It’s good to have a little chat with yourself before shelling out money for anything other than necessities.
- “Spontaneous expenses” do not exist. We each have at least one moment to reflect on what we are doing.
- We are each responsible for protecting our own financial interests.
My husband had a good laugh this morning when I told him that I sometimes catch myself planning an earthquake. We live in Missouri. It’s not like it can’t happen or has never happened before. It’s just not something that everyone I know spends time thinking about.
I’m not trying to convince you to add an earthquake endorsement to your home insurance policy (although that might be a good idea). I’m telling you this because it’s just that you know that I tend to plan for the worst. I’m not exactly a pessimist, but I like to put my ducks in line in case everything goes south.
This is how I approach life and how I make personal finance decisions. My habit of overthinking is perhaps one of my least appealing traits, but it’s come in handy more times than I can count.
It all starts with an internal dialogue, questions that I ask myself before making a personal financial decision. Here are my top six questions:
1. Do I understand what I am registering for?
I cringe every time I think back to all the contracts I signed without reading the fine print. Fees can eat away at us if we’re not careful, and it’s buried in the fine print that you’ll find the true cost of a loan.
But it’s not just loans. If you invest in your company’s 401k, an IRA, or any other type of investment, you pay brokerage fees. Do you know how much you pay? I know I didn’t even bother to check in our early days of investing. I thought one broker was pretty much like another. I was wrong. The higher the fees, the less money you have to keep.
Today, I’m that boring person who makes sure I know what I’m getting into before I commit to anything. This includes reading a contract and asking questions before signing.
2. Why do I want this?
Motivation is a big deal when it comes to money. I’ve gotten used to wondering why I’m about to make a purchase. Do I want a bigger house because I’m trying to impress others? Do I “need” new decor in the guest room because I feel sad and think it will cheer me up? Honestly, of all the things I ask myself before spending money, this question has probably stopped me more often than any other.
3. Am I willing to wait until tomorrow?
“Waiting until tomorrow” to make an investment or purchase means I have 24 hours to determine if what I’m doing is wise. Let’s say a local car dealership has 0% financing on my dream car and I to have to buy this car. If I don’t want to think for 24 hours, I know instantly that I’m making a mistake.
4. What would I do with the money if I didn’t buy this?
I have a friend who loves $700 handbags. Other than a trip to the grocery store, I can no longer make a purchase over $100 without wondering what I could do with the money instead. For example, if I was with the friend while she was buying a $700 handbag, my mind would immediately attempt to calculate how much that $700 would be worth in 10 years. Let’s say she invested it instead? At an annual rate of 7%, the $700 would almost double in 10 years, all thanks to compound interest. If she let it roll for another five years, her $700 investment would be worth over $1,900.
My answer to “What would I do with the money if I didn’t buy this?” is not always linked to the investment. Sometimes I think of something like having a fun weekend with my husband or having a backyard obstacle course for the dogs.
The thing is, before I make a purchase, I usually consider what other ways the money could be put to better use.
5. How many hours did I work to make this purchase?
Many years ago I heard someone say that he regularly calculated how much of his life he was exchanging for whatever he wanted to buy. I remember thinking it was obsessive at the time, but damn if it didn’t stick with me. Today, I do it all the time.
No matter how much you earn, you can come up with an approximate hourly wage. Let’s say you earn $60,000 a year. Divide that number by 2,080 (the average number of hours worked in a typical job per year). This means you earn $28.84 per hour. This means that if you buy concert tickets for $500, you are exchanging over 17 hours of work for those tickets.
Let’s face it, sometimes it’s worth it and sometimes it’s not. For example, I would gladly trade 17 hours of work for a chance to see Bob Dylan, Billy Joel or Bob Seger in concert. However, I wouldn’t trade 17 hours of my life for a new jacket or a new pair of shoes.
6. Am I trying to make someone else happy?
For as long as I can remember, I’ve spent money to make other people happy. Friends, family, the kid selling gift wrap at my front door – I just want them to smile. Admittedly, I have not completely overcome this problem. You would only have to walk to my garage to find two cases of Girl Scout cookies. My husband and I don’t care about Girl Scout cookies, but we do care a lot about the little girls in our lives who sell them.
Truth be told, spending money to make other people happy is a work in progress. Maybe that’s the point. In terms of how we handle money, it’s still a work in progress.
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