How you look at your situation could make all the difference
by Gary Foreman
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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. 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.
We'll begin with something very familiar, our homes. According to the United States Census Bureau, the median home size in the U.S. in 2016 was 2,422 square feet. That was up from 1,400 square feet in 1970. 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.
Or 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.
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Here's another one. Two thirds of college graduates had student loans. And students with loans had an average debt of over $37,000 at graduation (source: StudentLoanHero.com). Depending on the type and length of the loan, the monthly payment will run $200 to $350 a month or slightly more. So is that a large debt for a college grad?
Depends on how you look at it. The U.S. Dept. of Commerce estimates that a college grad will earn about $17,500 more per year than someone with a high school diploma. So in those terms, a $37,000 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 he'll take home about $2,400 per month.
That would mean that 12% of his take home pay is going to repay student loans. 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.
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.
Updated August 2017
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.
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