The most important lesson: personal finance is not really about money

If money is your hope for independence you will never have it. The only real security that a man will have in this world is a reserve of knowledge, experience, and ability — Henry Ford

In my opinion, personal finance is about financial independence. It is about having the proper knowledge, experiences, and ability to make better decisions. It is not about making decisions that give you the most money.

The money-first mentality is common, but it is wrong. There are always non-monetary considerations, and they are usually more important. What separates a good decision from a bad one is whether you weigh the costs and benefits appropriately. It’s about consciously choosing the best path.

Costly but right decision

Here is the story about career decision to illustrate. Recently my friend was deciding whether to switch jobs. His current job had great compensation, good networking opportunities, and a promising career path with salary jumps roughly every five years. It would be hard to find a better paying job. On the other hand, the job was so demanding my friend found little time to exercise or even sleep.

Ultimately, he took a 20 percent pay cut so he could spend time with family, sleep, and pursue interests like watching movies and traveling to Europe. It’s not the money that matters–it’s the satisfaction at the end of the day. My friend made the right choice only because he accounted for non-monetary factors.

Costly and wrong decision

That’s not to say all costly decisions are good. Some are just plain stupid. Consider a common situation: buying a high-end TV using credit card debt. The decision is not bad since a lot of money was spent. Heck, $2000 for a TV might be worth the great entertainment. A study in Science magazine explained that people were very happy when watching TV. The difference in this situation is that the monetary costs are simply too high.

Here are some facts. A $2000 TV could end up costing a phenomenal $7,000 in total credit card payments. Furthermore, those same credit card payments could have netted $46,000 if invested conservatively. Would any one consciously trade $53,000 (lost investments + credit card payments) for a $2,000 TV? No way! Yet people do this all the time. I suspect this is because such buyers are unaware of the true financial costs and they justify reckless behavior because others do the same. A bad decision–like jumping off of a cliff–is bad, even if a million people do it.

These examples illustrate that conscious spending is the key to personal finance.

This post is part 1 of a 7-part series on the most important lessons in personal finance. Here are links to all of the articles in the series:

1. Personal finance is not about money
2. Know your preferences
3. Consider opportunity costs
4. Calculate risk
5. Know the time value of money
6. Consider taxes
7. Know the value of your time

Knowing these factors, and applying these principles are the real way to make good decisions and get rich.

A few good books

Incidentally, if you want to know more about these factors, there are a few books that I would highly suggest you take a look at:

–Die Broke An amazing book on personal finance–see my full review

–The Black Swan A modern classic about risk and financial markets–a must-read for educated investors and decision makers

–Spend ‘Til the End An introduction to “consumption smoothing,” the goal of getting the highest sustainable living standard

You may also want to check my updated list of recommended books for my current recommendations.

But enough of my recommendations. What other factors do you think are important to making good personal finance decisions?