I write this personal finance blog because I like writing, I have real, professional experience in finance, and I like to help people. I also know that when I read a lot of the financial advice out there, it is either, too complicated, too oversimplified, or flat out inaccurate. This isn’t too surprising, because dealing with money and all of the various things that go with it, like savings, borrowing, investing and so on can get complicated very quickly. It is also very easy to lose sight of the forest, for the trees. I thought this might be a good time to remember that your balance sheet is not how you keep score in life.
Living Your Life Making Smart Financial Decisions
Recently, a reader left a comment on my review of Credit Karma basically calling me a fool for leasing a car. This seemed odd. Leasing does have a lot of moving parts, but the concept itself isn’t a scam. He went on to say that the only smart thing to do was buy a used car and live debt free. Then I knew, what was going on. Some people lock into “rules” about finance and take them as the gospel truth. Just like in politics, there is more to what happens in real life than just what fits on a bumper sticker. After all, it is just as sound to say,
“Only buy assets that appreciate in value. Lease, or rent, assets that depreciate.”
I’ll write a post about financing a car and how leasing a car is a smart financial move for some people later. (In fact, I think a series about buying a new car and how that all works is in order.) But, for today, let’s talk about earning and spending money and how it helps you live your life, not the other way around.
The commenter on that particular post is actually trying to make several points in a few sentences. It is true that leasing can be a bad money move for some people in some situations. It is not true that buying out a car at the end of the lease has any benefit to the dealer. If anyone is ripping you off there, it would be the leasing company, usually a bank. Finally, it is true that buying a used car is cheaper than buying a new car.
But, is that all there is to it?
Is the only thing that matters in any decision how it affects your balance sheet?
Consider another purchase you make, buying clothes. One could say that buying designer clothes is foolish and the designer is just ripping you off. After all, you can buy clothes cheaper at Target. Of course, one could also say that buying clothes at Target is a dumb money move and that you can buy clothes much cheaper at Goodwill.
All of these statements are true. However, they are not the end all be all of wisdom. Do you always have to do the cheapest thing possible to be smart? What about fun and luxury?
For example, I’ve never spent a penny on comic books in my entire life. A friend of mine, however, has probably spent thousands of dollars on them.
Am I smarter? Am I more financially savvy?
All other things being equal, my financial spreadsheet would say that I am better off, and therefore more financially savvy. However, my friend doesn’t collect comic books to make his balance sheet happy. He collects them because they make him happy. Furthermore, not all other things are equal. I buy season tickets for CU Buffaloes Football. He doesn’t. How does the score look now?
Consider further that pretty much anything you do in life that isn’t for your basic survival can be considered foolish or wasteful by someone else who doesn’t have the same interests or priorities. Restoring a ’65 Mustang is not the cheapest way to get a car. Planting anything other than food plants in your yard is a waste of money and water. Any part of your house that does more than provide security and shelter is a waste. In fact, every few years, someone comes out with the scientific version of a National Enquirer headline “proving” that having children is a waste of money and an inefficient way of generating happiness.
Of course, no one does any of these things because they represent the smartest possible use of the dollars they have.
How To Make Smart Money Decisions and Be Happy
This is your life. It is the only one you get. (That might not be true, but it is true is that this will be the only life you have with these finances.) You should probably enjoy it along the way.
So, how can you be smart with your money without ending up like one of those people who dies alone in a tiny house after years of reusing tinfoil only to end up leaving eight million dollars to a charity no one every knew you cared about?
Remember that money is complicated and personal finance can be tricky, but some steps can keep you on the right path.
Steps to Happy Smart Money Decisions
- Understand What You Are Doing – The commenter on that article is clinging to the idea that buying a new car is bad and that leasing for that purpose is also bad. Neither of those is a hard truth. Those rules may keep you from making an uninformed decision, and therefore might be good advice for some people. However, what really lets you make the right decision is understanding. You should understand that buying a new car costs more than buying a used car. This is always true unless something is collectible or rare. Before you lease, or buy, or get a loan you should understand how it works, and what it will cost you. Making an informed choice is making the right choice.
