Making big financial decisions is a balancing act. I’m sure you can relate as you reflect back on your life. As you go through the process, you probably think about being practical and sensible. However, as human beings, we are all driven by emotion. Emotion is what makes us so unique as individuals. It helps fuel our dreams and desires for life. Emotion brings us a wide variety of feelings, often in the same day! If emotion overpowers practicality, it can lead to some big mistakes.
Early Lessons in Big Financial Decisions
I’m sure your experiences with money reflect some of these conflicting feelings. I think back to early in my life about lessons I learned. For example, as a teenager, I was really into basketball. This was back in the mid-1980’s when the NBA was really gaining in popularity. Basketball shoes were all the rage, none more desirable than the Air Jordan. With all of the big shoe manufacturers trying to out-do each other, it was a time when it was hard to not want several pairs of hi-tops!
I remember that my Dad gave me a strict shoe budget. When we went shoe shopping, he told me that he would give me around $30 to spend. At the time, that was still a lot of money for shoes! However, it wasn’t enough to get the pair of Air Jordan’s or Converse Weapons that I really wanted. Those were around $60 a pair. So, I had to make a decision. Do I spend extra out of my own budget and splurge, or do I go with the practical decision?
I usually went with the practical decision. Most of the time, I bought a decent pair of shoes that was on sale. I just couldn’t bring myself to spend all that extra money. It wasn’t until I started working full-time that I would go out and spend more on shoes and clothes. I’ve always been rather frugal, but I did go through a stretch in my early 20’s where I blew a ton of money on stuff I didn’t need. Getting married was a wake-up call for me that I needed to revisit my practical and sensible side!
Big Financial Decisions and Growing Into Adulthood
It just shows that as we get older, the stakes get higher. One of the challenges we deal with in our society is financial literacy. We don’t talk enough about how money works, so many of us learn the hard way. Even with my early lesson from buying shoes, things change when you start working and get credit cards in your hand. When I had spending problems in my 20’s, it was from misuse of credit cards. I definitely had the “buy it now, pay it way later” mentality. If you are not extremely careful, you can get into financial trouble fast.
I feel that things are even more challenging for young adults these days. When I was entering the job market, the economy was strong and education was more affordable. It took me a few years to finish college, but I was able to pay for it myself without loans. I consider myself fortunate. Student loan debt is now an epidemic, and threatens the financial well-being of millions of people. Many young people are now seriously evaluating the value of a college degree. While college is not for everyone, it may be a requirement for the career path a person chooses.
Dealing With Economic Realities
Wages are also an issue. Real wage growth has been stagnant or falling according to most measurements. Throughout my corporate career, when times were good and jobs were plentiful, it was easier to get a meaningful raise. Now a days, keeping your job is the new raise. It’s hard to get a raise unless you become a job hopper and are willing to switch companies frequently. I was a job hopper for a few years before I started my financial career. It’s a lot of work and it’s stressful for most people to switch jobs on a regular basis. People entering the work force are often in for a rude awakening when they see their starting pay.
Despite these challenges, I think there is still plenty of room for optimism. There are an increasing number of people who recognize the need to manage their financial house carefully. Financial literacy is getting more emphasis. Millennials tend to have fewer credit cards than older generations. Finally, I work with people everyday who are advancing in their careers and putting their hard-earned money to work for them. I see a trend where younger people are really being cautious when it comes to big financial decisions.
The Biggest Financial Decision You Face
Let’s talk about some of the big financial decisions you will face. The number one issue that I see in my work is finding affordable housing. At this point, both buying and renting are expensive! Even if you have the desire to buy a house, it’s hard for many people to find something within their budget range. I know in my area, even the smaller homes are expensive. Not only that, they tend to be fixer uppers and require a lot of time and money to repair. It’s certainly not an ideal situation for many younger folks.
If you want to buy a new home, size and price are major factors. The average home size in the USA is now up to 2,641 square feet. Meanwhile the average family size continues to remain around the same. Do you really need that much space for your first home? We have seen the popularity of the “McMansion” explode in recent years. Suburbs around the country are full of large homes that are crammed into subdivisions. I want to be clear that there’s nothing wrong with having a nice big home. If you can afford it, and it’s what you really want, that is your prerogative! However, if the cost and maintenance are too expensive, it can quickly become a drain on your budget.
Beware of the House Fever Epidemic
Give careful consideration to your living arrangements. Renting may not be ideal, but it is better than making a mistake on a home purchase. Renting allows you time and flexibility prior to making a huge decision on a purchase. Being “house poor” is a common problem. Spending too much on a home takes away that flexibility and money available for other things in life. Falling in love with the idea of owning a home can lead to an emotional decision that overrides common sense and logic. I recently discussed our experience with our first money pit – it was a hard lesson to learn!
Thinking back to my basketball shoe days, I try to apply those lessons regularly. I carefully weigh the cost of the financial decisions I make. My wife and I are both frugal by nature, so we try to keep a balance. It’s OK to buy nice things and splurge once in a while, as long as you are focused on the big picture. For most things, I am content to buy items on sale or buy an “off-brand” if it means saving big money. My biggest weakness is golf. Last year, I finally splurged on a set of Titleist golf clubs. This is after wanting a set for over ten years! In hindsight, I should have loosened up a few years earlier and gotten them, but at the same time, it proved how much I really wanted to get them.
Your Personal Goals and Big Financial Decisions
Please take the time to think about your financial goals. When you figure out what you want your money to do, it helps you tremendously. All your decisions relate back to your goals. If you want to retire at age 60, you build a game plan to achieve that goal. If a financial decision comes up, you know that it has to be in line with your goal. That might mean driving an economy sedan over a German luxury car. Perhaps it means living in a smaller home for several years. However, when you stick to your plan and achieve goals, it is an awesome feeling.
Your goals become the fuel to your financial decisions. That doesn’t mean life is smooth sailing. If only things worked that way, right? However, by having a game plan and making decisions that align with your goals, you set yourself up for success. It will help you balance emotion with practicality. It may not always be fun “in the moment” to apply logic over emotion, but it will probably save you a lot of money throughout your lifetime!
We all need to balance emotion and logic. Big financial decisions require a careful mix of both! It’s important to think about the long-term ramifications for what might feel really good in the short-term. Take the time to set financial goals and decide what is truly important to you. When you find a balance, it can lead to a lifetime of financial success.