What Matters Most: Knowing When to Spend and When to Save

Saving money is not always as simple as merely forcing yourself to not spend it. There are times when it is actually a more intelligent move to spend a little to save a lot in the long run. Certain investments can potentially protect you from serious financial harm; the trick is to determine which investments fall into that category, and which will never do you any good in the future.

Worthwhile Spending

Health insurance is a perfect example of an expense that it would not be smart to avoid. Anyone who can afford health insurance would be wise to get it -- even if the cost of the insurance puts a dent in the amount you can afford to save. Why? Because potentially, you could be in a world of trouble financially if you became seriously sick or injured. The wrong medical problem can cost you anywhere from $20,000 to $100,000 in doctor bills, or even more. Few things are as devastating as saving up a bunch of money only to lose it all to an expensive medical bill. Protecting a somewhat smaller nest egg is better than unnecessarily risking a larger one. However, the other side of this coin is not spending too much on unnecessary insurance. Insurance is designed to cover serious expenses that you could not handle on your own -- not to cover every potential cost that might arise. For example, a policy with a higher deductible can decrease your premium significantly, saving you money in the short term but still protecting you from any financial catastrophes in the long term.

Deciding How Much to Spend

Of course, the benefit of every expense is not always as black-and-white as health insurance. Within reason, you should decide what to spend based on what is important to you. For example, you might occasionally choose to take your spouse out for dinner at a five star restaurant. Saving does not have to mean cutting out all treats or fun from your life. It means that you choose the treats that you enjoy the most, then use discipline to determine how often you can afford them. That is where creating a budget comes in; it allows you to have occasional fun while still staying on track with your savings.

When Spending Extra Money is Not Necessary

Cutting down on your unnecessary spending leaves you with extra funds, both to save and to allow you occasional fun. Often if you add up your minor expenses, you will realize that many of them are not worth their cost to you. For example, you could buy the name-brand cereal. However, many find that the store brand of the same cereal tastes almost identical while costing significantly less. You can then either save that extra money for the long run, or for a treat that you actually enjoy. Saving can be a relatively painless experience if you cut back on the spending that matters to you least.

You should always consider this before deciding on any purchase. Eliminating some expenses, like the medical insurance discussed earlier, can be a serious financial mistake. Antivirus protection would be another example; eliminating the relatively low cost of antivirus could leave you holding the bag for the cost of an entirely new computer if your computer were to become infected. Quality home renovations, auto repairs and the like are also examples of expenses that it would be unwise to cut out. Paying a little more for initial quality in these types of situations can save you the much higher cost of replacements down the road. In these cases, spending money can actually be a smarter decision than not spending it.

Using Coupons -- What to Avoid and What to Look For

Coupons fall first on many people's lists of money-saving strategies. Unfortunately, there is a common misconception that every coupon is going to save you money. Although many coupons can provide valuable savings, this is definitely not true in all cases. Some coupons might look like a good deal at first glance, but in the long run, they can trick you into spending more money than you originally intended. Frankly, a good price on a product that you do not need is still a waste of money. Even "Buy Two Get One 50 Percent Off" and similar coupons for products you do use can be a waste of money if you will only use one of that item before they go bad.

The general rule of responsible coupon use is, if you were planning on buying a particular product and find a coupon that decreases its price, go ahead and use it. However, if the coupon makes you spend money on products that you do not need or that will not last until you can use them, do not use it. In addition, pass on coupons that save you 50 cents on a brand that costs a dollar more than the store brand.

Why It Is Important to Know When to Spend and When to Save

Of course, these tips only scratch the surface of the potential scenarios you will have to navigate as you manage your personal finances. However, the principles behind them can be valuable in any situation. As you can see from these examples, simply cutting back on your spending overall is not always the best financial decision. Sometimes spending a little extra money can save you much more over time. After all, what is the point of saving a fortune if you are only going to lose it to something trivial? In these cases, spending a little up front is a better idea. However, that does not mean you are free to spend whenever you wish on unnecessary short-term expenses. As a general rule, spend on things that will save you more money in the long run, and avoid spending as much as possible on things that will never provide you with a return. That is not to say you should never enjoy yourself; it simply means you should rely on moderation and common sense in all your financial decisions.

inage: http://www.flickr.com/photos/newsusa/