check them out from the library. Individuals with high disposable income might continue to buy books, because owning a book brings them pleasure. Think of rubber bands and how some are stretchy, and some are stiff and break easily—that is how I think of elasticity and inelasticity.
Inelastic goods and services are ones you will continue to use no matter how much the price increases, like a prescription drug that keeps you alive. A good or service with elastic demand is one that you can drop easily or that has good substitutions. My McDonald’s Diet Coke habit is elastic. As I was looking at ways to save money, I dropped my daily Diet Coke habit to once a week, and I make tea at home. The degree to which your elastic and inelastic goods might be different from mine is based on your values and priorities.
Now that school is done, let’s put this into practice. I am first and foremost a financial planner, and a good financial plan starts with values and priorities. Understanding the “why” behind what’s important in life helps keep you focused on how you use money to support those priorities. Without the why, goals based on guilt or driven by comparison can end up feeling empty and hard to achieve.
When I think of big expenses we saved for, our children’s college education was one of the more expensive goals. The why behind that was that we wanted to be prepared to help our children receive the best education for them, and if they chose to go to a four-year college, we wanted them to come out debt-free or with a relatively low amount of debt. We made sacrifices to make that happen, but keeping the reason for those sacrifices in mind made it easier.
I also remember a friend who told her kids, “We choose not to spend our money that way,” rather than, “We can’t afford that.” It was her way of instilling in her children that how you spend money is a choice and not just about affordability.
When you are just starting out or have limited funds for other reasons, priorities tend to focus on covering the basics of food, shelter, transportation and health care. But priorities lie within those categories, too. Will you spend more on food, housing or transportation?
For some, a nice car is a priority, and they are willing to spend less on food or housing. For someone else, a nice apartment with amenities is more important than a more expensive car. Understanding your cash flow—what comes in and what goes out—is key to maintaining a sustainable lifestyle.
So, as you head into 2025, how will you choose to spend your money? Does your current spending match your values and priorities, or is spending an automatic action? My wish for you is to be able to set aside time to reflect on where you are and if you are truly happy with your spending choices. Identify your values and priorities and align your spending choices to match.•
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Hahn is a certified financial planner and owner of WWA Planning and Investments in Columbus. She can be reached at 812-379-1120 or jalene@wwafp.com.
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