The One Question That Can Help You Understand Your Finances

Is it practical? 

Practical means "concerned with the actual doing or use of something rather than with theory and ideas." It isn't merely sitting around pontificating all day about budget strategies or stocks that will make you a millionaire. Practicality and personal finance are closely related. Is your plan practical? Do you even have a plan? Is your financial future strictly fueled by fortune cookie wisdom? 

A FEW QUESTIONS

Answering the question of practicality can help you avoid doing dumb things with money. Is it practical to rent-to-own furniture? No, not when you will probably pay 25% over MSRP when you could have gotten a 10% discount with cash. Is it practical to have a $400 car payment on a $2,500 monthly income? Heh, you know the answer.

A lot of the time we operate off of emotion. We need that new car or we deserve that new car, when it actuality, whether we deserve something isn't a deciding question. The question should be, "Can I afford it?" This question has more to do with the total cost rather than the monthly payment. If you think about monthly payments instead of total costs, you aren't being practical. You're being a short-term thinker with no long-term plan. Another good example: If you are thinking about your tax return as a bonus instead of money that you worked hard for, you're not being practical. 

HOW TO AVOID BAD DECISIONS

I have four things I recommend people should do before they make a big decision:

  1. Write out the problem and solution(s)
  2. Ask a trusted friend
  3. Sleep on the big decisions
  4. Think about the long-term implications 

Let's do an example. Mallory wants to buy a car. She has $12,000 saved and has no debt apart from her mortgage. With my financial model, she'd be on Move #6. What should she do? First, she writes out her savings, budget, cars that she likes, what monthly payments would be on the car she likes, and also looks at cars she can pay cash for ($6,000 - $8,000). 

Then she calls her mom, who has always done well with money. She recommends that she ought not to go into debt as payments take away from compounding interest within her retirement account and she will have to pay interest on the vehicle as well as higher insurance premiums.

She looks over her list and decides to rest on it for the night. Thinking about how a $200-$400 car payment would impact her long-term, she decides to pay cash, which takes her savings down to $5,000 (she went with a $7,000 car), and still has no debt. 

That, my friends, is practicality. What people do too often is say "I can afford the payment and I'll still have $12K in the bank." But they don't realize the long-term implications: Increased insurance on the vehicle, interest, and less flex cash per month, just to name a few.

HAVE A QUESTION?

I'd like all of the readers of this site to know that RTM Solutions will help you navigate any big purchase you have, for free. If you are considering buying a vehicle, hit us up and we can walk you through the process and help you decide if it's practical. Having a plan, budget, saving, and taking care of your consumer debt are all big parts of the financial plan--and all of them are rooted in practicality. Is it practical to have $100K in consumer debt? Nope, so the logical thing to do is work as hard as you can to get out of it. 

Asking yourself "Is this practical?" can help you avoid a lot of bad decisions down the road. You just have to ask.