Decision Factor #1: Preferences
Preferences are the key to starting your personal finances. I don’t think financial websites emphasize this enough. For example, consider the articles “Skip Graduate School” and “Unpaid Internships are a Waste.” While the articles make valid points, their overall message is misleading. Isn’t graduate school good for some people, say, the professors who end up getting Nobel Prizes in their field? And can’t unpaid internships lead to paying full-time jobs later, or a chance to explore a non-profitable passion like a humanitarian non-profit?
I avoid blanket statements and advocate a more reasoned (though admittedly less sexy) approach of giving topical information and letting you decide what’s best. To do this, I ask that you follow a couple simple steps: one, understand your preferences, and two, check whether your decisions match your preferences.
The first part of understanding your preferences is pretty easy. Most of us already have a good sense of what we want. Following your preferences is very natural and most of the time we are able to do what we want. The biggest pitfall is when we cave into social pressure and do things we really don’t want to. I have more than once been unhappy going to sub-par restaurants since that’s where “the group” wanted to go. Following my preferences, I would spend more for quality food, or I would cook much better food for less cost. But besides this one exception, I am usually able to do things I enjoy.
The next step is to check your actions match your preferences. You may think that because you know your tastes that your actions are reflective of them. But this is presumptuous—I would argue that you simply don’t know where your money is going unless you track it. When I started keeping track of expenses, I was shocked to find that I spent more on a few meals at restaurants than my entire month’s grocery budget. Since I like to cook more than eat out, I ate out a few less meals and bought higher quality ingredients for home cooking. I ended up saving a few dollars and having higher satisfaction at meal time. Tracking your expenses is not as hard as it sounds—just take a few minutes each day to write down what you spend money on. There are all sorts of automated tools (including one I made), but that’s the topic of a future article.
4 Responses to “Decision Factor #1: Preferences”
Hi Presh! Thanks for the link to my article. I appreciate the differing perspective. Particularly with a financial decision as large as grad school I think that it is important to figure out what your preferences are. I wonder if a lot of people going to grad school are “caving to social pressure.” Grad school is set up in such a way that no one yells at you for going; it’s quite the socially acceptable next step. But in reality, I think it’s like going to a “sub-par restaurant.” Why go to McDonald’s when you can go have an experience of delicious and quality food elsewhere?
By Rebecca Thorman on Jul 30, 2007
What’s up presh. Interesting site (which I’ve been following for a bit now; apparently you’ve upgraded the interface.).
One question: what if your preferences are too costly for your particular set of finances? For instance, what if I make 200 dollars a week, but one of my high-priority preferences are to upgrade my PS3 gaming collection? Or to buy the most fashionable clothes? Or to soup up my car?
I ask this only because I always see such situations developing, especially in a place like NYC, and especially with people whose sole income is LOANS (usually for professional school).
I like the tracking of expenses part, but sometimes I fear that frugality & saving seems to be more of an ideal of the past. What do you think?
-A
By Avnish on Jul 30, 2007
Rebecca,
Good point–lots of people are pressured into graduate school because their advisors recommend it to them.
On the other hand, I do know people who really enjoyed graduate school over private industry. One college professor told me that his family life is much better after he got a Phd since he can live the flexible academic lifestyle instead of a high pressure consulting lifestyle.
The restaurant example is appropriate. While I find some places “sub-par,” my friends really do enjoy them. Try as I can, I simply cannot convince them my choices are better. Instead of thinking they’re wrong, I just think they have different preferences.
By Presh on Jul 30, 2007
Avnish,
I wanted to focus on unconstrained preferences, but you have a good point: expensive tastes and low funding are a damaging combination. I too am weary about people living well beyond their means and using credit card debt to finance it all.
I would guess most of these people aren’t taking opportunity costs into account (more on this in a future article). For instance, I wrote about buying a high end TV bought on credit card debt in a previous article. While the TV may be preference, is it really worth a total opportunity cost of $53,000? Similarly, I would guess people upgrading PS3 and souping up their car are not fully aware of what they’re losing.
On your second point, Even if frugality and saving are emphasized less, I would suggest they still very important. Sure, it’s not as flashy as making some quick stock trades, but it is a very sound way to accumulate wealth.
By Presh on Jul 30, 2007