6 Questions I Always Ask Myself Before Making a Personal Finance Decision

It’s good to have a little talk with yourself before shelling out money for anything other than necessities.

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key points

• There’s no such thing as “spontaneous spending.” We each have at least a moment to consider what we’re doing.
• We are each in charge of protecting our own financial interests.

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My husband had a nice laugh this morning when I told him that I sometimes find myself planning for an earthquake. We live in Missouri. It’s not as though it can’t happen or hasn’t happened before. It’s just not something everyone I know spends time thinking about.

I’m not trying to convince you to add an earthquake rider to your homeowners insurance policy (although it might be a good idea). I’m telling you because it’s only fair you know that I tend to plan for the worst. I’m not a pessimist precisely, but I do like to get my ducks in a row in case everything goes south.

It’s how I approach life, and it’s how I make personal finance decisions. My habit of overthinking things may be one of my least attractive characteristics, but it has come in handy more often than I can count.

It all begins with an internal dialogue, questions I ask myself before making a personal finance decision. Here are my top six questions:

1. Do I understand what I’m signing up for?

I cringe every time I think back on all the contracts I’ve signed without reading the fine print. Fees can eat us alive if we’re not careful, and buried in the fine print is where you’ll find the true cost of a loan.

But it’s not just loans. If you invest in your company’s 401k, an IRA, or any other kind of investment, you pay brokerage fees. Do you know how much you’re paying? I know that I didn’t even bother to check in our early days of investing. I figured one broker was pretty much like another. I was wrong. The higher the fees, the less money you get to keep.

Today, I’m that annoying person who makes sure I know what I’m signing up for before committing to anything. That includes reading a contract through and asking questions before I sign.

2. Why do I want this?

Motivation is a big deal when it comes to money. I have gotten in the habit of asking myself why I’m about to make a purchase. Do I want a bigger house because I’m trying to impress other people? Do I “need” new decor in the guest bedroom because I’m feeling sad and think it will raise my spirits? Honestly, of all the things I ask myself before spending money, this one question has probably stopped me in my tracks more often than any other.

3. Am I willing to wait until tomorrow?

“Waiting until tomorrow” to make an investment or purchase means I have 24 hours to consider whether what I’m doing is wise. Let’s say a local car dealership has 0% financing on the car of my dreams and I have to buy that car. If I’m unwilling to think things through for 24 hours, I instantly know I’m making a mistake.

4. What would I do with the money if I didn’t buy this?

I have a friend who loves $700 handbags. Other than a trip to the grocery store, I can no longer make a purchase over $100 without asking myself what I might do with the money instead. For example, if I was with the friend as she purchased a $700 purse, my mind would immediately attempt to calculate how much that $700 would be worth in 10 years. Let’s say she invested it instead? At an annual rate of 7%, the $700 would nearly double in 10 years, all thanks to compound interest. If she let it ride for another five years, her $700 investment would be worth more than $1,900.

My answer to “What would I do with the money if I didn’t buy this?” is not always related to investing. Sometimes, I think about something like taking a fun weekend trip with my husband or setting up an obstacle course in the backyard for the dogs.

The point is, before making a purchase, I’m in the habit of considering the other ways the money might better be put to use.

5. How many hours did I work to make this purchase?

Many years ago, I heard someone say they routinely calculate how much of their life they’re trading for anything they want to buy. I remember thinking it was obsessive at the time but darn if it hasn’t stuck with me. Today, I do it all the time.

No matter how much you earn, you can come up with a rough hourly wage. Let’s say you earn $60,000 per year. Divide that number by 2,080 (the average number of hours worked in a typical job per year). That means you earn $28.84 per hour. That means if you purchase $500 concert tickets, you’re trading over 17 hours of time worked for those tickets.

Let’s face it, sometimes it’s worth it and sometimes it’s not. For example, I would gladly trade 17 hours of time worked for a chance to see Bob Dylan, Billy Joel, or Bob Seger in concert. However, I would not trade 17 hours of my life for a new jacket or pair of shoes.

6. Am I trying to make someone else happy?

For as long as I can remember, I’ve shelled out money to make other people happy. Friends, family, the kid selling wrapping paper at my front door — I just want them to smile. Admittedly, I have not totally overcome this issue. You’d only need to walk as far as my garage to find two cases of Girl Scout cookies. My husband and I don’t care for Girl Scout cookies, but we care very much about the little girls in our lives selling them.

Truth be told, spending money to make other people happy is a work in progress. Perhaps that’s the point. When it comes to the way we handle money, it’s always a work in progress.