Using Financial Perspectives To Make Better Money Decisions

by Gary Foreman

It’s important to our financial well-being that we get more than one comparison for any major financial decision. By looking at different financial perspectives, we can better compare financial options.

The other day I was sitting in the courtyard of a tall hotel building. I happened to notice how small some palm trees appeared against the building. Then it occurred to me that I had similar sized palm trees in my yard. And compared to my split-level home they appeared huge. The difference? It’s all a matter of perspective.

Our personal finances are also often a matter of perspective. And we can use financial perspectives to make better money decisions. Afterall, whether $500 is a lot or a little depends on what we compare it to. So let’s take a look at some situations where our perceptions could have a big impact on our bank account.

Using Financial Perspectives To Make Better Money Decisions When Buying a Home

We’ll begin with something very familiar, our homes. According to the most recent United States Census Bureau data, the median home size in the U.S. was 2,299 square feet. The median way back in 1970 was 1,400. So is your home large or small?

If you have a 1,900 square foot home, you might compare it to your friends and think that you’re really quite cramped. In fact, it might be very important to you to find something bigger. Even if it means higher mortgage payments, insurance costs, utility bills and additional upkeep. Moving to a larger home could have a major impact on your budget and your bank account. But, if your friends’ homes are the comparison, you’ll probably talk yourself into moving.

On the other hand, if you compare your home to the one you grew up in, it probably seems spacious. No need to move to a bigger home. Just a matter of controlling how much stuff you try to cram under your roof. The savings could be significant. Not to mention the peace of mind. It’s all just a matter of perspective.

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Using Financial Perspectives To Make Better Money Decisions when Buying a Car

Let’s try car payments. Suppose that you have a car payment of $400 per month. That doesn’t seem like much, especially when you compare it to your neighbor’s payment of nearly $650. And, it sure is nice having a nearly new car in the driveway for everyone to see. After all, you wouldn’t want them to think that you couldn’t afford a new car because you can handle those payments with no problem.

Of course, if you should happen to lose your job, that $400 a month payment will suddenly look like a huge mountain. Trying to live on unemployment is hard enough when there’s only the mortgage and food to consider, but that car payment is going to make things very difficult. From this vantage point, it looks like a big problem.

Using Financial Perspectives to Make Better Money Decisions when Getting Student Loans

Here’s another example of using financial perspectives. 55% of 2020 college graduates had student loans. And students with loans had an average debt of over $28,400 at graduation (source: StudentLoanHero.com — most recent data). The student loan payment for a 2020 graduate is about $300 a month. So is that a large debt for a college grad?

Depends on how you look at it. The Bureau of Labor Statistics estimates that a college grad will earn about $525 more per week than someone with a high school diploma. So in those terms, a $28,400 debt doesn’t seem as big. In fact, it might even seem affordable.

But, let’s take another look. The first thing to note is that the difference in earnings for college grads is an average over their entire career. So they’ll probably average less their first job out of college.

What can current grads expect to be paid? That depends a lot on the job. So we’ll select something that’s fairly typical. The average business administration grad can expect to earn between $38,000 to $67,000 a year (source: Payscale.com). Depending on state taxes and some other deductions, at the lower salary they’ll take home about $2,400 per month.

That would mean that 12.5% of their take home pay is going to repay student loans if they are paying the average monthly student loan payment of $300. Now the debt seems a little bit bigger. Let’s further suppose that our graduate wants to replace the beater he drove through school. Add a car payment to the mix and the budget starts getting pretty tight. Once again, we have a different perspective on the same situation.

Financial Perspectives, Financial Comparisons and Financial Well-Being

Why is all this important? Many of us make financial decisions based on how we “feel” about a situation. Those feelings are very much affected by what we’re comparing to our potential financial transaction. Unfortunately, sometimes we focus on that first perspective and don’t consider any others.

It’s important to our financial well-being that we get more than one comparison on any major financial decision. Let’s give our feelings and our intellect a chance to see both sides of our potential choices. We’ll be much more likely to make a decision that is comfortable in the future.

So how tall is that tree? It all depends on what it’s standing next to.

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.

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