Filed under: BudgetingWhether or not you stop into the coffee shop several times a week probably won't kill your finances. However, when it comes to larger goals, like saving for a home or paying down debt, short-term decisions can have a dramatic effect on your finances and your emotions.
I recently spoke to Brian, a 29-year-old professional who has amassed $28,000 in his savings account. Several people told him that he should use that money to pay off his $25,000 student loan and be debt-free. Others said that he should use that money toward the down payment on a house that he wants to buy in a year or two and then pay down his loans with his extra savings each month.
Brian is an intuitive guy, but his gut was not helping him. Recognizing that this was a major life decision that he didn't want to get wrong, he did what many people do: he froze and did nothing.
We often think that financial decisions are black and white, like there is a right and wrong way to manage all aspects of our finances. Fortunately, this isn't the case for many financial choices. By looking at all aspects of a situation, decisions can be made that best suit the individual (or family).
Objectivity and Humanity
And some of these decisions will not strictly rely on objectivity, but rather, take into account the emotions and priorities of the decision-maker. We can pretend that we will always view tough situations objectively. However, we are human, and it's just not that easy. So, rather than resist the urge to be human, why not embrace it and give ourselves the freedom to choose what's best for us?
Brian could certainly take $25,000 in savings and pay off his student loan. From a cost standpoint, this would be the best decision, as he would avoid paying a few thousand dollars in additional interest over the life of the loan. Doing so would also leave him with a mere $3,000 in his savings account -- a long way from a down payment on a home.
Sure, he could build up his home fund again over the next few years. However, what if he comes across an amazing deal for the home of his dreams in 12 months? He can't buy it, because he used the down payment to pay off the loan.
How Would You Feel?
This is where the human factor comes in. Would he care that he saved some money on interest or would he be kicking himself for not keeping the savings for this once-in-a-lifetime home buying opportunity? Of course, only Brian would know the answer, but step into his shoes for a minute and ask the same question. How would you feel?
On the other hand, if he kept the down payment in his savings account and simply used his extra monthly savings to pay off additional principal on his student loan, he would have been able to buy that home.
This is precisely the situation where objectivity and emotions collide. Paying off that loan saves money in interest, albeit, over a long period. But, having money set aside to buy his dream home when the opportunity arises -- well, that's priceless.
And so it goes in the world of personal finance. We all look for the right answer to our financial questions. Sometimes the answer is clear, yet other times, we must consider all relevant information before making a choice. And the choice that is best for us may not always be the one that saves us the most money. Our emotional well-being plays a huge role in the quality of our lives, so we'd be smart to consider it when we make important financial decisions.