6 questions I always ask myself before making a personal financial decision

Woman working from home using computer, phone and laptop.

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It’s nice to talk to yourself before shelling out money for anything other than necessity.


Key points

  • There is no such thing as “spontaneous spending”. Each of us has at least a moment to consider what we are doing.
  • Each of us is tasked with protecting our financial interests.

My husband had a good laugh this morning when I told him I sometimes find myself planning an earthquake. We live in Missouri. It’s not that it can’t or hasn’t happened before. It’s just not something everyone I know spends their time thinking about.

I’m not trying to convince you to add an earthquake pilot to your homeowners insurance policy (although that might be a good idea). I’m telling you this because it’s only fair that you know that I tend to plan for the worst. I’m not exactly a pessimist, but I like to line my ducks in case everything goes wrong.

It’s the way I approach life and it’s the way I make personal financial decisions. My habit of thinking too much about things may be one of my least attractive characteristics, but it has come in handy more often than I can count.

It all starts with an internal dialogue, questions I ask myself before making a personal financial decision. Here are my top six questions:

1. Do I understand what I am signing up for?

I shudder every time I think back to all the contracts I signed without reading the fine print. Fees can eat us alive if we’re not careful, and buried in the fine print is where you’ll find the true cost of a loan.

But it’s not just loans. If you invest in your company’s 401k, IRA, or any other type of investment, you pay brokerage fees. Do you know how much you are paying? I know I haven’t even bothered to check out our first few days of investing. I thought one broker was pretty much like another. I was wrong. The higher the fees, the less money you can keep.

Today, I’m that annoying person who makes sure you know what I’m signing up for before committing 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 into the habit of asking myself why I’m about to make a purchase. Do I want a bigger house because I’m trying to impress other people? Do I “need” some new furniture in the guest bedroom because I feel sad and think it will lift my spirits? Honestly, of all the things I ask myself before spending money, this question has probably stopped me in my footsteps 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 assess whether what I am doing is wise. Let’s say a local car dealership has 0% financing on my dream car and me to have to buy that car. If I’m not willing to think about things for 24 hours, I immediately know I’m making a mistake.

4. What would I do with the money if I didn’t buy it?

I have a friend who loves $ 700 bags. Aside from a trip to the grocery store, I can no longer make a purchase over $ 100 without wondering what I could do with the money. For example, if I were with her friend while she was buying a $ 700 purse, my mind would immediately try to calculate how much that $ 700 would be worth in 10 years. Let’s say you ran over it instead? At a 7% annual rate, the $ 700 would almost double in 10 years, all thanks to compound interest. If she let him go for another five years, her $ 700 investment would be worth more than $ 1,900.

My response to “What would I do with the money if I didn’t buy it?” it is not always related to investments. Sometimes, I think of something like going on a fun weekend trip with my husband or setting up a backyard obstacle course for the dogs.

The point is, before making a purchase, I have a habit of considering other ways the money could be better used.

5. How many hours did I work to make this purchase?

Many years ago, I heard someone say that they regularly calculate how much of their life they are trading for whatever they want to buy. I remember thinking he was obsessive at the time, but damn it if it didn’t stick with me. Today I always do.

No matter how much you make, you can get an approximate hourly wage. Let’s say you make $ 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 $ 500 concert tickets, you’re trading over 17 hours of worked time 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 worked time 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 pair of shoes.

6. Am I trying to make someone else happy?

For as long as I can remember, I’ve shelled out money to make other people happy. Friends, family, the guy who sells wrapping paper on my doorstep – I just want them to smile. Of course, I have not completely overcome this problem. It would be enough to walk to my garage to find two boxes of Girl Scout cookies. My husband and I don’t care about Girl Scout cookies, but we care about the girls in our lives who sell them.

To be sure, spending money to make other people happy is a work in progress. Maybe that’s the point. When it comes to how we manage money, it’s always a work in progress.

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