Financial Choices, Good vs. Better

Posted By Paul

I was working in the yard and thinking about how I view savings and investing, and my rambling thoughts started to take shape into a set of rules that I call 'Good' and 'Better'. The idea is that in my opinion people spend a lot of time focusing on the wrong financial view.

Good: Focusing on making sure you income is growing.
Better: Focusing on making sure you are living within your means.

I've known a lot of people who were incredibly focused on their incomes. They wanted to make sure that they were constantly making more and more money year after year. Now I certainly agree that income is important (and so is income growth), but I often see that in all that focus on income sometimes people lose sight of the basic idea of living within their means. For example, someone works feverishly to make a great salary and because they work so hard and burn themselves out to make that money they spend lavishly on cars, boats, and all kinds of toys to make the most of the their limited free time. These toys require even more money to maintain the lifestyle so they have to work even harder. The result ends up being that their finances turn into a very fragile house of cards, and just one layoff or recession results in financial ruin.

Good: Bargain hunting to make sure you save money on purchases.
Better: Focusing on simplicity to make sure you don't buy a lot of stuff you don't need.

You ever see the one where someone buys some expensive toy that they really don't need and can't afford, and they work VERY hard to make sure they get a good deal? Remember that getting a great deal on something you don't need is still more expensive that not buying the thing in the first place.

Good: Focusing on finding ways to save pennies here and there.
Better: Focusing on ways to save LARGE amounts of money.

I've always thought it was odd to see people who will save and return their aluminum cans religiously for the nickel deposit on each can but will then turn right around and spend $100 a month on a premium cable package they rarely use, or blow $200 on an impulse buy. I don't mean to say that you're a bad person if you have cable, or if you indulge on a fun purchase. The point I'm trying to make is that it's great to work to save your pennies, but it makes very little sense (cents?) to save your pennies if you're wasting dollars.

Good: Focusing on your investments to make sure that you are getting good returns.
Better: Focusing on making sure you're saving a lot.

It's great to search around and find your best investment based on what you want out of it, but sometimes it can be overwhelming to try to find the perfect investment (mostly because there is no such thing as the perfect investment). Don't worry too much about finding the perfect mutual fund or that CD that gets you .1% more, instead focus on saving the money in the first place. The way I think of it is that if I have $1,000 and spend a lot of time finding a CD that pays me 5% on that $1000 as opposed to 4.9%, the result is that after a year I will have made $1 more. Instead of researching CD's as a way to squeeze every penny, if I could use the time to shave $10 off of my monthly budget then after a year I will have saved an extra $120!