Every day we are faced with choices. Some of them are small, and some of them are larger than we realize. But the choices we make today will affect our financial future.
Reflecting on the past, and thinking about how the future could look with different choices, puts us in strong positions to make better financial decisions. Better financial moves do not guarantee the future will look a certain way. But it is the best chance we have in securing our future.
Let’s look at a few ways I’ve learned to tackle this problem.
Past: What financial choices have I made?
If we don’t have a firm grip in what good or bad choices we have made in the past, and the result of those choices, it is hard to know what we should do going forward. And often when we look at our past decisions, we can find reoccurring habits.
Looking at my past, I noticed that I often would get excited about something: a new tv, new technology, etc. I would spend an extensive amount of time researching that item and write out a plan that helped me justify going into debt for that purchase. This included how I talked to Andrea about what I wanted, and all the benefits this new purchase would bring us. I would then purchase the item with credit card debt. But what I found when I dug deep, most of the time, I enjoyed the idea of researching the purchase more than owning it.
What became apparent was a vicious cycle where I was moving from one purchase to another while growing our credit card debt. Without thinking about these choices and consequences, it is much harder to realize what is going on, until it is too late.
Another example is if you started contributing towards your companies 401k right away. The result of that choice is that you have a growing 401k balance that is earning interest. But if you are like me and didn’t take advantage of your 401k, valuable time has been lost with a lower 401k balance.
The point in reflecting on our past choices is not to go into an infinite guilt loop about how we messed up. It is about shedding light on the outcomes from our financial decisions. We can’t change our past choices. But we can affect our future results if we can improve our behavior.
Present: How could things have been different?
If you are like me, where you realize you have made financial decisions that had a negative impact, it can be easy for the weight of those decisions to push you down. We don’t want to ignore those feelings; we should think about what our choices caused.
It is healthy to look at a few different perspectives in this phase:
- What good decisions have I made to get me to my current spot?
- What are some decisions I could have made to make my situation worst?
- If I made better financial decisions, how could that have changed my current situation?
In my case, I avoided taking on large car loans. I was able to grow my career and my income, and marry a woman I love dearly. I always kept up with my bills and credit card payments, so I have an excellent credit score.
We need to be careful and not use “the bad choices we avoided” as a reason to continue making “not as good choices”. If I had made better decisions, I might be able to retire earlier. I could have saved a lot of money on credit card interest. Things could have been worst, but that bar is much lower than what I want. The idea is that once we have a good sense in our past decisions, we get a better idea of how we ended up in our current situation.
Thinking of how the present could have been different has a practical outcome of leading us to make smarter financial moves right now. Our “financial muscle” gets stronger, and we can move on from our mistakes.
Future: What could my financial future look like?
Looking at our possible future can be exciting because regardless of where we are at, our future could look better. If you started contributing to your 401k, how could things look 5-10 years from now? If I stopped going into debt for big purchases, what opportunities would that give me? We cannot be 100% sure what our finances will look like in the future, but we can tip the scales in our favor to make positive outcomes more likely.
No one is going to say: “I hope my financial future is a disaster”, but that is often the result of our bad decisions.
For me, I realized that I was spending a massive amount of energy trying to get out of debt. But then I would justify going into debt again, repeating the cycle. By breaking that cycle, my future could look different. If I didn’t break that cycle, I would most likely have to work indefinitely, without much financial freedom when I get older. Looking at this now, that future version of myself is depressing. Am I working as hard as I do to experience this amount of pain and stress from my choices?
Looking into the future gives us a better outlook on the real cost of our choices.
Is this $3,000 OLED HDR tv worth going into more credit card debt? Instead of going into debt, if I want this tv, is there a smarter way of getting it? Is the real cost of this large purchase worth it? Doing this has a tendency to strip away the power these kinds of purchases have on our psyche.
Smart financial decisions have a domino effect on our lives. It is similar to how compound interest works with our investments. We start making smart financial decisions, which gives us a glimpse into how things can look, and motivates us to make better decisions.
Considering the long-term effects of our financial choices is eye-opening. A smart decision today has the power to create opportunities in the future.
By recognizing our financial habits, and figuring out what has and has not worked, we are educating ourselves on how we can get to where we want to go. We don’t think enough about how and why we got to where we are, which usually guarantees we are going to be unsatisfied with the destination.
Changing our negative behaviors is easier when we can see their long-term effects. But when we are blind to these bad choices, they can ruin our financial future.
It is healthy to think about the ramifications of our financial decisions and where they will lead us if we continue down that path. It is never too late to start making sound money decisions. If we can learn to do this regularly, we might be surprised at what we accomplish.
What are some good or bad financial decisions you’ve made in the past?