Short Term View can have a Domino Effect on your Personal Finances

SFL Domino effect on finances

When it comes to making personal financial decisions do you consider the long term effect it could possibly have on your finances? Many times when making a decision financial in nature or not we often don’t consider the long term impact that decision can have on your life.

Consider when you may have applied for a store credit card to receive a discount on your purchase as well as received 0% interest for 90 days. It sounds like a great deal at the time so you may purchase a little more than usual because you planned to planned to pay off the debt before 90 days

You receive the first bill and to your surprise you discover that you are only required to make a minimum payment of $25.00. You say to yourself this will really help my monthly cash flow. Well making the minimum payment each month does not enable you to pay off the debt before the interest free period ends. Instead of paying off the debt you make additional purchases since you received an offer that offers you an additional discount on all purchases with your store credit card.

You continue to get deeper and deeper into debt. You accidentally forget to make a payment because you miss placed your bill. I know this maybe a little extreme but wanted to illustrate how one simple seemly minor decision can have long term impact on your finances. Instead of paying no interest you ending up:

  •  Paying interest which cost you more
  • Missed a payment which incurred a late fee and impacted your credit score
  • Used card to add additional consumer debt to balance sheet
  • Added another credit card and bill to your existing collect
  • Not enabling you to save since your potential savings is use to pay off the debt

Here are a few other short term financial decisions which can have a long term financial impact on your finances:

Not putting down 20% on home purchase

Yes home ownership is wonderful financial accomplishment. But you want to do it right without costing you in the long run. If you are unable to put a down payment of at least 20% you could possibly have a higher interest rate. Having higher interest rate means you will have a larger monthly payment each month. In addition to higher monthly principal and interest payment, you will also have PMI payment which is an additional monthly cost. Not saving the additional 10% will cost you more in the long term than you thought. The amount you finance will also be larger which means you pay more in interest and carry more debt on your balance sheet. So consider waiting until you have that additional 10% saved to purchase your new home.
Not paying off your credit card monthly – it may help your monthly cash flow but longer term you will pay more in interest payments. It may not seem that much at first but if you continue to not pay off the balance you will end up spending more money on your purchase than you thought. Debt continues to grow and more debt you carry the less money you will have to prevents you from saving or put toward retirement.

Buying more house than you can afford

Yes the bank may be willing to lending that amount but is it really necessary. Larger house comes with larger insurance payments, larger property tax bill utilities expenses as well as maintenance expenses. What seems like a great idea to start can end up costing you more long term.

Not having emergency fund

Deciding not to have an emergency fund will cost you more in the long term. You thought it would be better to use the funds for other things instead of putting it a side just in case. Yes I know just in case may not happen and you assumed you would be in a better financial position something did happen and that you could handle it. Well guess what it happened well before you had planned for it happen. You never know when an emergency will occur just be prepared for it. If you don’t have an emergency fund you will have to figure out a way to pay for the unexpected emergency. For example you have unexpected car repairs, it will cost you a $1,000. That amount will significantly impact your monthly cash flow. You don’t have the money set a side so instead you have to use your credit card to cover the expense. You hope to pay off the additional debt at the end of month. But it’s unlikely so you add the additional expense to your existing debt. Doing this will increase your consumer debt balance as well as increased your monthly expenses and does not allow you to save. That one decision you made to not have emergency fund cost you more money because you had to pay additional interest on your credit card balance and cost you future savings as well as tightened up your monthly cash flow.

Guaranteeing a friend or family member loans

We all want to help out a friend or family member when we can. But sometimes those simple things can backfire and end up costing you. If you sign on as guarantor for loan, that means if the person does not pay you will be responsible for the loan. As long as your friend or family member pays as agreed upon and pays off the loan no problem. If they miss a payment or two guess who the bank or finance company will come looking for to pay the past due bills. You got it. They will be looking for you now. This will create additional debt for you to pay off as well as possible late fees and additional interest charges since your friend or family member has stop making payment. Now you have additional debt with nothing to show for. It’s possible this could end up impacting your credit report.

Not having sufficient insurance coverage

Who does not want to save on their insurance. It nice to have a lower insurance bill as long as you don’t have any damage or need to file a claim. Having the lower cost mean you possibly have a higher deductible or you are under insured. Having a higher deductible means more that you have to come out of pocket when there is a claim you hope you have that amount saved in an emergency fund. Under insured means you don’t have enough insurance to replace or cover the cost of damage. This means you have to come out of pocket to cover the difference. Which can set you back if you don’t have the money available. It could also add more debt if you have to finance the cost.

Not saving for retirement

Instead of saving for retirement you use the funds now. This results in you losing out on the long term grow and you may have to work longer than you planned. The longer you wait to invest for retirement the more you will need to save to meet your retirement goals.

Large impulse purchase

You see it and you need to purchase it now. It will satisfy your current desire but how will it impact your future finances. Did you consider the additional debt you may incur with the financing of the purchase or any additional maintenance or insurance ? That one large impulse buy may set you back several years. Consider planning and doing a little research before make that large purchase.

As you can see from these examples having a short term view can impact long term impact on your finances can be like dominoes.

Have you ever made a short term financial decision that has had a long term impact on your finances?

PHOTO CREDIT: Copyright: texelart / 123RF Stock Photo

Comments

  1. says

    Some great, great points! Many I have made myself over the course of running my blog. I like the first example of getting a credit card with a low/0% interest rate with the intent to pay off the balance before the introductory period ends. Too often people have good intentions but fail to follow through. I have seen that happen more than once. I’m also a huge fan of emergency funds. In my mind, establishing one is among the first actions someone that is serious about building a solid financial foundation should take.

  2. B Simple says

    Glad you enjoyed the post. Well have good intentions but some come back to bite us. Some of those examples are from personal experience so easy it write about them.

  3. says

    What a great list. I’d say it covers almost eveything but I’d add one (that is near and not very dear to my heart) student loans. They seems like a great idea at the time. You tell yourself you need them to get ahead in the world. And you borrow, borrow, borrow without really having a plan in place for how you’ll pay those loans in 4 years. The loans impact your ability to save for a house, to save for retirement, to afford life insurance, to save for an emergency fund. Their impact trickles down the roughy the next 20 years of your financial life.

  4. says

    Yep, I’ve done all of these at one point or another. Well, except for buying too much house — somehow we’ve managed to avoid that pitfall (yay). I too think setting up an emergency fund is a critical first step.

    It’s interesting that some ‘risky’ actions cease to be risky when you have a solid emergency fund. For example you mention the risk of having a high insurance deductible to save on insurance costs. Our emergency fund allows us to do just that without risk — in essence we are self-insuring that $1,000 deductible. But I could never have safely done that before having an emergency fund.

  5. says

    I am guilty of a lot of these as well. I have not purchased a house, but I have had an apartment lease where I was paying more than I could afford. It was a tough year, but I learned the hard way.

  6. says

    I don’t recall any single big purchase that really knocked me for a loop, or started a chain reaction. But we have made several four-figure purchases that didn’t work out too well — as in we sold them later for pennies on the dollar, or nothing at all. Thankfully we learned from them.

    But you can only do that so many times before it starts to hurt.

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