How much is enough?
Posted on October 2, 2016 by bob in MoneyWise
“Financial planning is the process of using limited resources
to meet one’s needs and reach one’s goals.”
One of the best questions to ask yourself when considering a financial decision is, “How much is enough?” The question implies that, for any financial choice, a line exists. On one side of the line is territory labelled “insufficiency” or “less than required.” On the other side is an area called “excess” or “more than necessary.” The line itself marks out the Goldilocks zone which is “just right.”
This criterion can be applied almost universally. How much is enough income for me to reach my objectives? How much is enough insurance coverage? How much cash is enough in reserve for emergencies? How much is enough to spend on a car, a house, a vacation? How much is enough risk to take in my retirement account? How much is enough to support me/us in retirement? How much is enough to leave my heirs?
Admittedly a few people (like Bill Gates and Warren Buffet) have resources sufficiently vast that their financial security is unlikely to be damaged by a few minor bad decisions. But plenty of folks with big temporary incomes (like professional athletes and entertainers) suffer by failing to consider, “How much is enough?”
Since you can only spend a particular dollar once, when you use more than necessary for any good or service, or buy things that do not match your priorities, you have less to apply toward other things. Financial planning is the process of using limited resources to meet one’s needs and reach one’s goals. It is all about trade-offs, and success depends on lots of correct small decisions. A good long-term outcome is more likely for those who do the following:
1. Develop and follow a realistic plan that prioritizes what is important to you. For example, my wife and I value travel and creating memories more than driving new or luxury cars. For 41 years of marriage we have tried to conserve on vehicle costs. This has allowed us to visit a lot of memorable places. Know what you want and don’t let other people set your values or priorities.
2. Follow a rational decision-making process, especially for big decisions. Avoid making rush decisions when you do not have all the important information or when you are under stress or duress. Impulse decisions rarely turn out well, and the higher the stakes, the worse the potential consequences. Determine what it is you really need or want from the outlay, identify and evaluate options in light of your preferences, and consider the risks of the preferred choices before finalizing your decision. Seek objective counsel when appropriate.
3. Distinguish between needs and wants. The line between these two has become blurred for many people. Most of us would be surprised what we could do without if we had to, as our parents and grandparents did during the Great Depression. Often it is okay to have your wants fulfilled, but it is still helpful to distinguish a want from a need. It permits one to prioritize and make tradeoffs that allow the achievement of additional other goals. For instance: If you buy house # 1, that is all you get. If you buy house # 2, you also can take a two-week trip to Italy.
4. Make the best all-around deal that you can. It takes effort to find out what things cost so that you do not overpay. It takes self-control to wait until you can pay cash or to negotiate a better deal than the one being offered. It takes judgment to know whom to trust, when to compromise, and when to walk away. And consider ongoing expenses (maintenance, etc.) as well as the up-front cost.
5. Learn the right lessons from your mistakes and from those of others. Everyone makes a bad decision now and then. Make the most of it by learning the right lessons so that you do not repeat the same error.
If you consistently consider the question, “How much is enough?” before making financial decisions, you may find yourself experiencing less buyer’s remorse, a larger bank balance, more satisfaction with your choices, and a greater sense of control over your financial future.
Alan Wallace
Alan Wallace, CFA, ChFC, CLU, is a Senior Private Wealth Advisor for Ronald Blue & Co.’s Montgomery office, www.ronblue.com/location-al. He can be reached at 334-270-5960, or by e-mail at alan.wallace@ronblue.com.
(4926528-08-16)
