Calculate How Much of Your Savings a Big Purchase is Before Buying

The first step to making a purchase is usually to ask whether you have enough money to cover it. A better question to make us more financially conscious, though, might be how much of your life savings you're giving away.

As About.com's financial blog explains, you can use the "ten times test" as a quick rule of thumb (though it may require a bit more leniency, depending on your situation). Simply put, figure out if you have more than ten times the purchase price of an item stored away in savings. If you don't, you're spending a tenth of your entire savings on this item:

When buying something you want (rather than something you need), you should have at least ten times that amount in savings. For example, if you want to spend $50 for dinner at a fancy restaurant, you should have at least $500 in savings. If this isn't the case, that means you are spending over 10% of your life savings on something you don't even need. This test works whether you are just starting out wanting to buy a candy bar, all the way up to when you are a millionaire wanting to buy that Ferrari.

If you're just starting out, this can be a lot harder, but it can certainly help you identify what's worth spending your money on. And how you define your "savings" may be up to you (do you include your 401(k), for example?). However, whether you adopt it as a hard fast rule, or just a guideline, knowing what percentage of your savings you're spending to buy something can help you decide whether or not it's really worth it.

The Ten Times Test: An Exciting New Rule of Thumb for Becoming Wealthy | About Money

Photo by 401(k) Calculator.

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