A letter from Carel Nel reminded me how utterly irrational I used to be about money. My irrationality manifested in two ways: avoidance and minimising.
In an attempt to feel more in control of my chaotic financial life, I organised all my bills into folders by month. Sometimes I would spend whole days easing my anxiety over my debt by this ritual of organisation. I didn’t read the statements, but doing the paperwork made me feel like I was dealing with my debt.
I also became the queen of debt comedy. When forced to confront my financial situation, I’d joke about the crushing weight of it. “I’m so screwed. Har! Har!” It’s a stupid defense mechanism that I still use.
These days I’m irrational about other aspects of money. For example, the crushing feeling of anxiety when I invest my emergency fund or the inability to buy something I like, want and can afford.
In this episode of The Fat Wallet Show Simon and I try to put together a rationality checklist for making financial decisions. Here’s a cheat sheet:
- Work out the true cost, especially if you’re not paying cash. The true cost is the sticker price plus account fees, Interest is how much it costs to borrow money. You can either earn interest when you lend money to somebody else or pay interest when you borrow money. Interest is the reason why debt is expensive. In addition the money you borrowed, you have to pay back an additional fee in exchange for using money that you didn't have. These More rates, delivery charges and any other rates that may apply.
- Work out the cost per use. Every time you use something, it becomes cheaper. Work out how often you’ll realistically use the item, divide the price by your answer to get to the cost per use. If you had to pay that amount to rent the item when you needed it, would you think it’s cheap or expensive?
- Work out the opportunity cost. If you had to invest that cash amount at 7% growth after Inflation refers to how much you can buy with the same amount of money over time. R100 can buy you a bread, milk and a dozen eggs today. If those products become 10% more expensive within a year, you will need R110 to buy the same products next year. If you keep all your savings in cash, your cash will be More for 30 years, how much money would you have? Is the utility of the object or the joy it will bring your worth sacrificing that amount in your future?
- Are you trying to buy your way into a new skill? You want to acquire a new skill. You convince yourself the first step to acquiring the skill is to buy an expensive tool used by those who already have the skill. You find yourself unskilled with an expensive tool. Get the skill. Reward yourself with the tool.
- If you like it, can afford it, want it, buy it. This one is for me.
I think the first step to making more rational choices is acknowledging that we can be irrational. Awareness is often a powerful antidote to stupidity.
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