Some decisions have life-changing consequences either with immediate effect or in years to come. Our financial decisions are obvious examples of this. We take a closer look at the big commitments that will either harm or help you and that should never be made in haste and without proper forethought.
1. Financial Planning for Retirement
Many young professionals see retirement planning as being something they should only concern themselves with later on. They’re interested in the other big moments in life. They’re young. They think that they can take time to think about retirement a few years on – but they procrastinate at their cost.
A look at the majority of the elderly population will tell you that many of them are cash-strapped despite pension plans and other preparations. The amounts that they believed to be more than sufficient to retire comfortably on a few decades ago, just don’t go as far as they expected.
This might lead you to ask: “How much money do I need to retire?” The answers will vary depending on personal circumstances, and there are online calculators that can give you a baseline, but it’s safe to assume that more is better.
Having “more” when you retire will depend heavily on the retirement-related financial decisions you make and when you make them. Just as more is better, so is sooner. The longer you work towards your retirement, the more you’ll have, and the better your financial situation will be.
2. Your Career Choices
Career decisions are also financial decisions. While it’s true that money isn’t everything, it’s simple logic to conclude that the more you make, the more you’ll have to spend.
Of course, there are caveats to this. Even top earners can make bad choices and end up in the financial doldrums, but if you can earn well and make smart financial decisions, you’re definitely going to have more wealth, more disposable income, and less to worry about in years to come.
Doing what one loves is a great choice – up to a point. If you do opt for a profession with low financial rewards, be sure you know what you’re letting yourself in for financially and be ready to adjust your lifestyle expectations accordingly.
3. How Much You Save
It would be easy to say that having the largest possible amount of money saved up is a great idea, but there are caveats to this. Money saved only earns a certain amount in interest or investment value. Meanwhile, money owed is subject to interest. Very few of us are able to buy a house for cash, for example.
If your savings earn more than your mortgage interest, it makes sense to pay off your home gradually and accumulate savings instead. If, however, interest on the money owed is higher than the value your savings can accrue, pay off that debt as fast as you can, even if it means using much of your savings to do it. Credit card debt is a good example here. Do remember the power of compounding over time and take the long view. Whichever way you look at it, the more you can save, and the faster you can pay off your debts, the better off you’ll be.
4. Buying a Home
Buying a home is a massive financial decision. Typically, you’re looking at a 20-year debt, and cutting your budget too close can be absolutely disastrous. You should also consider the maintenance costs, taxes, insurance, and other expenditure that flow from homeownership. All in all, it’s a big commitment, and many young people are finding rental to be a more economical option.
While some may say that rental is so much money down the drain, it does have several advantages. It isn’t as big a commitment, or as risky (property values may fluctuate), or as long-term, and ownership expenses are covered by somebody else. On the surface, it may seem that ownership is still better because you can sell your home and maybe even make a profit, but that’s not necessarily true. You do incur costs when selling a home, and if you haven’t stayed there for at least five years, you may still be better off had you chosen a rental.
5. The Person You Marry the Legal Terms of Marriage
While we all know that marriage is a big decision, not all of us realize that it’s also a financial decision. Financial compatibility is often the last consideration when you’re in love and thinking of sharing your lives forever, and that can end up being a big mistake. As for the terms of any future separation, your emotions may tell you that’s never going to happen. Of course, it’s to be hoped that it won’t, but it is a consideration that should be taken seriously.
While we’re talking about marriage, give a thought to the family you’ll start together. Having kids is great, but raising a child is a massive financial commitment – and things could go wrong.
6. The Cars You Buy and How Often You Replace Them
The cost of buying a car may seem negligible in comparison with some of the things we’ve already discussed, but cars don’t last forever. If you choose the fanciest cars you think you can afford the installments for and replace them for newer models frequently, it’s going to affect your financial health. Crunch the numbers and see for yourself
Need more convincing to choose modest, reliable cars and drive them for a long time? Ask yourself why some of the world’s richest: people like Vladimir Putin, Mark Zuckerberg, Jeff Bezos, and more drive unassuming cars. Could it be that they believe that the price, maintenance bill, insurance cost, and replacement cost of luxury cars aren’t worthwhile? They’re right!
There’s Nothing Wrong With being Frugal and Cautious
Whenever you make frugal and cautious decisions, there will be those who are ready to criticize you. Ignore them. Having good financial habits that will lead you to make mature money choices is the smart way to go. Contrary to popular belief, being wealthy doesn’t mean being ostentatious. In fact, many of the people you see flaunting conspicuous consumerism are already in deep financial trouble.
Debt is the opponent of wealth. Your “net wealth” can be calculated by adding up the value of your assets and deducting the amount you owe. If you take nothing else out of this article then let it be this point. The best money decision you can make is to make as little debt as possible in your lifetime and pay it off as quickly as you can so that the assets become wealth. While you’re at it, plan for the future.