Preferences, not money, dictate personal finance

Tell me what you eat, and I will tell you what you are–Brillat-Savarin

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 these 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?

You decide what is right

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.

Know 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. I have also hated the subsequent “splitting the bill” where I end up paying for someone else’s wine and steak.

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.

Does your money match your preferences?

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 your expenses.

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.

Track your expenses

Tracking your expenses is very easy–just take a few minutes each day to write down what you spend money on. There are all sorts of automated tools like mint.com or wesabe.com. While these sites are great, they are often not necessary. I simply use a spreadsheet and I have made it freely available: visit my page of tools and find the spreadsheet to track expenses. Since this site has began, there have been over 4,000 downloads of this spreadsheet and the feedback has been very positive. I’ve had people email me that they are saving hundreds each month and finally getting their finances in track.

The best part for me is that people are finally putting their money towards what they truly love. Or as I like to say, they are putting their money where their mind is.

How do you avoid bad, social-pressure purchases? Do you track your expenses?

This post is part 2 of a 7-part series on the most important lessons in personal finance. Here are links to all of 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