How to Make Financial Decisions That Benefit You
It's seven p.m. on a Thursday evening. I'm just getting off the metro after a long day at work. I barely have the energy to walk the remaining five blocks to my house, let alone cook dinner.
The refrigerator is filled with groceries that will go bad if I don't use them in the next day or two. I can't muster enthusiasm for a bowl of noodles and a soggy salad - especially not when I'm walking past the local Domino's and their macaroni and cheese bread bowls are only $5.
What's $5 after all? I can afford that, even if I'm pretty sure my checking account balance is currently hovering at $21. And I might as well stop by CVS to grab a bottle of soda and some peanut butter M&Ms for dessert while I'm at it, right? It wouldn't be a satisfying meal without a Coke and some sweets to round it out.
Never mind the fact that I've ordered out every night this week. This is tonight, and tonight I'm eating Domino's.
This was how I lived in 2008.
Fresh out of grad school, I was doing a fellowship in Washington, D.C. I was living in a house I couldn't afford and eating meals that were expanding my waistline as they shrunk my bank account. I was constantly stressed about being able to make the $950 rent on my basement apartment.
I assuaged my financial anxieties by spending more money. If I wasn't ordering bread bowls or burgers, I was passing the hours after work buying clothes at Filene's Basement. I never paid full price for anything, so somehow that made it alright. Until it didn't.
Reckless spending in my early 20s caught up with me as I approached 30. I realized that bad credit and lots of debt was going to ruin my financial life if I didn't make a change. All of those seemingly harmless take-out orders, new dresses, and weekend jaunts with college friends added up to thousands of dollars. That's thousands of dollars that could have gone toward savings or paying down student loans.
I learned the hard way that good money management isn't just about paying credit card bills on time or planning for big purchases. It's about making smart decisions every day, even when they're the less exciting ones.
A Healthier Approach to Money Management
Money management is a tricky thing. On the face of it, the concept seems simple enough. Don't take on too much debt, build an emergency savings account, and live within your means. But actually implementing those guidelines is another matter altogether.
The average American household carries more than $130,000 in debt, $15,000 of which is tied to credit cards. Consumers in the U.S. owe a collective $733 billion in credit card debt. And it's no wonder.
The U.S. is known as a land of plenty and consumer culture runs rampant here. Designer handbags, celebrity-endorsed bottles of water, flashy vacations, and wedding party getaways. It's all about spending money and accumulating goods and experiences.
That's how I lived. I adopted the "You can't take it with you" mentality. I told myself that I cared more about enjoying my life now than saving my pennies for someday.
Of course, there's a place for living in the moment and not denying yourself things you'd enjoy. But when it happens without boundaries, it can lead to massive amounts of stress later.
Making Better Money Decisions
Some people are pushing back against consumption by embracing minimalism: downsizing their possessions and even opting for "tiny homes." But you don't have to go to extremes to cultivate a healthy relationship to money.
If you really want to make the best money decisions you can, all you have to do is measure your everyday purchases against your long-term goals. This will enable you to recognize the spending that goes against your goals and the indulgence worth going for. Here are a few questions to help you evaluate like this when you're in the moment of a purchase:
Why Do I Want This?
I used to buy designer clothes because I wanted people to think I was stylish and wealthy.
It made me feel good to see the brand name labels on all my sweaters, dresses, and handbags - even as I was waking up in cold sweats over my credit card bills. Buying quality clothes can be a good investment, but I was motivated by external validation.
Now when I'm buying anything, I ask myself whether the purchase is for myself or for other people. If it's to project a certain image or doesn't align with my values or desires, I skip it.
Will I Regret Not Making this Purchase?
After reading The Life-Changing Magic of Tidying Up, I've tried to apply The KonMari Method to all my personal buying decisions. In other words, I ask whether the thing is useful or whether it sparks joy.
If the answer is yes to either (and the price isn't too extreme), I usually allow myself the indulgence, especially when traveling. I like to pick up unique souvenirs that remind me of where I've been and that I know I can't get elsewhere. But if I'm fairly sure that I'll forget about the item the next day, I move on.
Can I Afford This?
There was a time when I would spend every last dime in my bank account. "Can I afford this?" meant "Is there enough in my checking to cover this purchase?" Now I build in more breathing room.
If something is going to put me in a precarious position, I hold off until I'm in a better financial place.
How Am I Going to Feel About this After the Fact?
Some occasions warrant indulgence. A nice bottle of whiskey for a friend's 30th birthday, a dinner out with the college roommate you haven't seen in years, a nice wedding gift. I don't often regret spending a little extra under celebratory circumstances.
The main thing here is to make sure occasions like this don't happen every month or even several times a month. Celebratory circumstances can become a problem if they become a regular habit.
Will this Put Me In A Difficult Financial Position?
Just because you technically have money to spend doesn’t mean you should. Are you dipping into your savings for superfluous reasons? Things might be looking up right now, but you never know when your car is going to break down, you’ll need to make a sudden move for work, or you’ll have a costly medical crisis.
Rather than blow through everything, try to create a buffer for your finances. It’s not as immediately satisfying as spending heedlessly, but it will be a wonderful thing to have in case of emergencies.
Every Day is an Opportunity to Make Good Financial Choices
We’re faced with limitless options for spending our money every day. We all inevitably have days where we make sound decisions that will benefit us now and later - and days when we're tired and cranky and can't think more than five minutes into the future. It's on those days that you have to be more vigilant about your finances.
Every day is an opportunity to make good financial choices. Always ask yourself the questions above before you make a purchase and you'll ensure that you're creating sustainable, positive financial habits that will benefit you for years to come.