Many people pay a lot of attention to the little things in their financial lives and lose sight of the bigger, more important ones. For example, I hear people talking about cutting out their favorite coffee drink to save money. This is not a bad idea, and savings, wherever you find them, are helpful. But often these same people are making large financial mistakes that they don’t realize are costing them hundreds of dollars a month.
I recommend focusing on the big financial issues: income, housing expenses, car expenses and other major costs in your life. Get the big things right, and the other puzzle pieces are much easier to fit together.
Be smart about your assets
One way to get the big things right is to optimize existing assets. When I was in the corporate world, we used to call this “sweating the asset.” This means that you want to use your existing capital base as much and as efficiently as possible before replacing it. If you have an existing factory, add a shift rather than building a new factory or expanding. It is extremely common in the business world to look at all the uses of your capital before making a decision on deploying it.
This translates well to personal finance. Many of us don’t think about optimizing what we have. About five years ago, before the birth of our first child, my wife and I took a child-care class sponsored by our hospital. During the group session, a father-to-be shared with the class that his spouse had insisted that they move to a larger San Francisco apartment and purchase a new “family-friendly” car before their child was even born, although those moves would seriously stretch their finances. Rather than optimizing their existing assets, this young family was about to make some potentially risky moves.
Housing, auto costs dominate
There are lots of areas that we can focus on to optimize our existing assets. But first it requires thinking about our biggest-ticket items and whether we are making smart decisions there. Here are a couple of typical examples:
Housing costs: This is often a family’s biggest expense. When you get the urge to upgrade, pause and think: Can I stay where I am a little longer?
When we had our first child, we lived in a loft. We had almost no rooms with doors in our condo. So we set up our nursery in the only room that did have a door — the bathroom. In all fairness, it was a really big bathroom. You should be bursting at the seams before you decide to upgrade your most expensive asset.
Auto expenses: I’m not a car guy, but as a former engineer, I certainly appreciate the appeal of a well-designed car. Recently I figured that for the price of a mid-range Tesla, someone could afford a Nissan Leaf (for the environment), a Honda Odyssey (for family) and a (used) Mini Cooper (for fun). Luxury cars are an expensive indulgence. Do you really need to spend $90,000 to commute back and forth to work?
Think of alternative uses of capital
In order to “sweat your assets,” it is imperative to start thinking differently in terms of where to deploy your money. Rather than thinking “Can I afford it?,” think about trade-offs and possibilities.
For example, if you are planning on moving to a new house, think about the annual increase in your expenses. A $500 monthly increase in housing expense is $6,000 a year. Maybe you can stay put for a while and use the $500 a month to save more for a down payment. If you save a down payment of 20%, you can avoid paying private mortgage insurance and decrease your costs significantly over the long term.
Or you may be considering buying a nice new car. Consider instead driving your modest, older-model car for another year and avoiding an increased car payment and increased insurance costs. You can use the savings to invest, travel or meet any other short- or long-term goals.
The key is to establish values around which you can manage your money. By thinking about the trade-offs involved in your expenditures, it can make it much easier to align your spending with what is really important to you and your family. Spend your money on what is important — then go enjoy your coffee.
This article was originally published on Nerdwallet.com.
Note: The contents of this site are general in nature and not intended as specific investment advice. All investments are subject to risk; including loss of investment value. If you have any question regarding investments or concepts in these pages, please consult with an investment professional.