Think Bigger

Jonathan Clements

TO BE PRUDENT managers of our own money, we need to read the small print—but we also need to keep an eye on the big picture.

To that end, whenever we make a financial decision, we should ponder three key questions: What’s the tradeoff, does the choice make sense given our broader financial life, and will we feel as good about the decision tomorrow as we do today?

Trading Off. Suppose we remodel the bathroom, buy a new car or purchase a vacation home. On their own, all are perfectly reasonable uses for our money. But we might still be making a mistake—if we don’t stop and consider whether there are better ways to spend the dollars involved.

Our financial lives are a never-ending series of tradeoffs: Every time we purchase an item, we’re effectively deciding not to purchase something else. There is, as economists like to say, “an opportunity cost”—and yet we often fail to ponder the opportunities forgone.

We may also fail to think through the full cost involved. Let’s say we trade up to a larger house. Most of us would need to take out a bigger mortgage, and that would mean either a larger monthly mortgage payment or a longer time until the loan is paid off, and possibly both.

In addition to those mortgage payments, however, there would be other costs, which we may not fully appreciate—such as heftier property taxes, homeowner’s insurance, maintenance expenses and utilities. Will all those costs make it harder to help the kids with college costs—and will we still be able to save enough each month for our own retirement?

To be sure, there’s always a risk that we’ll devote too much money to one goal and not enough to others. But I suspect we’re especially prone to do so with housing, because of the prevailing myth that homes are a great investment—and because overspending on housing involves consuming right away, whereas saving for college and retirement represent gratification delayed.

Looking Around. Novice investors often collect investments without thinking about whether they make sense as a portfolio. A classic mistake: They buy five top-performing funds—but it turns out the five funds all invest in the same market sector, which is why they ended up topping the performance charts at the same time.

Even more sophisticated investors can slip up. We might build a portfolio that makes sense when viewed in isolation, but we don’t stop to consider whether it makes sense given our broader financial life. One example: If you’re a doctor, and hence your paycheck hinges on the future of the medical profession, you should think twice before doubling down on that bet by investing in the stocks of pharmaceutical and medical device companies.

“Money may feel like our scarcest resource, especially when we’re younger. But in truth, our most finite resource is time.”

Similarly, we might plow our spare cash into bonds. But those bonds may yield less than our debts are costing us, even after figuring in any tax advantages. Result: The money would have been better used to pay off loan balances and rid ourselves of credit card debt.

On Second Thought. We typically make purchases based on how they make us feel today. But we often don’t think about how we’ll feel a year or two down the road—and perhaps sooner. For instance, the country home might initially seem like a wonderful weekend escape. But what about the weekly trek to get there and the upkeep once we arrive? At the risk of offending animal lovers, we run the same risk with pets: The family clamors for the cute dog—but the dog doesn’t seem so cute when a walk is required at 6 a.m. on a cold, wet Saturday.

Like buying a vacation home and getting a family dog, purchasing new mutual funds and stocks can make us feel good today. Often, it’s seductively easy to buy investments: The hassles are typically modest and you don’t trigger any tax bills by buying. More important, the purchase is a moment of great hope. We get to dream about all the money we might make.

But once the investment is made, there’s the potential for disappointment—and the prospect of ongoing hassles. Every new investment in a taxable account can be an added headache at tax time. Every new financial account is another one our heirs will have to close after our death. Contemplating purchasing an antique car or a timeshare? Your heirs will think of you often as they try to offload these goodies. But they may not think of you fondly.

We should also consider the downside when making career moves. Suppose we take a new job with a higher salary. Captivated by the idea of a bigger paycheck, we might fail to ask about the health and retirement benefits, and give scant thought to the longer hours we’ll be expected to work. Those longer hours would leave us with less time for friends and family—moments that are crucial to our happiness.

Indeed, as we contemplate whether we’ll later regret a decision, we should think about more than just dollars and cents. Money may feel like our scarcest resource, especially when we’re younger. But in truth, our most finite resource is time. Whether it’s a demanding new job or a bigger house that involves more maintenance and a longer commute, money decisions often have a big impact on how we spend our time.

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