- Understand You Are Making CHOICES – Here is where things go wrong for a lot of people. Your money is a finite resource. Everything you do with your money results in you not being able to do something else with your money. If you buy a $300 shirt, that is isn’t intrinsically bad. It does mean that you cannot use that $300 for something else. For some people, this is an issue. If spending $300 on a shirt means you can’t pay your electric bill, then that purchase is a very bad idea. However, if spending $300 on shirt means that you can’t spend $300 on a comic book, then that is a very different scenario. The only right answer in that situation is what you care about more. The only way to make a mistake in that case is to try and buy BOTH things and come up $300 short.
- Understand There Is a Tomorrow – Remember that $300 from above. Don’t forget that choosing to spend it is choosing to not have it later. As a financial planner, I saw a lot of people who talked very passionately about their long-term financial goals. However, when it came down to it, they weren’t doing so well achieving them. Sometimes, it was a lack of understanding. Sometimes it was making the wrong choices. However, most commonly, it was spending for today and “planning” for tomorrow. You can talk until you are blue in the face about whether it is better to buy, lease, save, invest, or whatever, but unless you are actually making choices with tomorrow in your sights it really doesn’t matter. Leasing a car means reducing the amount of money you can use for other things EVERY MONTH until the lease is up. That is a big deal, and an important decision. It doesn’t mean that there is only one right answer.
- Understand What Really Matters – People often get so caught up in the tiny details that they miss the bigger picture. Is buying a used Mercedes S-Class smarter than buying a new Honda Civic? After all, you followed the “buy used” rule. The purchase price, your needs, your income, and yes, you desires should all factor more into this decision than how you’ll pay for it. Just because it is used doesn’t make it smart, and just because it’s new doesn’t make it dumb.
It’s Not Always the Little Things
If one person uses high-cost mutual funds to save for retirement, and someone else uses low-cost index funds, who will have more money at retirement?
Did you pick the person using low-cost index funds? Good for you. That means you understand something about investing and mutual funds, but did you get the question right?
Actually, there is a much more important piece of information missing from that question than who uses what kind of funds. What really matters in this scenario is how much each person is saving.
I don’t care how high the fees are on your mutual funds, if you are saving $1000 per month and someone else is using much better funds but only saving $100 per month, the former is doing much better than the latter.
Which brings us back to the car situation. Rather than just follow the bumper stick advice, let’s look at my situation.
I leased a new Honda CRV in 2006. By leasing, I got to deduct the payments instead of having to depreciate the value, which worked out better for me. This was before they changed the rules and made a big Section 179 deduction. (Remember when people were buying Hummers for tax purposes? It isn’t just the bumper stick rules.) At 6′ 3″, I actually cannot drive well over half of the cars on the road in America. I hit my knee on the steering wheel, my legs on the dash, or my head on the ceiling. That limits my used car selections. I live in Colorado, so I wanted both all-wheel drive for the snow, and anti-lock brakes for the ice. I also needed room in the backseat to make it easy and pleasant to use a car seat (eventually two car seats). Finally, I bike, hike and camp, so I needed real room in the back, not just a little trunk.
Were there used cars out there that fit the bill? Maybe, but remember this was back when things like AWD and anti-lock brakes and side airbags, and so on were fairly new. In other words, at best I was looking at a one or two-year old car. Those aren’t THAT much cheaper than a brand new car. So, instead, a I got a new CRV that fit me, was the color I wanted, had the features I wanted, and that I liked more than I would have someone else’s used car. I drive it well and I maintain it regularly. You can’t guarantee that a previous owner did that.
Guess What? It’s still my car. I has barely 40,000 miles on it. (I live in the city and I work from home, so I don’t drive far.) The result is that not only do I have a functional, low-mileage, paid off, 2007 CRV in great condition, but I still LIKE driving it.
Would the result have been the same if I got a used one? Maybe, maybe not.
But, here is what actually matters. The payments never caused me the least bit of financial hardship. I save money every month. I have a pile of money in my retirement accounts, I have plenty of savings and investments and a nice home. It’s not because I’m a miser counting my pennies while my family eats beans out of a can. It’s because I understand when I can use money for fun and when I can’t. Sure, my kids have more toys than they need, we eat out a restaurants a few times each week, we go on a couple of trips every year and that fort I had installed in the backyard would have been a lot cheaper if I built it myself, so I can’t really afford to buy any mint condition comic books, but I’m happy.
My friend would trade in the fort and eating out to get more comic books. As long as he’s happy too, it doesn’t matter what the advice is on that bumper sticker.
I’m also a CFP practioner and agree with your article. In fact I enjoyed your writing.