Mind Your Decisions

First Lesson: Personal Finance is NOT 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 I argue it is flawed because good financial decisions don’t depend on just money. What separates good and bad decisions is the level you are consciously considering relevant costs and benefits. I’ll give examples of good and bad decisions below to illustrate.

Here is the story about a good, though monetarily costly, career decision. 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 chose to switch to a lower-paying job with a better lifestyle. What matters is not only the money he made, but his satisfaction at the end of the day. He made the right choice because did not only focus on money.

On the other hand, here is what I consider a bad decision: buying a high-end TV using a credit card and making only minimum payments. The decision is not bad since a lot of money was spent. Heck, $2000 for a TV might be worth the great entertainment it gives you. But here are the 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? Yet people do this all the time–what is going on? I suspect the TV buyers are largely unaware of the true financial costs and feel guiltless because so many other people do the same thing.

The examples above illustrate that conscious spending is the key to personal finance. Conscious spending, in turn, is achieved by considering at least six important factors:

1. your preferences
2. opportunity costs
3. risk
4. the time value of money
5. taxes
6. the value of your time

Stay tuned because I will be writing articles about each topic. I promise that if you consider these factors for each financial decision, you will most certainly be minding your decisions.