Handling Finances

I was talking to a coworker of mine who has an MBA about one of the biggest lessons in business management classes that gets ignored not only in business management, but in national policy and yes, in our own personal finances.  Quite simply, it is never wise to base major decisions on ANY single event!  Terrorism is a big problem worldwide, but the additional safety to our airplanes of having our nail clippers confiscated and eye-drops visible in plastic baggies is insignificant compared to the added cost of even badly enforcing these new rules.  Some oversight of mortgage brokers would be a good thing, but it should be broad and loose rather than simply cracking down hard on a specific two or three practices that led to the recent increase in forclosures.  And yes, spending less than you earn is a great idea, but you shouldn’t decide to save just because you declared bankruptcy!

That’s right, even good decisions should never be based on rare events.  You shouldn’t decide to go with a used car because a friend had to fight with a dealer over whether their new car was a lemon.  You shouldn’t ride your bike to work because you normally drive over a bridge and you heard about the 35-W bridge collapse.  You certainly shouldn’t save for retirement because Enron went bankrupt and their pensions became worthless.

Emotions are healthy, but they can never be trusted to drive major decisions. If you’re looking to buy a car, certainly take the chances of buying a lemon into account, but only as part of your decision.  Look carefully at the price differences, warranties, reviews, safety information, fuel effiency etc…  You might end up buying a used car anyway, but you won’t be risking your hard-earned cash on a hasty decision.  Similarly, don’t save for retirement just because Enron’s collapse scared you — evaluate your expected income from social security, private pensions, annuities etc… and look carefully at how likely they’ll be there until you die.  Hopefully you do decide to save significantly for the time when you may be unable to work, but you’ll be better educated to be able to decide how much you’ll need each year and how much you need to save to meet your goals.

Unfortunately, we are wired to make snap decisions based on emotions. It’s a great survival trick from back when we had to choose to fight or run when staring into the eyes of a tiger.  It’s a great way to be manipulated though as politicians routinely use natural disasters or (in these days) terrorist attacks to get votes.  Yes, it’s best to have FEMA be prepared to respond to the next emergency, and we certainly want to avoid as many terrorist attacks as possible!  Still, it’s important to evaluate the facts — would adding a billion dollars to the INS budget really prevent determined terrorists from bombing shopping malls?  What about ten billion, a hundred billion?  How much liquid does a potential terrorist need to down a plane?  (answer: less than you could fit in a shampoo bottle).  Will suspending the national gas tax bring down the price of gas?  I haven’t yet heard a professional energy analyst say yes — we’d perceive gas prices as a “deal” and increased use would push the price far higher than the 18 cent “sale.”

Of course, emotions are a vital part of being human and they can’t be ignored either.  Any decision should certainly take into account our stress levels and how a decision will affect us emotionally! In some cases, as with tragedies that affect us and our families, emotional factors may even be the primary reason for making a particular decision.  Even when that happens, though, it’s important to step back, look at the facts, and then choose one way or another.  Because while you might feel better for a little while in a large new house to soothe your feelings about living in a tiny shack as a child, reality will eventually catch up and you might wish you’d looked at facts as you’re being evicted.

This entry was posted on Wednesday, June 18th, 2008 at 11:31 pm and is filed under Spending. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.