When you earn income, you get to decide how you spend that money. What you spend money on won’t be the same as other people, because everyone has different spending habits. Learning when and what to spend money on is an important part of money management.

Opportunity Cost

Every purchase comes with a tradeoff. This tradeoff is called the opportunity cost, and it means that when you spend money on one thing, that money is no longer available for a different purchase. If you buy a new video game with all your money, for instance, you won’t have money to buy a Lego set.

Money is limited, so before you make a purchase, think through other ways you could use it. What is the opportunity cost of a purchase? It’s also important to identify what is a need and what is only a want. Consider what you might want to spend money on down the road.

Spending Decisions

There are different reasons for spending money. Does it cost more than you have to spend? Or are you buying it just because it’s on sale?

You may want to buy something just because other people you know have it, or because a friend is pressuring you to make a purchase. This happens to everyone. Try to avoid spending money because of peer pressure.

Advertising also influences you to spend money. Not all advertising is accurate. If you’re researching a purchase, make sure you’re using reliable sources for information.

To save money, you may want to split the cost of an item or service with someone. Or borrow an item or trade a service, like doing a chore for a friend in exchange for using their bike for the day.

When it’s time to spend money, you can use cash, checks, and cards. Paying with cash is immediate—the money is gone right away. If you use checks, the money may take a few days to leave your checking account. With a debit card, there could also be a short waiting period.

If you use a credit card, you’ll make a payment now and need to pay the money back to the credit card company later. If you don’t pay the credit balance in full by the due date, you’ll owe interest on what you borrowed. This increases the overall cost of the purchase.

Even if you don’t have a lot to spend, making good spending decisions now is necessary practice for spending appropriately in the future.