It happens to the best of us...
You've bought that candy-apple-red Jaguar SUV, the shares of that hot stock you've researched, or a pair of Bruno Magli wing tips. And then you get that familiar sinking feeling in your gut.
There are few things worse than shelling out money for something and then feeling like you've made a mistake. That's what buyer's remorse feels like.
But there are ways to avoid it... You just need to get in the habit of asking yourself and answering honestly. Then tuck the Ben Franklins (or the platinum card) back into your wallet if the answers don't sit well. It's better to resist the temptation than regret the purchase.
So here are three questions I (Kim Iskyan) want you to ask yourself to avoid buyer's remorse...
1. Why am I buying it/investing in it?
There's only a handful of good reasons to buy something. Perhaps it's something you legitimately need, like a toaster or jeans or a way to get to work. Or maybe you're buying what you want (but don't need), like a bungalow on the beach, a Tom Ford bespoke suit, or a Samsung 8K HDR smart TV. Or perhaps you want to invest to create more wealth – in a stock that you think will rise in price or generate income via dividends.
Whatever the reason, anything you buy is an investment – even if you don't think of it that way. You expect to get a return from any purchase whether that "return" is toasted bread, sand between your toes, or a higher balance in your brokerage account.
It's key, though, to not confuse needs with wants. A need serves a purpose... while a want fulfills a desire. You may need a suit for work, a car to get there, or an apartment to live in... But while high-end handmade threads, a luxury vehicle, or a penthouse with a view may fulfill a need, they are a lot more than just that.
If you buy a "want" when you're telling yourself it's a "need," you're more likely to feel the money equivalent of a hangover. It's the financial equivalent of using a sledgehammer to kill a gnat or buying a Porsche Cayenne when a Toyota CRV will do the job.
In other words... bear in mind why you're making a purchase. After all, you wouldn't be upset if that biotech stock you bought doesn't keep your wine chilled – that's not what you bought it for. In the same way, if your beach bungalow collapses in value, it shouldn't bother you too much – because remember, you bought it as a vacation getaway and not as an investment.
In life, if you don't have an objective, you'll never know if you've achieved your aim... and with money, if you don't define why you're buying something, chances are that you're not going to be satisfied with your purchase.
2. When am I going to sell?
When you buy an asset, you probably don't know exactly when you're going to sell (and in fact, you probably shouldn't). It's not going to be a date on the calendar, circled in red one day in the future.
A lot of things – in that "need" category in particular – you probably won't sell. For everything else, though, you'll be less likely to suffer buyer's remorse if you know when (and why) you might sell, and what kind of return you'd expect.
But for a lot of "want" items, and for any investment, you should know in advance your criteria for selling – and be ready to sell when those criteria are met. (My colleague Jeff Havenstein explained how to know when to sell your investments here.)
In short... it makes sense to sell something when the reason that you bought it is no longer valid. If the car isn't big enough for a growing family, the beach house is no longer relaxing, or the stock falls below your stop loss... that's when your money isn't delivering the "return" that you need. That's the time to re-evaluate it and decide whether to sell (or dispose of) it and put the money to better use.
3. What am I not buying?
There is an infinite number of things that we could buy... The universe is full of stuff with a price tag. But we don't have an infinite amount of money (unfortunately). So whenever we buy one thing, we're making an explicit decision to not buy a lot of other stuff. And there is a cost associated with that decision – it's called opportunity cost.
When you're investing in stocks, the opportunity cost is easy to figure out. You can see how the prices of other stocks changed after you made an investment decision, and then (if you're in the mood for some stock sadism) look at how much money you might have made.
But the "cost" of what you didn't buy isn't so obvious with other types of goods. The money you spend on a surf getaway is cash that you're not putting away for your children's education. You're also not buying shares in a stock that could double or triple in price in the coming years (or... in a stock that could fall to zero).
When you understand what you're not buying, you might change your mind about your purchase. Or you might decide that given your aims and objectives (see question No. 1 above), what you're buying is the best possible use of your funds.
Once you address these three questions, before buying, there's one more self-query about everything that you have now: Today, you're "buying" everything that you own... right now. The Rolex on your wrist, the house you're living in, the iPhone 12 in your pocket – they're using valuable capital that, in theory, you could be putting to a different use. Every day, you are "buying" everything that you already own.
Why are you buying something – need, want, investment, or a mix?... When, and why, will you sell?... And what are you not buying?... Answer those three questions before you crack out the credit card, and you'll likely make far wiser, remorse-free purchases.
Editor's note: In retirement, it's even more important to understand exactly what you're spending your hard-earned dollars on because the last thing you'd want is to run out of money. That's why, next Wednesday, June 23, Dr. David Eifrig is hosting a Retirement Wake-Up Call.
In this first-of-its-kind event, Doc's going to break down the retirement reckoning headed our way... and the simple steps you can now take to protect yourself.