The Foundation of Good Financial Choices

Reviewed: April 09, 2015
By FinanceWeb

For anyone who is interested in making good financial choices, the journey begins with being able to differentiate between wants and needs. In his autobiography, Benjamin Franklin addressed this very problem by starting a log book of all his everyday expenses, and this can be a very valuable tool for people living in these modern times.

Keeping Track of Things

After all, if someone can’t even reliably say what they are spending, it is not likely that they can formulate any realistic financial plan other than going out and making more money. While we would all prefer to do this, it is not always possible. By religiously writing down every single expenditure of any sort over a period of a month, a clear picture rapidly emerges—and it is seldom a very happy one. When it is all down in black and white, or perhaps black and red, most people are astounded to discover how much they are actually spending. In particular, they are shocked to discover how much those nickel and dime expenditures add up to some real money over the period of a month.

The Want Versus Need Dichotomy

This is where it becomes necessary to decide what is a “want” and what is a “need”. By paring away at all of the incremental wants that have burrowed their way into the need category, significant progress can be made in freeing up capital that can then be put to wiser uses. Once all of these small leaks have been plugged in the financial ship, it is then time to look at all of the big ticket purchases in life. While these tend to be actual needs, such as transportation or shelter, that does not mean that there is not an element of want in the equation as well.

Gassed Up and Ready to Go

For example, a new car may offer improved gas mileage over an older model, but it will cost more in terms of license fees, insurance, and the actual price of the vehicle. Most people can drive a long way on $30,000 worth of gas in their old car. The same goes for housing. Proximity to work, good schools, and nearby shopping are often very important factors in choosing where to live, but it is often possible to obtain all of these criteria in a dwelling that is a little more modest than a brand new custom home.

You Don’t Have to Live Under a Rock

This should not imply that financial wisdom is incompatible with enjoying life, but the key point is that wisely-invested money can be made to work for you, and thus provide a more secure and comfortable lifestyle in both the short and long terms, whereas unfettered expenditures are simply…. gone. Every penny you do not throw away can be used to make the important things more affordable to you.

But You Do Need to Save

By cutting down on minor extravagances, it may be possible to double up on mortgage payments, for example, and thus pay off the house much sooner. This often puts six-figure sums into your pocket by defeating the need to pay many extra years of interest on your loan. Speaking of pockets, it is important to establish a reserve of cash that can get you through an emergency or allow you to jump upon some lucrative but fleeting cash-only deal.

Winning Is Easy

In short, making good financial choices really gets down to asking yourself a simple question every time you reach for your wallet or dig into your purse: Do I really need this, and if so, why? Once you develop that habit, you will find that all of the other financial decisions get easier, since you have more money available to make them with.