As your financial situation changes over the years, so too can the way you handle it. There are a few fundamental ways to treat your money that are a sure way to pave your path to financial success.
Define What You Need Versus What You Want
A human being needs very few things to actually survive: food, shelter and clothing. Technically speaking, anything more than this can be defined as something you want. But if you have limited money, you need to start making sound financial decisions about what extra products and services you purchase. If you don’t, you could find yourself reaching for bad credit loan every time you need it. Letting your wants overpower your needs is a quick way to find yourself in troubling debt that can lead to other hardships.
No Matter How Much You Make, You’re Always Broke
This well-known saying doesn’t always have to come true, but the reality of it can be baffling. This is also known as the “hedonic treadmill”. To put it simply, this means if your financial situation improves, your lifestyle will also change. In turn, and you will end up spending more money than you previously did, because you can justify spending more cash.
For example, if you get a pay raise at work, you could go out and buy a nicer car, more expensive clothing or move into a larger home. However, once these craving are met, and you come down off of the high of making these upgrades, you will find yourself where you started.
Understand Opportunity Costs
Every major decision you make about spending money often comes with an added cost, but this may not be exactly what you think. An opportunity cost is missing out on an alternate situation as a result of a decision you make. While this can be applied to many areas of your life, it’s especially important when it comes to your long-term financial planning.
For example, if you make the decision to invest in going to college, the opportunity cost of choosing this option is that you will miss out on roughly four years of working. However, in the big picture, this choice can earn you more in the future.