We make dozens of choices each and every day. We drive our car in one direction, instead of another. We shop at one store, instead of another. We attend one church, instead of another. All of these are mutually exclusive choices that don’t seem to provide us much difficulty. In the financial arena however we often want this AND that, not this OR that. Why?
Choices always involve trade-offs. If we save some of our income today, we have less to spend now, in return for more (to spend) later. I am not certain of the root cause, but we certainly see clients struggle much more with trade-offs today than previously. Scarcity is at the core of economics. Resources of all kinds…money, time, energy…are all relatively scarce.
If we decide to retire early, we are exchanging more time today for a lower overall income in retirement (because we have shifted from saving to consuming). We can’t retire early AND have more income, an all too common refrain we hear today. We can’t simply dissolve the universal laws of economics just because we want them to be different.
- Decisions, choices that we make in the financial area should be made within a framework of realistic, real-life, long-term goals; Your goals – not your neighbor’s goals or your friend’s goals. Only if they are truly yours can you then comprehend that trade-offs will be necessary.
- Financial decisions also should be dynamic, that is, they should be regularly examined to determine if they still make sense. Given the world we live in, it is likely that a decision made even a few years ago might benefit from re-examination just to assure yourself that the particular choice still makes sense in relation to your goals.
Just remember, choose A or B, not A and B.