Resolutions: price and gain
ABSENCE VS PLENTY: COUNT THE SACRIFICES A life of less could go further in creating a healthy financial position, with the odd luxury thrown in as well.
At the start of a new year, it’s common to plan ahead and compile New Year’s resolutions. Each financial resolution has an opportunity cost, but the choice isn’t always clear cut. To evaluate the opportunity cost, start with a comprehensive budget, listing all your income and expenses. Are there prospects to increase your income in 2018? What would you have to sacrifice to do so?
Are there opportunities to lower your expenses? Commentators often recommend cutting down discretionary or variable spending – reducing restaurant visits and spending less on new clothes.
You can derive great long-term benefits from buying a reasonably priced, slightly smaller home or vehicle from the outset. These two items in particular are like magnets for extra expenses. Buying a bigger, more expensive house in an exclusive suburb attracts higher interest payments, insurance premiums, rates bills and maintenance costs. The same is true for cars.
A friend recently argued that the vast majority of people can’t “afford” to live in a large, luxurious house, to buy expensive cars and to go overseas every year. For most people, even relatively wealthy ones, managing their finances sensibly and responsibly will mean they can only choose one – perhaps two of these if they’re fortunate.
While he didn’t suggest it’s impossible to live a life where all these things are present, he was saying that the “opportunity cost” of having all these things would be extremely high – so high it arguably won’t be worth the sacrifice or added financial stress.
A successful tech businessman once said it’s almost impossible to be an entrepreneur if you have to finance a high-flying lifestyle. It’s much easier to navigate rough patches if there aren’t piles of debt and significant bills to be paid each month.
This is true even for salaried individuals. Society places a high premium on status and career success to earn more money to finance a life of abundance.
But a life of absence can go much further in creating a balanced financial position that may still include a “luxury” or two.
A life of absence – without unnecessary debt and other suffocating financial obligations – also translates into greater flexibility … to take time off, attend university, take a lower-paying but more meaningful job, or create a financial buffer to help navigate tough financial periods.
The risk with a column like this one is that it creates the impression that debt is bad, spending ill-advised and that you should aim to live like a pauper while hoarding as much as you can.
Rather, it’s about truly considering the opportunity cost of financial and lifestyle decisions: Is the sacrifice truly worth the long-term gain? Is it worthwhile, in the long term, to cash out your pension to pay for an overseas holiday?
Is a bigger house worth the additional debt and interest payments?
The sacrifices may not only be monetary – less time with family, more stress.