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

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It’s good to have a little chat with yourself before shelling out money for anything other than necessities.

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 in charge of protecting our own financial interests.

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

I’m not trying to convince you to add an earthquake rider to your homeowners insurance policy (although it 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 up in case things go wrong.

This is how I approach life and this is how I make personal financial decisions. My habit of overthinking things may be one of my least attractive traits, 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 registering for?

I cringe every time I think of all the contracts I’ve 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 about 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 are paying? I know I didn’t even bother to check our first days of investing. I assumed that one corridor was quite similar to another. I was wrong. The higher the fees, the less money you can keep.

Today, I’m that annoying person who makes sure I know what I’m signing up for before committing to anything. That 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 other people? Do I “need” a new decor in the guest room because I’m feeling down 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 tracks 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 consider whether what I’m doing is smart. Let’s say a local car dealer has 0% financing on my dream car and I have to buy that car. If I am not willing to think things through for 24 hours, I immediately know that I am making a mistake.

4. What would I do with the money if I don’t buy this?

I have a friend who loves $700 bags. Aside from a trip to the grocery store, I can no longer make a $100+ purchase without wondering what I could do with the money instead. For example, if I was with the friend while she was shopping for a $700 handbag, my mind would immediately try to calculate how much that $700 would be worth in 10 years. Let’s say she invested it in her place. At a 7% annual rate, the $700 would almost double in 10 years, all thanks to compound interest. If he let it run 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 don’t buy this?” it is not always related to investment. Sometimes I think of something like going on a fun weekend trip with my husband or putting on a backyard obstacle course for the dogs.

The point is, before I make a purchase, I make 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 routinely 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 if he hasn’t stuck with me. Nowadays, I do it all the time.

No matter how much you earn, you can get an approximate hourly wage. Let’s say you earn $60,000 per year. Divide that number by 2,080 (the average number of hours worked at a typical job per year). That means he earns $28.84 per hour. That means if you buy $500 concert tickets, you’re trading more than 17 hours of work time for those tickets.

Let’s face it, sometimes it pays off and sometimes it doesn’t. For example, I would gladly trade 17 hours of work time for the opportunity 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 have spent money to make other people happy. Friends, family, the kid who sells wrapping paper at my doorstep, I just want them to smile. It is true that I have not totally overcome this problem. You would only have to walk to my garage to find two boxes of Girl Scout cookies. My husband and I don’t like 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. When it comes to the way we handle money, it’s always a work in progress.

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