There are many financial decisions we make daily or monthly that impact our financial future, but many fail to realize the significance of these decisions. We often forget they impact our finances or do not give them a second thought.
The first one which comes to my mind is the use of the credit card. The use of credit is no longer a thoughtful process as it was when I was a child watching my parents’ use of money and credit. We are so accustomed to its use we are now buying hamburgers and toothpaste on credit. Today, it is more about the minimum payment amount than the total debt.
With the use of credit cards, we are no longer required to watch what we spend to avoid bouncing a check; and as a consequence, many overspend thus raising their debt balance. It seems we only use cash or checks these days when the merchant does not take credit cards, and when that happens we are often more concerned about losing mileage or airline points than anything.
My recommendations to clients of going back to the use of checks or debit cards is frequently met with “what, and lose the points/miles I am accumulating.” The first priority should be to be to avoid carrying a balance on the cards. If this can be done, then use them to obtain the points. But, if you are carrying a balance, stop using credit and go to paying cash until you have gotten them back under control. It never hurts to look once again and truly consider ‘need’ verses ‘want’ when you are about to make a purchase. Answering truthfully to yourself may cause you to spend less and thus enable you to get out of debt more quickly.
Another area that is seldom considered financial is the purchase or lease of a vehicle. While this is does not occur monthly, at least not for most of us, it will be a decision you will have to live with for many years. In my youth, everyone purchased a vehicle within their means and was content with dreaming about the more expensive or luxurious vehicle. Today, we are no longer content; and through the magic of leasing, we are now able to afford our dream cars. But, are we really affording them?
The advice I provide my clients is to first find the vehicle you want and can afford to purchase. Once that decision has been made, then they should determine whether purchasing or leasing the vehicle is better. If you choose to lease, you have one more step to complete. Take the savings you have in the payment and set it aside so you will have the down-payment for the next vehicle, since you will not have a trade-in. It is this step that is omitted by most. They take the monthly savings and often spend it on other consumption items, thus their financial security takes a hit.
The other option many individuals take when leasing a vehicle is they determine what they can purchase and are not happy with that particular vehicle. So, they take the payment amount for a purchase and see what it will provide in the form of a lease.
This decision generally results in throwing away five to ten thousand dollars, because at the end of the lease, they will have no equity in the vehicle nor will they have the money to make a down-payment on the next car. If they had purchased a car with the same payment amount, at the end of the payments they would have had the value of the car to trade or they could potentially go months or years without a car payment.
Unless you invest your savings from leasing a car you could have purchased, leasing a vehicle generally does not guide you to becoming financially independent.
Another financial decision many are facing is due to today’s high gas price environment. Many are choosing to ‘dump’ their low gas mileage vehicle and purchase a new hybrid. While you may be spending an extra $125 or more per month in gas, it does not make financial sense to sell a working vehicle when there is a glut on the market only to purchase a new vehicle in high demand. Selling now most likely will cause a loss on your current vehicle and additional debt or investment in the more expensive hybrid.
The savings at the pump from the new car may never be sufficient to recover from the loss and additional costs. It would be best to trade when the current vehicle is older and you have received most of the benefit from it.
Be kind to yourself and do not forget that many of the decisions you make daily can and do impact your financial future.
HOW TO REACH THE WRITER
Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member FINRA, SIPC.