Are you an optimist or a pessimist?
Do you see the glass half full or half empty?
No matter your answer, I have a secret for you. We’re all financial optimists, and it’s hurting our bottom line.
Don’t believe me?
I didn’t expect you to.
You might say, my finances are a mess. I have debt; I’ve pulled money out of my 401(k). I’m definitely not a financial optimist.
But, I’d argue that you are. When you look into the future, you don’t see bankruptcy and years of the same financial mess. You likely think that eventually things will get better, and you make decisions based on that.
If your financial situation isn’t that bad, you’re probably even more of a financial optimist. Say you’re getting ready to buy a house, and you know that your limit is a house that costs $250,000.
You find the perfect house. The problem? It costs $270,000. Still, you decide to buy it, even though you know you can’t afford it.
What do you tell yourself?
- It’s in a good neighborhood, and the house will appreciate.
- In just a few years, inflation will make your now nearly unmanageable payment much smaller, and paying it won’t be such a hardship.
- You’re just starting your career, and in a few years you’ll be making a lot more money, so the house payment will be easier to afford.
Just a few years ago, millions of people thought their houses would appreciate, and then they were caught up in the housing crisis.
Houses don’t always appreciate, but we optimistically think ours will.
Sure inflation will make your house payment more manageable, but you’ll have other expenses in a few years that you’re not thinking of because you’re thinking optimistically. In a few years, maybe you’ll have a few kids to fill that house, and they’ll cost a lot of money. You’ll be spending more on food, health care, transportation and day care, just to name a few things. Suddenly, having a manageable house payment doesn’t really make a financial difference because you’ll have so many other expenses competing for your money.
If you’re lucky, your career will soar, and you’ll make more money, but that doesn’t always happen. You might get laid off and have to find a job that pays less. You or your spouse may decide to quit so one person can stay home with the kids. Or, maybe you do get raises, but at the same time your health care premiums go up every year so your pay essentially stays stagnant.
Of course, thinking optimistically is beneficial to our mental health, but for our financial health, recognize that thinking optimistically hurts your bottom line. When you get ready to make a large purchase like a house or a car, don’t forecast into the future. Determine if you can afford the item now, in your current situation. If you can, you’ll tie up less of your future money and benefit from this. If you can’t, it’s best to pass it up.