Besides our expertise as financial planners, we are in the business of helping people to make the big financial decisions because we understand that not everybody wants the same things in life. The interpersonal side of what we do when we meet with our clients is as important, if not more important than the numbers themselves. In order to make the best big decisions, you need to consider what is going to make you happy and from there determine the best way to invest your money.
The big decisions are the hardest to make. This excerpt from a book by Richard Thaler called Misbehaving: the Making of Behavioural Economics illustrates why:
I wrote a list of products on the blackboard that varied from left to right based on frequency of purchase. On the left I started with cafeteria lunch (daily), then milk and bread (twice a week), and so forth up to sweaters, cars, and homes, career choices, and spouses (not more than two or three per lifetime for most of us). Notice the trend. We do small stuff often enough to learn to get it right, but when it comes to choosing a home, a mortgage, or a job, we don’t get much practice or opportunities to learn. And when it comes to saving for retirement, barring reincarnation we do that exactly once. Because learning takes practice, we are more likely to get things right at small stakes than at large stakes. If learning is crucial, then as the stakes go up, decision-making quality is likely to go down.
Unfortunately, this is why when it comes to savings, there’s so much more advice pertaining to cutting back on cappuccinos than there is on the really big decisions, like buying a car, a house or getting your retirement plan in place. The small things make us feel like we are taking action, but they are really just a drop in the bucket in the big scheme of things.
So what are the three big lifestyle decisions that can make or break your financial security and contribute or detract from your happiness?
- Where you live (consider the financial impact of a bigger bond for much longer on your financial wellbeing)
- Where you choose to send your children to school (a very emotive decision but one that can be financially crippling in the long run. You need to consider the full impact of 13+ years of schooling plus additional unexpected school-related expenses)
- What cars you drive (and how often you replace them)
Happiness Begins at Home
What does this mean when you are looking at buying a house, the biggest lifestyle decision we will make?
Say you are in your mid thirties and have the opportunity to buy a lovely big house in an affluent suburb. Initially this might seem idyllic to you: a beautiful neighbourhood with lots of space and close to all the local amenities. But perhaps you haven’t really taken into account the small factors in the big decision, like bigger insurance premiums, a bigger garden to keep up and greater maintenance to soak up your cash and time.
Or say you are in your sixties. You swop your old family home for a beautiful four-bedroom unit in a new development with plenty of guest accommodation which seems ideal for when your children from overseas come to visit. But it turns out, if you’d bought something smaller, you could have afforded more visits on both continents with your children. You could have gone overseas to visit them and hosted them all for a week in the Kruger. There is an experiential value you have missed out on because the means to realising family time is sitting in your property.
These are the sorts of things one needs to consider when making big decisions which will affect not only your today but also your future. We will be looking at some of these big decisions over the next few months. We’re here to assist by asking the right questions, then help you match what your heart wants with what your investments can do.